Subsidiary of Foreign Company
A company where 50% or more of its equity shares are owned by a foreign company is a foreign subsidiary company. The foreign company in such case is called the holding company or the parent company.
Compliances are based on the company that is incorporated. Hence, it is necessary to understand what compliances are supposed to be met according to the type of the company, the operations of the industry, annual turnover, number of employees, etc.
Foreign subsidiary companies are mandatorily required to maintain compliance according to the Income Tax Act, Companies Act, Transfer pricing guidelines, and FEMA guidelines.
The foreign subsidiary compliance includes income tax filing with the income tax department, annual return with the ministry of corporate affairs, and other filings with the authorities like the Reserve Bank of India or the securities and exchange board of India (SEBI).
All the companies’ even foreign subsidiaries will have to comply with other Indian tax regulations like the TDS, GST regulation, PF regulation, ESI regulations, and others. The compliance requirement for a foreign subsidiary company would differ based on the industry, state of incorporation, number of employees, and sales turnover.
Foreign Direct Investment of up to 100% is allowed into an Indian private limited company and limited company for most of the sector. The amount of FDI in India has increased manifold over the last few years due to a booming economy and welcoming environment for foreign investors.
FDI Inflow into the Company
What is the role of FDI in a foreign subsidiary company?
An Indian Company that issues shares or convertible debentures under the FDI can receive the money for such shares or debentures through the following modes:
- Remittance through normal banking channels.
- Debit to NRE/FCNR account of a person concerned maintained with a Bank.
- Conversion of royalty/lump sum/ technical know-how fee due for payment or conversion of ECB shall be treated as consideration for issue of shares.
- Conversion of import payables/pre-incorporation expenses/share swap can be treated as consideration for the issue of shares with the approval of FIPB.
- Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.
Reporting FDI Inflow into the Company
Within 30 days of receipt of share application money/ amount of consideration from the foreign investor, the Indian company must report details of the FDI inflow to the foreign exchange Department and the RBI.
The report must be submitted to the regional office at the RBI under whose jurisdiction the registered office is located. The form to be filed at this stage is the advance reporting form which should contain the following details:
- Name and address of the foreign investor(s);
- Date of receipt of funds and the Rupee equivalent;
- Name and address of the authorized dealer through whom the funds have been received;
- Details of the Government approval, if any; and
- KYC report (Identify and Address proof) on the non-resident investor from the overseas bank remitting the amount of consideration.