Download PDF
Editorial Team
Updated :- March 5, 2024
Foreign Businesses can establish their footprint in India by setting up several entities, each for a different purpose. These include a subsidiary company, branch office, project office, and liaison office. Based on the purpose, suitability, and objectives of foreign businesses, any of these entities can be opted for. However, making the right decision over which one to opt for can be challenging if the stakeholder is unaware of their specific requirements. We have discussed these requirements in detail here, to give you a clearer picture. Our emphasis is on two popular options, subsidiary Company, and Branch Office- the ideal entities to expand a foreign business in India.
WOS is ideal if a foreign company wants to carry out full-scale manufacturing or other activities, and is planning a long-term stay in India. It is incorporated by the Indian Government and has extremely low tax liabilities.
Branch Office is ideal if a foreign company wants to establish its brand in India. So, manufacturing activities are not allowed. It is incorporated by a foreign government and operates as a foreign entity. Tax Liabilities are higher (Upto 40% tax rate).
Liaison Offices are established by foreign companies for market research purposes. It cannot generate any revenue in India. All its expenses are met by its foreign parent company. So, it operates as a foreign entity in India.
Project Offices are established for completing specific projects given to a foreign company by India’s public or private sector. It operates as a foreign entity and its income is taxed at 40% rate, plus cess and surcharge.
As discussed above, wholly-owned subsidiaries and branch offices are popular options for foreign companies to open their businesses in India. However, they have extremely different purposes. Let’s analyze the key points of differences between the two for a clearer understanding!
Wholly-Owned Subsidiary: A Wholly-owned subsidiary is a company having 100% foreign shareholding, subject to sector-specific limits. It is established by a foreign business and is incorporated under the Indian Companies Act of 2013. This allows it to operate as a distinct legal entity regulated under Indian laws and regulations. For tax purposes, it is considered at par with other Indian companies. Usually, a WOS is established when a foreign entity wants to expand its business full-scale in the Indian market.
Branch Office : On the contrary, a branch office is established with the RBI’s approval. It operates with the legal identity of its foreign parent and is not incorporated in India. However, its operations are strictly regulated by Indian regulatory bodies like the RBI and the Registrar of Companies combined. A Branch Office pays taxes at rates as high as 40%. As far as the business activity is concerned, it cannot carry out manufacturing or processing operations in India.
| Key Points of Difference between Wholly Owned Subsidiary and Branch Office | |
|---|---|
|
|
Subsidiary Company : A wholly-owned subsidiary can carry out any business activity, provided the FDI laws permit 100% foreign investment in the same. During incorporation, this business activity must be mentioned in the company’s Memorandum of Association, as prescribed under the Companies Act, 2013.
Branch Office : On the other hand, a branch office is prohibited from carrying out manufacturing and processing activities in India. Usually, it carries out the same activities as its parent company. However, here’s the specific list of permitted activities for a Branch Office in India.:
Subsidiary Company : Despite having 100% foreign investment, a wholly-owned subsidiary is incorporated and regulated under the Indian Companies Act of 2013. The Registrar of Companies ensures its compliance with the prescribed laws and regulations. Moreover, it is treated at par with any domestic company for tax purposes, subject to sector-specific FDI limits.
Branch Office : On the other hand, a branch office operates with the identity of its foreign parent company. It is regulated under the Foreign Exchange Management (Establishment in India of Branch Office or other Place of Business) Regulations, 2000. Since it is not incorporated within India, it faces stricter regulations, higher tax rates, and administration by two of the most crucial regulatory bodies for corporates, the RBI, and the Registrar of Companies.
| Governing Laws for Subsidiary Company | Governing Laws for Branch Office |
|---|---|
|
|
Subsidiary Company : A Subsidiary Company is required to meet the same criteria as a domestic company in terms of minimum subscribers and directors. This includes at least 2 subscribers and 2 directors of which one must be an Indian resident. No minimum capital is prescribed for setting up a WOS. Also, the parent company need not have a profit-making record.
Branch Office : On the other hand, a branch office can only be set up if the parent company has a profit-making record for the past five years in the native country and a net worth of at least USD 100,000. Also, it has to carry the same name as its parent company since it is not distinctly incorporated in India. Further, a branch office can only be established to carry out the activities specified within the law.
| Criteria to Setup a Subsidiary Company | Criteria to Setup a Branch Office |
|---|---|
|
|
Subsidiary Company : Once incorporated under the Companies Act, a subsidiary company can exist until its shareholders voluntarily shut it down. No approval has to be sought for its establishment. However, once established, it must adhere to the rules and regulations prescribed under the Companies Act, MOA, and AOA. Further, it must also meet the minimum criteria discussed above.
