India still has a big influx of foreign companies interested in growing their businesses into one of the fastest developing markets in the world. Having a massive population of consumers, a developed infrastructure, favourable government policies, and increased use of digital technology, India presents massive opportunities in many sectors, including technology, manufacturing, healthcare, retail, and professional services.

Nevertheless, prior to penetrating into the Indian market, foreign firms have to determine the business structure that would best fit their interests. The two most popular alternatives are the establishment of a subsidiary company or establishment of a branch office.

Even though both structures enable a foreign business to get a presence in India, the two structures differ greatly in terms of legal status, acceptable activities, taxation, compliance and operational flexibility.

These differences are crucial to be understood before one makes a decision.

Subsidiary Company: An Independent Legal Personality.

The Indian subsidiary is typically a company formed as a limited company that is privately held according to the Companies Act, 2013. The parent company abroad is the one that owns either 100 percent or majority of the shares.

A subsidiary is considered to be a separate legal entity compared to its parent company unlike a branch office.

This means:

• The subsidiary is able to make contracts on its own name.
• It is allowed to own assets and property in India.
• Its debts are usually restricted to the company.

The parent company does not bear the obligations of the subsidiary directly.

Foreign business ventures that intend to establish a long-term presence in India often prefer a wholly owned subsidiary.

Key Advantages of Establishing a Subsidiary

A subsidiary is more flexible in its operations and it is allowed to conduct a broader business.

A subsidiary can:

• Manufacture goods
• Provide services
• Direct customer sales.
• Hire employees
• Enter into commercial contracts
• Raise local funding

India also allows 100 percent foreign direct investment (FDI) in most industries under the automatic route, that is, it does not require government approval.

Nevertheless, there are other areas that are yet to be allowed by the government or the ownership is restricted by foreigners.

Registration Process

In order to form a subsidiary, the foreign firm needs to:

• Get Director Identification Numbers (DIN) of directors.
• Request Digital Signature Certificates (DSC).
• Register the name of the company.
• Incorporate the business under the ministry of corporate affairs (MCA).
• Acquire permanent account number (PAN) and tax deduction account number (TAN).
• Open bank account in India.

The company has to adhere to Indian corporate, tax, and labour laws once it has been incorporated.

Branch Office: An Extension of the Parent Company.

A branch office is not an independent legal personality. It is viewed as an offshoring of the foreign company running in India.

The Reserve Bank of India (RBI) allows branch offices. Any foreign company is normally required to open a branch office in India with the approval of the RBI.

As opposed to a subsidiary, the branch office is closely connected with the parent company. Accordingly, the branch office liabilities and obligations could be held to the responsibility of the foreign company.

Branch Office Authorized activities.

A branch office can only perform some approved activities in India.

These may include:

• Goods exportation and importation.
• Provisions of professional or consultancy services.
• Conducting research work.
• Encouraging technical or financial partnerships.

As the channel of communication between the parent company and the Indian customers.

Nonetheless, a branch office is not generally able to:

• Conduct direct manufacturing processes.
• Trade on a retail basis.
• Earn money doing jobs that are not within the scope.

Due to these limitations, branch offices tend to be more appropriate to the companies that desire to have a presence in India on a limited scale.

Eligibility for Opening a Branch Office

To establish a branch office, the foreign firm normally has to:

• At least five years of history of profitable business.
• Not be below required by RBI regulations net worth.
• Gain the Reserve Bank of India approval.
• Approval and registration with the Registrar of Companies.

The approval process is longer than incorporation of a subsidiary.

Differences in Taxation and Compliance.

Among the key distinctions between a subsidiary and a branch office is associated with taxation.

A subsidiary is taxed as a company in India. It can also qualify to receive lower corporate tax rates given to domestic companies depending on the nature of the company and turnover rate.

A branch office, on the other hand, is taxed as a foreign company, which generally attracts a higher tax rate.

Moreover, the branch offices can also encounter further limitations in repatriation of profits to the parent company.

Compliance wise, the two structures must maintain accounts, submit their tax returns, and adhere to the Indian regulations. Nevertheless, there are also certain RBI reporting requirements on branch offices.

Which Is The Better of the Two?

The appropriate option will be based on the business objectives of the foreign company.

A subsidiary is more likely to be appropriate when:

• The company desires to have a long-term presence in India.
• Direct sales or manufacturing are needed.
• More operational flexibility is required.
• The company has intentions of growing considerably.

When: A branch office can be more suitable in case:

• The business desires to have a lesser or interim presence.
• It can only deal with liaison, consulting, or support services.
• The company is not desirous to establish a distinct legal entity.

A wholly owned subsidiary is frequently considered to be more viable and malleable to most of the foreign businesses that are entering India today.

Final Thoughts

Foreign companies need to consider their business goals, industry-related policies, and their future expansion strategies before making a decision.

Professional advice may assist in making sure that the selected structure corresponds with the law and the business objective.

We, Badami & Kamath Chartered Accountants help foreign firms to set up a presence in India through strategic guidance on company formation, regulatory clearances, tax planning and maintenance of compliance.