India has become one of the world’s most attractive business destinations, thanks to its growing economy, large consumer base, skilled workforce, and supportive government policies. For global businesses looking to expand, setting up a subsidiary in India is a strategic way to establish a strong presence in one of the fastest-growing markets.
This guide will walk you through the benefits, legal requirements, tax implications, and compliance essentials of setting up a subsidiary in India.
What Is a Subsidiary Company in India?
A subsidiary company is a business entity in which another company (the parent company, usually foreign) owns more than 50% of the share capital. In India, subsidiaries can be either:
Wholly-Owned Subsidiary (WOS): 100% owned by the foreign parent company.
Partially-Owned Subsidiary: Where the parent holds majority control but local shareholders own a minority stake.
Subsidiaries in India are treated as separate legal entities, meaning they are subject to Indian corporate laws, taxation, and compliance requirements.
Why Set Up a Subsidiary in India?
1. Access to a Massive Market
India’s population of over 1.4 billion provides a huge customer base for global companies in sectors like IT, manufacturing, healthcare, retail, and more.
2. Favorable Business Environment
Reforms such as Make in India, Startup India, and improved ease-of-doing-business rankings have made India more attractive for foreign investors.
3. Skilled and Cost-Effective Talent
India offers a highly skilled workforce, particularly in IT, engineering, finance, and healthcare, at competitive costs compared to developed markets.
4. Tax Benefits and Incentives
Various tax holidays, sector-specific incentives, and Special Economic Zones (SEZs) support global companies setting up subsidiaries in India.
5. Limited Liability
The liability of the parent company is limited to its shareholding, safeguarding global investors from excessive risk.
Legal Requirements for Setting Up a Subsidiary in India
Foreign companies must comply with the Companies Act, 2013, the Foreign Exchange Management Act (FEMA), and guidelines issued by the Reserve Bank of India (RBI).
Here’s a step-by-step outline:
1. Choose the Right Entity Type
Most foreign businesses set up as:
Private Limited Company (most common)
Public Limited Company
2. Obtain Director Identification Number (DIN) and Digital Signature Certificate (DSC)
At least two directors are required (one must be an Indian resident).
3. Register with the Registrar of Companies (RoC)
Submit the incorporation documents through the Ministry of Corporate Affairs (MCA) portal.
4. Reserve a Company Name
The company name must comply with Indian naming guidelines and include “Private Limited” at the end.
5. Draft Memorandum of Association (MoA) and Articles of Association (AoA)
These define the subsidiary’s objectives, operations, and internal rules.
6. Obtain PAN, TAN, and GST Registration
Mandatory for taxation and compliance.
7. Open a Bank Account
To receive foreign investment and carry out financial operations.
Tax Implications for Foreign Subsidiaries in India
Foreign subsidiaries in India are taxed as domestic companies:
Corporate Tax: 25–30% (depending on turnover and concessions).
Dividend Distribution Tax (DDT): Abolished in 2020; dividends are now taxable in the hands of shareholders.
Goods and Services Tax (GST): Mandatory indirect tax registration for most businesses.
Transfer Pricing Regulations: Apply to transactions between the Indian subsidiary and its foreign parent.
Additionally, Double Taxation Avoidance Agreements (DTAA) can help reduce tax burdens for global businesses.
Compliance Requirements
Subsidiaries must follow all Indian corporate regulations, including:
Annual filing with the RoC.
Statutory audits of accounts.
Filing income tax returns annually.
Adhering to FEMA for foreign investments.
Regular board and shareholder meetings.
Key Challenges and How to Overcome Them
Regulatory Complexity – Partnering with a local expert or legal advisor simplifies compliance.
Cultural Differences – Understanding Indian business etiquette and workforce culture helps smooth operations.
Tax and Accounting Rules – Professional accounting services ensure accurate reporting and compliance.