Setting up a Wholly Owned Subsidiary (WOS) in India

Foreign corporations that are venturing into the Indian market, selecting the appropriate entry structure is among the most strategic decisions ever. A Wholly Owned Subsidiary (WOS) in India is a company where a foreign parent company holds 100 per cent of the share capital, allowing it to fully own and control its operations in India. A WOS provides greater operational freedom as compared to branch or liaison offices and permits the subsidiary to engage in manufacturing, trading, and services operations. Well-known examples include Google India Pvt. ltd. and BMW India Pvt. ltd., which are fully owned by their foreign parent companies but exist as separate legal entities under Indian law.

The procedure of establishing a Wholly Owned Subsidiary in India involves navigating company law, foreign exchange regulations, taxation policies, and sector rule policies. Over the years, FDI policies in India have been liberalised and most sectors now allow 100 per cent FDI under the automatic route. Nonetheless, a foreign company must comply with legal requirements for registering a subsidiary in India, such as appointing resident directors, preparing constitutional documents, and fulfilling reporting obligations. This article consolidates the process of setting up a WOS in India, the compliance framework, practical tips, and common questions. Each sections are based on the provisions of the law, the professional practice of practitioners, and published commentaries.

Learning the Concept of a Wholly Owned Subsidiary

Under the Companies Act 2013, a company is considered a Wholly Owned Subsidiary when its parent company, located in a foreign country, owns one hundred per cent of its shares. This structure gives full control to the parent company while giving the Indian subsidiary a separate legal identity. A WOS has wider operational authority compared to a branch or a liaison office. Liaison offices are limited to activities such as brand promotion and cannot conduct commercial business, whereas branch offices are permitted to carry out business but are subject to restrictions and must maintain profit records. A WOS is typically registered as a private limited company, which has perpetual succession and limited liability for its shareholders/ directors. These features make the WOS model a preferred choice for many foreign companies entering India.

The benefits of the WOS Structure

The popularity of Wholly Owned Subsidiaries stems from several inherent advantages:

• Full ownership and control: the parent company can align Indian operations with its global strategy without entering into any negotiation with local partners.
• Legal independent identity: a WOS has the ability to enter into contracts, hold property and sue or be sued in its own name, which shields the assets of the parent and limits the liability.
• Complete operation: a WOS can undertake manufacturing, trading, consultancy and other authorised business activities, unlike liaison offices.
• Improved branding and credibility: being an Indian company improves market acceptance and facilitates banking and business relations locally.
• Facility in repatriating profits: profits can be repatriated after taxation, subject to compliance with foreign exchange regulations.

Such benefits have made the WOS model the preferred route for various multinational companies when establishing their business ventures in India, especially in the technology, manufacturing and pharmaceutical industries.

Legal Framework Governing Wholly Owned Subsidiaries in India

The primary legislation that regulates the formation of companies and their management is the Companies Act of 2013. It establishes incorporation procedures, rights and obligations of directors and requires statutory filings, including annual returns and financial statements. For foreign investors, the Act requires a minimum of two directors, at least one of whom must be a resident of India (must have been residing in India at least 182 days in the last calendar year). The minimum paid-up capital is zero; a WOS may be incorporated with capital authorised and paid up by its parent company.

FDI Policy and Foreign Exchange Management Act (FEMA)

The Foreign Exchange Management Act 1999 and the regulations made under it govern foreign direct investment in India. The consolidated FDI Policy (which is periodically revised) differentiates sectors into three groups:

1. 100 per cent FDI under the automatic route: sectors like manufacturing, IT services, pharmaceuticals, and automobiles are considered in this category.
2. FDI with limits requiring governmental approval: multi-brand retail (51 per cent cap), banking and insurance (74 per cent cap) and telecom (100 per cent with conditions) are to be approved in advance.
3. Forbidden industries: lottery, gambling, chit funds and real-estate trading (not inclusive of township development).

According to the FEMA rules, the inward remittance used to purchase shares must be declared to the Reserve Bank of India (RBI). The subsidiary must submit an advance reporting form within 30 days of receipt of funds and file Form FC-GPR through the Foreign Investment Reporting and Management System (FIRMS) within 30 days of issuing shares. These filings would make sure that FDI limits and foreign-exchange regulations are adhered to.

