Summary: Foreign companies establishing a private limited subsidiary in India must comply with several key regulatory requirements. A resident director, defined as someone residing in India for at least 182 days in a year, is mandatory. If the Indian subsidiary receives share capital from its foreign holding company, Form FLA must be filed annually with the RBI by July 15. At least four board meetings must be held annually, with video conferencing permitted for foreign directors, and recordings preserved. Companies raising share capital over INR 10 lakh must file Form 61A (SFT) by May 30 of the succeeding year. Upon receiving share capital, a Foreign Inward Remittance Certificate (FIRC) from the bank is necessary. Agreements between holding and subsidiary entities must outline transactions clearly while avoiding Permanent Establishment (PE) risks in India. Companies must also analyze tax implications, ensure proper valuation of shares, prepare transfer pricing reports, and file Form 3CEB to comply with Indian tax laws.
Compliance Rules for Foreign Companies in India
1. Mandatory to have Resident Director- For a foreign company to be registered as Private limited Company in India, it is mandatory to have a resident director. A person is considered as resident if he stays in India for 182 days o more in the relevant year.
2. Filing Form FLA to RBI- If the Indian subsidiary company has received share capital from foreign holding company, they need to file Form FLA on every 15Th July of the relevant year. Form FLA is filed in case of foreign assets & liabilities owned by the Company.
3. Conducting Board meeting through Video Conference- Company has to mandatorily conduct atleast 4 board meetings in every 120 days. In case foreign directors are on board in the Company, Company can conduct board meetings through video conferencing. Recordings of such meeting should be saved for future purposes.
4. Filing SFT Form- In case Company has raised share capital for more then INR 10 lakhs during the financial year, Company has to file Form 61A SFT by 30th May in Succeeding year.
5. Obtain FIRC from Bank- On receipt of share capital by foreign Company, make sure to obtain Foreign Inward remittance Certificate (FIRC) from Bank wherein the code of share capital receipt shall be mentioned.
6. Preparing agreement contract between holding & Subsidiary Company- Whenever a foreign holding & Indian Subsidiary Company setup has been setup, make sure both the companies enter in the agreement wherein products & services supplied by the either of the Company shall be clearly mentioned alongwith the terms of the Contract
7. PE Analysis- Make sure that while entering agreement & providing services by foreign Company in India, foreign company does not create a Permanent establishment in India. PE can be created by presence of foreign Company in India or buy digital presence. From branch offices to construction sites, PE can take many forms. & if the PE is created in India, foreign Company can be taxed @ 35% India. Make sure you analyse the PE structure in India before doing business in India.
8. Tax implication on issue of Shares- When shares are issued by the Indian subsidiary Company in India, make sure to analyse the tax implications on issues of shares. It is important to get the valuation of the Company done prior to issuing of shares. Shares should be issued as per the valuation of the Company. In case, shares are issued at lower the the fair market value of the shares, holding Company shall be taxed under the section 56(2)(x) of the Income Tax Act, 1961. The section explains that if shares are issued at lower the FMV of the shares, then the difference the FMV & the price at which shares are issued shall be taxed under the head Income from other sources, which shall be taxed @ 30% in the hands of the holding Company in India
9. Prepare Transfer Pricing report- The Transfer pricing report should be prepared to ensure that transactions entered between the holding & subsidiary company are entered at Arm’s length Price. The most appropriate method should be chosen to ensure transactions are entered at Arm’s length Price & benchmarking should be done accordingly. Further, Form 3CEB should also be filed by 30th November of the succeeding year.
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About the Author: Author is CA Vidhu Duggal helping in advisory on domestic & International taxation issues. She is also founder of Vidhu Duggal & Company. Chartered Accountants, a Chartered Accountancy firm with its head office at New Delhi and can be reached at vidhuduggal94@gmail.com or+91-9268747482 .
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