Subsidiary Companies in India
What Is a Subsidiary ?
In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or the holding company.
The parent company holds or controls the subsidiary company. The parent company should have more than 50% of ownership in another company to make it a subsidiary. If in case parent company acquires 100% control of holding then it becomes a wholly owned company.
Subsidiary companies are separate legal entities from their parent companies, which means they have their own management, operations, and financial reporting. However, the parent company exerts control over the subsidiary through its ownership stake, typically by appointing the subsidiary’s board of directors and influencing its strategic decisions.
There are various reasons why a company may establish subsidiaries, including:
- Diversification: Subsidiaries allow a company to enter new markets or industries without directly affecting its core operations. This can help spread risk and provide opportunities for growth. Companies can enter new markets and products through its subsidiary.
- Legal and Financial Protection: Subsidiaries can provide legal and financial protection for the parent company. If a subsidiary faces legal or financial troubles, it is generally separate from the parent company’s assets and liabilities.
- Tax Benefits: Subsidiaries can be established in jurisdictions with favorable tax regulations, allowing the parent company to benefit from tax advantages and optimize its overall tax liability.
- Branding and Market Segmentation: Companies may create subsidiaries to target specific customer segments or to maintain separate brand identities within different markets.
- Acquisitions and Mergers: Subsidiaries can be created through acquisitions or mergers with other companies, allowing the parent company to expand its operations or integrate complementary businesses.
Sec 2(42) of the Companies Act, 2013 (‘Act’) defines a foreign company as a body corporate or company that is incorporated outside India, but-
- Has a business place in India, whether through an agent or by itself, either physically or through electronic mode.
- Conducts business activity in India in any other manner.
Benefits of Indian Subsidiary for a Foreign Company
Establishing an Indian subsidiary can offer several benefits for a parent company. Here are some specific advantages of having an Indian subsidiary:
- Access to a Growing Market: India is one of the fastest-growing major economies in the world, with a large and increasingly affluent consumer base. Having an Indian subsidiary allows companies to tap into this market, expand their customer reach, and capitalize on the country’s rising purchasing power. India provides huge customer base to foreign companies and its subsidiary.
- Strategic Geographic Location: India’s geographical location provides a strategic advantage for businesses. It serves as a gateway to the South Asian and Southeast Asian markets, offering opportunities for regional expansion and trade.
- Skilled Workforce: India is known for its abundant pool of highly skilled and educated professionals. By establishing an Indian subsidiary, companies can access a talented workforce at a competitive cost. The country’s IT and technology sectors, in particular, have a strong reputation for skilled personnel.
- Cost Efficiency: Operating costs, including labor and infrastructure, are comparatively lower in India than in many developed countries. Establishing a subsidiary in India can result in cost savings and improved profitability, especially for labor-intensive industries.
- Research and Development (R&D) Hub: India has a thriving R&D ecosystem, with numerous research institutions, universities, and technology parks. Setting up an Indian subsidiary can provide access to this ecosystem, enabling companies to engage in collaborative R&D activities, innovation, and technology transfer. More than 200 institutions provide R&D services in India.
- Government Incentives and Policies: The Indian government offers various incentives, tax benefits, and policies to attract foreign investment. These include tax holidays, subsidies, export promotion schemes, and simplified regulatory frameworks, which can enhance the attractiveness of setting up an Indian subsidiary.
- Intellectual Property (IP) Protection: India has strengthened its IP protection laws and regulations in recent years. Establishing a subsidiary in India can help companies safeguard their intellectual property rights and benefit from improved legal frameworks for IP enforcement.
- Manufacturing and Supply Chain Opportunities: India has a significant manufacturing base and offers opportunities for companies seeking to diversify their supply chains or leverage India’s manufacturing capabilities. Establishing an Indian subsidiary can facilitate local production, sourcing, and distribution.
- Cultural Understanding and Localization: Having an Indian subsidiary allows companies to develop a deeper understanding of the local culture, business practices, and consumer preferences. This facilitates better localization of products, services, and marketing strategies, resulting in improved customer engagement and market penetration.
- Sustainable Growth Potential: India’s demographic trends, urbanization, and rising middle class present long-term growth potential. By establishing an Indian subsidiary, companies can position themselves to benefit from India’s economic growth trajectory and contribute to sustainable business expansion.
Taxation of Foreign Companies in India
As per Section 139(1) of Income tax Act 1961 Foreign companies registered in India is required to file an income tax return. However, paying income tax in India depends on whether the company earning profit in India. The income tax rate applicable to foreign companies in India is 41.6%. Income below 10 crores is taxed at 42.43% and when the income of the branch office is above 10 crores then the tax rate applicable is 43.68%.
Tax benefit for Foreign Subsidiaries
If a foreign company incorporates an Indian subsidiary then it can avail tax benefits in India. With respect to a subsidiary company, when annual turnover is less than 250 crores and income is below 1 crore then they are taxed at 26%, income below 10 crores is taxed at 27.82% and income above 10 crores is taxed at 29.12%. When the annual turnover of the subsidiary company exceeds 250 crores then income below 1 crore is taxed at 31.20%, income below 10 crores is taxed at 33.38%, and income above 10 crores is taxed at 34.94%.