Income Tax Act and Other Laws

WOS are considered domestic companies for tax purposes under the Income Tax Act of 1961. Corporate taxes are 25 per cent for companies with a turnover up to ₹400 crore and 30 per cent for those above this threshold. Dividends paid to the parent company are subject to taxation on the hands of the shareholder (taxation on the distribution of dividends has been abolished). Withholding tax applies to royalties, fees for technical services, and interest payments to the parent company. Transfer pricing rules require transactions between a subsidiary and its parent to be conducted at arm’s length pricing. Additionally, WOSs must comply with labour and employment laws, goods and services tax (GST) and industry-specific regulations based on their business activity.

Pre-Incorporation Planning and Legal Requirement

The foreign firms must evaluate the legal requirements before going through the process of establishing a WOS in India:

• Directors: no less than two directors, with at least one resident in India. The resident director is not required to be an Indian citizen but must have resided in India for at least 182 days in the preceding year.
• Shareholders: the parent company must own 100 per cent of the share capital. At least two subscribers are required, with the parent company holding all shares and a nominee occupying shares on its behalf. No minimum capital is required.
• Registered office: the WOS should have a registered office address in India; it can be a leased space or a business centre.
• Company Secretary: appointment of a company secretary is required when the paid-up share capital exceeds ₹5 crore.
• Adherence to sectoral FDI regulations: in case the parent company operates in a restricted industry, it might require approval by the Foreign Investment Promotion Board (which is currently part of the Department of Promotion of Industry and Internal Trade).

Documents required for incorporation

Efficient pre-incorporation planning minimises delays. Key documents include:

• Memorandum of Association (MOA): specifies the authorised capital and the objectives of the company.
• Articles of Association (AOA): specifies the rules of governance, director powers and internal procedures.
• Parent company Board resolution and Power of Attorney to incorporate and appoint signatories.
• Identity and address documents of every director and authorised signatory.
• Evidence of registered office, e.g. lease deed or property tax receipt.
• Foreign documents apostilled or consularised, and a no-objection certificate from the landlord.

Pre-incorporation planning must also consider the capital structure, company names and trademark clearance, and due diligence on sectoral restrictions.

Step‑by‑Step Procedure to Incorporate a Wholly Owned Subsidiary in India

This section outlines the stepwise process of incorporating a WOS in India, as stated by the Ministry of Corporate Affairs (MCA). Each of these steps has to be done in a systematic way to ensure a smooth registration process and timely issuance of the Certificate of Incorporation.

Step 1: Name Approval

Select a unique business name. Name reservation is done using the RUN (Reserve Unique Name) service or through the SPICe+ (Simplified Proforma for Incorporating Company Electronically Plus) form. The proposed name should end with a limited liability suffix, should not have the same name as other existing company names and must not include a restricted name without authorisation. The name approval usually takes 1-2 days; in case of objections, this period can extend to 7-10 days. An approved name remains valid for 60 days.

Step 2: Acquire Digital Signature Certificate (DSC)

All the proposed directors must obtain a valid Digital Signature Certificate in order to sign forms electronically. Class-2 DSCs are issued by certified authorities within 1-3 days. In the case of foreign directors, DSC can be acquired through Indian consulates or embassies.

Step 3: Obtain Director Identification Number (DIN)

Each director must obtain a Director Identification Number if not already allotted. DINs can be applied during the incorporation period through the SPICe+ form. At least one director must meet the residency requirement of having stayed in India for a minimum of 182 days in the previous calendar year.

Step 4: Draft Memorandum of Association (MOA) and Articles of Association (AOA)

The Memorandum of Association defines the company’s objectives and authorised capital, while the Articles of Association govern internal management and the powers of the directors. When drafting the MOA and AOA for a WOS, ensure that the object clause includes all proposed business activities and that the AOA permits 100 per cent foreign shareholding. The documents must be signed by the subscribers and stamped in accordance with applicable state laws.

