Setting Up Business Entity in India by the Foreign Company

A Wholly Owned Subsidiary (WOS) is a business entity in India that is entirely (100%) owned and controlled by a foreign parent company. In India, a WOS can be set up as a Private Limited Company, Public Limited Company, or Limited Liability Partnership (LLP), each of which has unique legal and tax implications for both the foreign parent company and the WOS. From registering your business to obtaining specific licenses, there are multiple steps to ensure that your company operates smoothly within the legal framework. This article outlines the essential licenses and compliance obligations that must be met when setting up and running WOS Company in India

Requirements for Forming a Wholly Owned Subsidiary (WOS) as a Private or Public Limited Company in India:

A. By a Foreign Company:

To establish a Wholly Owned Subsidiary (WOS) as a Private or Public Limited Company in India, the foreign parent company must comply with the following requirements:

1. Reserve a Unique Company Name: Secure a unique name for the WOS through the Ministry of Corporate Affairs (MCA) using the Reserve Unique Name (RUN) service or the SPICe+ form.
2. Submit SPICe+ Form and Required Documents: File the SPICe+ form along with the Memorandum of Association (MoA) and Articles of Association (AoA) with the MCA. Ensure that the MoA and AoA clearly state that the WOS is a subsidiary of the foreign parent company, with the foreign parent company holding 100% of the WOS’s share capital.
3. Obtain Certificate of Incorporation, PAN, and TAN: Secure a Certificate of Incorporation from the Ministry of Corporate Affairs (MCA) and obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department.
4.  Open Bank Account and Deposit Share Capital:Open a bank account in India for the WOS and deposit the subscribed share capital within 60 days of incorporation.
5. Register with Statutory Authorities: Register the WOS with relevant authorities such as Goods and Services Tax (GST), Employees’ Provident Fund Organisation (EPFO), Employees’ State Insurance Corporation (ESIC), and Professional Tax, as applicable.
6. Shareholding Requirements: The foreign parent company must have at least two shareholders, one of whom can be a nominee shareholder acting on behalf of the parent company.
7.  Director Requirements: Appoint at least two directors, including at least one Indian citizen and resident. Each director must obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN).
8. Compliance with Foreign Exchange Management Act (FEMA): Follow FEMA regulations, which may include obtaining prior approval from the Reserve Bank of India (RBI) or filing necessary declarations and returns with the RBI.
9. Compliance with Companies Act, 2013: Ensure adherence to the Companies Act, including appointing at least one resident director, maintaining statutory registers and books of accounts, and filing annual returns and financial statements with the Registrar of Companies (ROC).
10. Compliance with Income Tax Act, 1961: The foreign parent company must adhere to the Income Tax Act, 1961, which includes:
    • Paying corporate tax on income earned in India.
    • Withholding tax on payments made to non-residents.
    • Complying with transfer pricing regulations and other related requirements.
11. Compliance with GST Act, 2017: Under the Goods and Services Tax (GST) Act, 2017, the foreign parent company must:
    • Obtain GST registration.File GST returns periodically.Pay GST on supplies of goods and services within India.
12. Compliance with FEMA and RBI Regulations: For foreign direct investment (FDI) in India, the foreign parent company or foreign individuals must comply with the Foreign Exchange Management Act (FEMA) and Reserve Bank of India (RBI) regulations. This includes: Obtaining prior approval from the RBI or the Foreign Investment Promotion Board (FIPB), depending on the sector for investment.
13. Corporate Tax Compliance: The foreign parent company must ensure that the wholly owned subsidiary (WOS) pays a corporate tax of 40% on the income earned in India.  The subsidiary company is eligible for all exemptions and deductions available to Indian companies under the Income Tax Law.
14. Compliance with Other Applicable Laws:   The foreign parent company and its subsidiary must comply with other relevant laws in India, including but not limited to Labour laws, Environmental law and Intellectual property laws

These regulations must be adhered to for proper functioning and compliance in India.

The foreign company must comply with various tax, legal, and regulatory requirements in India, including Filing annual accounts and returns, Withholding taxes on payments, Obtaining Permanent Account Number (PAN) and Tax Deduction Account Number (TAN), Adhering to foreign exchange management and anti-money laundering laws and Complying with labour and environmental regulations.

