Summary: Foreign companies establishing operations in India must carefully evaluate whether a branch office or a wholly owned Indian subsidiary offers the more suitable legal, regulatory and tax structure. A branch remains part of its foreign parent and is generally taxed at the applicable foreign-company rate of 35%, together with surcharge and cess, on income attributable to its Indian operations. A wholly owned subsidiary is a separate domestic company and may qualify for the regular corporate tax rates or the concessional 22% regime under Section 115BAA of the Income-tax Act, 1961, corresponding to Section 200 of the Income-tax Act, 2025. However, the overall tax comparison must also account for repatriation. A subsidiary’s distribution of dividends can attract withholding tax in India, subject to applicable treaty relief, whereas remittance of post-tax branch profits to its head office is generally not treated as a dividend. The article also compares minimum alternate tax, legal liability, permitted activities, RBI and authorised dealer bank requirements, Companies Act registration, transfer pricing, audit obligations, Foreign Liabilities and Assets reporting and exit procedures. Branches ordinarily operate within specified permitted activities and expose the foreign parent directly to liabilities arising from Indian operations. Subsidiaries offer a separate corporate structure suitable for employees, investment, expansion and business transfers, subject to sectoral investment restrictions. The article concludes that the appropriate structure should be selected through a multi-year comparison of effective tax rates, dividend and profit repatriation, regulatory constraints, liability exposure and ongoing compliance costs rather than by comparing headline corporate income-tax rates alone.
1. Tax rate
The Income Tax Department’s foreign-company page (AY 2025-26 and AY 2026-27) shows a general rate of 35% for a foreign company, with surcharge of 2% where income exceeds Rs 1 crore up to Rs 10 crore and 5% above Rs 10 crore, plus 4% cess. A branch, being part of a foreign company, is taxed at this rate on income attributable to it. An Indian subsidiary is a domestic company. It may be taxed at the regular rate (25% or 30% depending on turnover under the 1961 Act provisions) or may opt for the concessional regime of section 115BAA at 22%, with a flat surcharge of 10%, if it forgoes specified deductions and incentives. The 2025 Act position and the present surcharge structure should be checked before relying on the effective rates.
2. What happens to profits
- Subsidiary: profits taxed in the company; dividends then taxed in the hands of the foreign shareholder at 20% or a treaty rate with withholding.
- Branch: profits are taxed in the branch at 35% and remitted to head office with no dividend withholding tax, since a remittance of branch profit is not a dividend.
The combined burden should be modelled for each route, as the lower rate in a subsidiary plus dividend tax at the treaty rate can still be lower or higher than the single 35% layer depending on the treaty.
3. Minimum alternate tax
Both entities may face MAT where normal tax is below 15% of book profit (the Income Tax Department notes that certain income taxed below 15% is excluded for foreign companies). Entities that choose section 115BAA are exempted from MAT.
4. Comparison
| Parameter | Branch office | Wholly owned subsidiary |
|---|---|---|
| Legal status | Part of foreign company | Separate Indian company |
| Tax rate | Foreign company rate (35% plus surcharge and cess) | 22% regime or regular rate, plus surcharge and cess |
| Repatriation | Branch profit remittance through AD bank | Dividend (withholding), buyback or other routes |
| Permitted activities | Specified activities only, with RBI or AD approval | Any permitted sector |
| Liability | Parent liable | Limited to the capital |
| Transfer pricing | Applies to transactions with head office in specific circumstances | Applies to transactions with associated enterprises |
| Audit and filings | Tax audit and ROC filing of annual accounts as a foreign company | Statutory audit and ROC filings, tax audit if required |
| Exit | Wind up the branch with approvals | Sale of shares or liquidation |
5. Compliance points
- A branch must file annual activity certificates and audited accounts with the RBI through the AD bank and register with the Registrar of Companies as a foreign company under the Companies Act.
- A subsidiary has board and shareholder meeting requirements, a resident director, and annual FEMA filings (FLA).
- Both need PAN, TAN, GST where applicable, and TDS compliance.
- A liaison office does not earn income; it files annual reports and is generally not taxed on income, but expenses are borne by remittance, and the activity must stay within its permitted scope.
6. Which is better?
There is no universal answer. A branch suits a short, specific project or a regulated activity where the parent wants direct control. A subsidiary suits a business that will hire a team, raise funds or sell a business. The tax rate difference does not decide the question on its own.
Practical takeaway: model the all-in tax cost over five years, including repatriation, compare it with the non-tax constraints such as RBI conditions and liability, and revisit the decision when the activity changes.
Sudheer Nagavarapu is a Partner at A2 Consultants, Hyderabad.