Step 5: File SPICe+ Form (INC-32)

The SPICe+ form integrates several applications, including company incorporation, PAN, TAN, EPFO and GST registration. Along with the forum, submit the MOA, AOA, identity documents, address documents and professional declarations. Upon verification, the Registrar of Companies issues the Certificate of Incorporation, Permanent Account Number (PAN), Tax Deduction and Collection Account Number (TAN) and Corporate Identification Number (CIN). Government fees depend on authorised capital.

Step 6: Open a Bank Account and Infuse Capital

On incorporation, open a bank account in the name of the subsidiary and deposit the proposed capital. As per FEMA regulations, capital must be remitted from the parent company through inward remittance. Capital may be infused as equity or compulsorily convertible instruments. Shares must be issued within a period of 60 days after the receipt of funds, and the corresponding share certificates must be delivered to the subscribers.

Step 7: Report FDI to the RBI

For inward remittance, submit the advance reporting form to the RBI within 30 days of receiving inward remittance. After allocating the shares, Form FC-GPR must be filed on the FIRMS portal within the next 30 days. These filings must include details of remittance, valuation certificates and shareholding patterns. Delays may attract penalties and compounding charges, making timely compliance essential.

Step 8: Obtain other statutory registrations

The subsidiary might need further registrations depending on the business operations, such as GST (subject to turnover thresholds), shops and establishment registration, Professional Tax, Employees’ State Insurance (ESI) and Provident Fund (EPF). For import and/or export activities, an Import Export Code must be obtained from the Directorate General of Foreign Trade. Manufacturing or environmentally sensitive businesses may also require approvals under environmental and industrial laws.

Post-Incorporation Compliance and Ongoing Obligations

Successful incorporation of a WOS is not the end of the process and compliance is a continuous process that keeps the company in good standing. Key post-incorporation obligations include:

• Board Meetings: The first board meeting should be held within 30 days of incorporation, and Form INC-20A should be filed as a declaration of commencement of business.
• Maintain Statutory Registers and Minutes: The company must maintain registers of members, directors, loans, contracts and charges, and prepare minutes of board and general meetings.
• Filing Annual Reports to the RoC: Financial statements (Form AOC-4), annual return (Form MGT-7) and directors’ report must be filed within 30 days of the Annual General Meeting. Late filings attract penalties and additional fees.
• Tax Returns and Transfer Pricing Compliance: Corporate income tax returns (Form ITR-6) must be filed within prescribed timelines, along with payment of advance tax in quarterly instalments. Transfer pricing documentation must be maintained for transactions with the parent company to demonstrate arm’s-length pricing.
• FEMA Reporting: The annual return on Foreign Liabilities and Assets (FLA return), must be filed by July 15 each year, along with reporting any changes in shareholding or capital structure.
• Secretarial Compliance: A company secretary must be appointed once the paid-up capital exceeds the prescribed threshold, and a secretarial audit must be conducted where applicable. The Companies Act provides compliance requirements available for small companies.
• Employment and Labour Compliance: Registration under the Shops and Establishments Act, contributions to the Employees’ Provident Fund (EPF) and Employees’ State Insurance (ESI) and compliance with laws such as the Payment of Gratuity Act, Payment of Bonus Act, and other labour legislation are mandatory. Employment contracts and internal policies must align with the Indian labour standards.

Compliance with these obligations not only ensures statutory adherence but also builds credibility with regulators, banks and business partners.

Taxation and Financial Issues

Under the Income Tax Act, WOS are taxed as domestic companies. At the current rates, companies with turnover up to ₹400 crore are taxed at 25 per cent tax and those with higher turnover have 30 per cent, along with surcharge and cess. Dividend distribution tax has been abolished, and dividends are taxed in the hands of the shareholders. Where the subsidiary pays royalties, technical service fees or interest to the parent company, withholding tax applies at rates specified under the Income Tax Act and in the relevant Double Taxation Avoidance Agreement (DTAA). Such payments must comply with transfer pricing regulations and be supported by proper documentation.

Indirect Taxes

Goods and Services Tax (GST) applies to the supply of goods and services in India. Subsidiaries must register for GST upon crossing the prescribed turnover thresholds (₹40 lakh or ₹20 lakh for goods and ₹40 lakh or ₹20 lakh for services in most states) and file monthly or quarterly returns as applicable. Custom duties and import GST apply to imported goods, subject to exemptions available under different export promotion schemes.