B. By Foreign Individual(s):

Foreign individuals wishing to incorporate a private limited company in India must meet the following requirements:

1.Directors and Shareholders: At least 2 directors and 2 shareholders are required, with one director being a resident of India.

2. Director Identification: Obtain a Digital Signature Certificate (DSC) and a Director Identification Number (DIN) for each director.

3. Company Registration: Register the company name, Memorandum of Association (MoA), and Articles of Association (AoA) with the Ministry of Corporate Affairs (MCA) via the SPICe+ portal.

4. Tax Registration: Obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for the company from the Income Tax Department.

5.  Bank Account and Share Capital: Open a bank account in India for the company and deposit the subscribed share capital within two months of incorporation.

6.  Statutory Registrations: Register the company with relevant authorities for Goods and Services Tax (GST), professional tax, Provident Fund (PF), Employees’ State Insurance (ESI), and other applicable regulations.

The incorporation process may take a few weeks, depending on document availability and approvals. Foreign individuals may need RBI or FIPB approval if their business falls under restricted or prohibited investment sectors in India.

C. Branch Office of a Foreign Company:

A foreign company can open a branch office in India to engage in activities like importing/exporting, providing consultancy, conducting research, and promoting collaborations. However, it cannot engage in manufacturing, retail trading, or agriculture. Approval is required from the Reserve Bank of India (RBI) and the Registrar of Companies (ROC) to establish a branch office.

RBI approves the opening of a branch office in India if the foreign company has been profitable for the last five years, has a net worth of at least USD 100,000, and its activities support India’s economic interests and align with the government’s FDI policy.

Note:  RBI approval for a branch office is valid for three years and can be extended with an application. The RBI may impose conditions on profit repatriation, fund utilization, and operation reporting.

To register a branch office with the ROC, the foreign company must submit Form FC-1 within 30 days, along with documents such as the charter or memorandum of association, board resolution, declaration from the authorized representative, a certificate from a professional verifying the company’s details, RBI approval, and proof of identity and address for key personnel.

Note: Once the ROC verifies the documents and fees, it will issue a certificate of establishment. The branch office must display its name, address, country of incorporation, and a statement confirming it is a foreign company branch. It must also maintain books of accounts and statutory records as per Indian laws.

The foreign company must comply with tax, legal, and regulatory obligations in India, including filing annual accounts, withholding taxes, obtaining PAN and TAN, and adhering to foreign exchange, anti-money laundering, labor, and environmental laws.

Licenses Required by WOS of Foreign Company

To establish and operate an IT company in India, you must obtain the following licenses and comply with Indian regulations:

1. Business Registration: Register your company as a Private Limited Company or Limited Liability Partnership (LLP) with the Ministry of Corporate Affairs.
2. GST Registration: Obtain GST registration if your annual turnover exceeds Rs. 20 lakhs. You must also collect and remit service tax at 14% if turnover exceeds Rs. 10 lakhs.
3. ESI/PF Registration: Register for Employee State Insurance (ESI) and Provident Fund (PF) if you have more than 10 and 20 employees, respectively, to provide social security benefits.
4. Recruiting Agent License: Required from the Ministry of Labour and Employment if you plan to offer global manpower supply services.
5. Contract Labour License: Obtain this license from the state Labour Department if you employ more than 10 contract workers. The license is valid for one year and ensures compliance with labor conditions.
6. Shop and Establishment Act Registration: Register with the local municipal authority to regulate working conditions, holidays, wages, etc.
7. MSME Registration: Register as a Micro, Small, or Medium Enterprise (MSME) to avail government benefits such as subsidies, tax exemptions, and loans.
8. Startup India Registration: Register under the Startup India initiative to benefit from tax advantages, easier compliance, and expedited patent registration.
9. Professional Tax Registration: Register for professional tax if operating in states that levy this tax on professions or employments. The tax rate and process vary by state.
10. Labour Welfare Fund Registration: Register for this fund if operating in states that have a labor welfare fund, which is contributed by both employers and employees based on wages

These are the basic legal requirements for setting up an IT company in India. Additional licenses or compliance may be necessary based on specific activities and location.

Ascent Supply Chain Consultants Private Limited (ASCC),
406 Raheja Arcade, Sector-11, CBD Belapur,
Navi Mumbai – 400614, MH – India.
Tel: 022-4897-4888
Email: info@ascc.in