Repatriation of Profits

Once taxes and statutory liabilities are settled, profits can be repatriated to the parent company. Remittances must be routed through authorised banking channels and comply with FEMA and RBI reporting requirements. Dividends, royalties and management fees must be supported by board resolutions and proper documentation. In cases involving the sale of shares or assets, capital gains tax may apply based on the holding period and applicable treaty benefits.

Strategic Advantages of Establishing WOS in India

A Wholly Owned Subsidiary offers several strategic benefits to multinational corporations seeking a long-term presence in India:

• Global strategy fit: 100 per cent ownership allows the parent company to integrate Indian operations seamlessly into its global supply chain and management systems.
• Asset protection and limited liability: the subsidiary’s liabilities are generally confined to its own assets and do not extend to the parent company, providing legal ring-fencing and insulation.
• Convenience of obtaining licenses and contracts: Indian clients, vendors and banks prefer dealing with locally incorporated companies due to clearer enforceability, familiarity with local regulations, and jurisdiction certainty.
• Availability of incentives and subsidies: companies incorporated in India may avail themselves of incentives such as subsidised land, tax refunds and production-linked incentives offered by central and state governments. These benefits are available to WOS entities.
• Increased investor confidence: operating through a WOS demonstrates a commitment to the Indian market and can help attract local investors or strategic partners as the business scales.

On the other hand, branch offices are typically considered to be short-term arrangements with limited scope, whereas liaison offices are restricted from generating revenue.

Problems and Real-world implications

Despite these advantages, foreign investors should be mindful of practical challenges associated with establishing a Wholly Owned Subsidiary in India:

• Bureaucratic Delays: even though incorporating the SPICe+ system has made the process of incorporation simpler, delays may arise due to name objections, document discrepancies or processing backlogs. These risks can be mitigated through thorough preparation of full documentation and engagement with professional advisors.
• Resident Director Requirement: identifying a director who meets the 182-day residency requirement can be challenging, particularly for companies without an existing presence in India. It might be necessary to hire the services of a professional directorship or to shift an employee to India.
• Compliance Burden: continuation of compliance, i.e. Board meeting, annual filing, transfer pricing documentation, and labour law registration demands specific resources. Lack of compliance can lead to fines and reputation.
• Sectoral Restrictions and Approvals: investments in operations such as banking, insurance, multi-brand retail and telecom can be subject to approval by the government and fulfilling conditions such as lock-in periods and minimum capital. These factors need to be analysed by the companies at an initial stage of planning.
• Apostille and Consularisation: foreign documents have to be apostilled or consularised, which may delay incorporation. It is better to coordinate early with the notaries and embassies rather than allowing red flags to be raised at a later stage.
• Currency Fluctuations: repatriation of dividends, royalties, and management fees exposes companies to foreign-exchange risk. Volatility is controlled with the help of hedging strategies and prudent cash-flow planning.

Through projecting and managing these challenges, the foreign companies can simplify the incorporation process and secure their investment.

Best Practices and Practical Tips

According to the recommendations by experienced advisers, the best practices to be pursued when setting up a Wholly Owned Subsidiary in India are as follows:

• Incorporate Local Experts: employ local legal firms, chartered accountants and company secretaries who have experience in foreign investment. They are able to give advice on sectoral laws, the structure and compliance of tax.
• Get Backup Names: in making the name reservation request, suggest more than one name in order to prevent rejection. Carry out a pre-trademark search to make sure it is unique.
• Plan Document Legalisation: make sure that the foreign documents, such as board resolutions, certificates of incorporation, and financial statements, are properly apostilled and stamped. Have a copy of them, both digital and physical.
• Arrange with bankers in advance: find one that is conversant with remittances of FDI and the establishment of foreign-owned firms. There are banks that might insist on more documentation on KYC.
• Adhere to Transfer Pricing: keep detailed records of all related-party transactions where loans between companies, service pacts and royalty deals are involved. The pricing policies are periodically reviewed to prevent conflicts.
• Keep abreast of Updates in Regulations: FDI regulations, taxation rates and compliance procedures keep changing on a frequent basis. Sign newsletters of legal firms or visit professional advisers to keep up to date.

Through these practices, foreign investors will be able to minimise unexpected situations and make a seamless approach on entering the market.

Frequently Asked Questions (FAQs)

What is a Wholly Owned Subsidiary (WOS) in India, and how does it differ from a branch or a liaison office?

An Indian company that has 100 per cent of the share capital in the form of share capital owned by the foreign parent company is referred to as a Wholly Owned Subsidiary. It is legally separate, is able to run full-fledged business activities and provides limited liability. A branch office, on the other hand, is a projection of the parent company; it is able to engage in some commercial activities, but its liabilities are transferred to the parent company, and a branch office also needs an RBI permission. A liaison office can only do liaison and promotion, and not generate any income.

What are the legal needs in case of foreign companies registering a Wholly Owned Subsidiary in India?

The foreign companies shall be required to nominate at least two directors, with at least one of the directors being a resident of India for at least 182 days during the previous year. It does not have any minimum paid-up capital requirement, although it needs to have a registered office address in India, and must have a company secretary where its paid-up capital is higher than ₹5 crore. A board resolution authorising incorporation must be passed by the parent company, and must be apostilled or consularised. It is important that sectoral FDI caps and FEMA reporting are adhered to.

What is the typical time it will take to incorporate a Wholly Owned Subsidiary in India?

Depending on the experience of the practitioner, incorporation can be made in 15-30 days if applied with proper documentation. The process of acquiring DSCs and name reservation requires 2-3 days, document preparation requires 3-5 days, government processing requires 7-10 days, and post-incorporation set-up requires 3-7 days. The delay can be caused by objections, incomplete documents or area approvals.

How does one incorporate a WOS in India?

The procedure to incorporate is: (1) Reservation of the name of the company through RUN or SPICe+; (2) DSCs and DINs of directors; (3) drafting of the MOA and AOA; (4) filing of SPICe+ form along with supporting documents; (5) receiving the certificate of incorporation, PAN and TAN; (6) opening of the bank account and infusion of capital; (7) reporting FDI to the RBI through the advance reporting form and Form FC-GPR; and (8) obtaining other registrations as required by law. They should be done in order, and the filing should be done within the mandatory time in order to avoid penalties.

Does it have sectoral limitations on foreign investment in a Wholly Owned Subsidiary?

Yes. Although there are no limitations on 100 per cent FDI in sectors such as manufacturing, IT services, pharmaceuticals, and automobiles in the automatic route, there are limited sectors, such as multi-brand retail, banking and insurance, which have a limit, and foreign investment cannot be undertaken in these sectors without prior government permission. There are activities that are not allowed to be foreign invested, like lottery, gambling, and chit funds. Any investor should look at the latest consolidated FDI policy and seek advice before making a commitment of capital.

Is it free to repatriate profits and capital to the parent company?

Profits can indeed be repatriated to the parent, having paid the relevant taxes, provided that they include compliance with FEMA and RBI reporting conditions. Dividends are taxed at the parent level; royalties and management fees are subject to withholding taxation and have to meet the requirements of transfer pricing. Repatriation of capital, including disinvestment, would involve further filing and the capital gains tax.

Is a resident director mandatory, and what qualifies a person as a resident director?

Yes. According to the Companies Act, at least one director of every company should be one who remains in India for not less than 182 days in the past calendar year. Such a resident director can be an expatriate staff member or a professional director contracted by a service provider. This requirement is not restricted to Indian citizens.

Conclusion

The Wholly Owned Subsidiary in India is a strong path that the foreign corporations would aim to have full control and local presence. It involves a rigorous procedure to incorporate a WOS in India, ensuring compliance with the Companies Act, FEMA and sectoral policy of FDI and careful preparation of documents. Although the regulatory system might be perceived to be complicated, reforms, including the SPICe+ form and liberalised FDI policy, have made the process easier. Incorporation can be performed perfectly and work successfully through proper planning, utilising professional advisers, and timely compliance. The long consumer base, available skilled labour force, combined with the increased economy of India, means that a WOS gives foreign investors a lucrative tool to develop sustainable business ventures coupled with the advantages of ownership, flexibility and access to incentives.

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