Subsidiary companies can be incorporated as a Private or Public Company. Note that, Private Companies have a restricted share transfer mechanism where the general public is not allowed to subscribe to their shares. Also, private companies cap the maximum number of shareholders to 200. Further, they cannot accept deposits from anyone other than their members, directors, or their kins. Contrary to this, Public Companies offer free share transfers to the general public as well. Due to this reason, they face stricter regulations from SEBI authorities. Whichever structure you opt for, make sure all their specific requirements are met.
Branch Office : To establish a branch office in India, a foreign company must first get approval from the RBI. Once the approval is granted, it lasts for 3 years from the approval date. This period can be extended by the Government. However, before seeking approval or extension of approval, the following conditions must be met promptly:
Besides approval by the RBI, and incorporation by the Registrar of Companies, several other registration and licensing requirements need to be met. These include registrations under Indian Labour Laws, Tax laws, Local laws and more. Let’s have a brief look at these requirements for both Subsidiary Company and Branch Offices in India.
| Subsidiary Company | Branch Office |
|---|---|
|
|
GST and withholding tax provisions apply similarly to both Subsidiary and Branch Offices. However, income tax provisions differ for the two. Branch Offices have to pay higher income tax compared to subsidiaries in India. This is because branch offices are considered foreign entities whereas subsidiaries are considered entities incorporated in India. Let’s understand their tax liabilities and the prescribed rates separately.
| Particulars | Subsidiary Company | Branch Office |
|---|---|---|
| Income Tax Rate | Rates applicable are similar to an Indian Company; 15% for manufacturing companies, 22% for others. Cess and Surcharge are also applicable. | Rates applicable are similar to a Foreign Company; 40% of total income. Cess and Surcharge are also applicable. |
| Tax on Dividend |
| Profits can be freely repatriated to the Parent Company subject to Income tax payment. |
| GST | GST Rates are uniform for both entities and range from 1% to 28%, subject to ITC claims. | |
Subsidiary companies and branch offices both have a foreign origin. So, the government has prescribed strict reporting requirements for them. These requirements must be completed within the prescribed time frame to avoid penalties and legal consequences. The Reserve Bank of India and the Registrar of Companies are crucial authorities governing these compliances under the Indian Government.
| Subsidiary Company Reportings | Branch Office Reportings |
|---|---|
| FDI Reporting to RBI (FC-GPR) | ROC Yearly filings of BO and World Accounts |
| Annual Return - Foreign Liabilities and Assets (FLA) | Annual Activity Reporting to RBI through AD |
Besides the specific reporting requirements discussed above, subsidiary companies and branch offices must fulfill the usual tax and regulatory compliances prescribed for all businesses in India. These include filing GST returns, TDS returns, PF returns, ESI returns, and conducting statutory audits. Here’s a brief list along with the due dates.
| S.No | Type of Compliance | When to do it ? |
|---|---|---|
| 1 | GST Payment (Return in GSTR-3B) | Monthly |
| 2 | GST Return | Monthly or Quarterly |
| 3 | TDS Payment | 7th of Next Month |
| 4 | TDS Return | Quarterly |
| 5 | PF and ESIC Payment & Return | Monthly |
| 6 | Professional Tax Payment & Return | Monthly |
| 7 | Statutory Audit | Annual |
| 8 | Annual Income Tax Return | Annual |
| 9 | Annual Return to ROC | Annual |
So far, we have discussed the differences in compliance between the Subsidiary and the Branch Office. However, the two entities have operational differences too, which include those regarding management, audit, remittance of profits, borrowing limits, and liabilities of the parent company. Analyzing these differences will give a clear and complete picture.
| Particulars | Subsidiary Company | Branch Office |
|---|---|---|
| Management | Managed by a Board of Directors. At least two directors are required of which one must be an Indian Resident. | Managed by an Authorised Representative of the parent company, resident in India (Country Manager) |
| Audit | Financial statements are liable to Statutory Audit by a Chartered Accountant. Internal and Tax audits are also applicable subject to certain terms and conditions. | Financial statements would be liable to Statutory Audit by a Chartered Accountant and tax audit, subject to certain terms and conditions. |
| Remittance of profit to parent company |
| Profits can be freely repatriated to the Parent Company subject to payment of applicable taxes and adherence to FEMA guidelines. |
| Borrowing |
| The Branch Office is not allowed to borrow locally unless a prior approval from the RBI is taken |
| Permitted Incomes | All income arising out of its business activities can be spent on routine expenses. | The entire expenses of the BO will be met either from funds received by the parent company through normal banking channels, or by the income generated in India. |
| Liabilities Of Parent Company/Head Office | The parent company has its liability limited to the extent of its shareholding. Its assets are not at risk of attachment. | The parent company has unlimited liability and its assets are at risk of attachment if the BO’s liabilities excceds its assets in India. |
Subsidiary Companies and Branch Offices are popular options for a foreign company starting their business in India. Choosing between the two can be challenging if you lack proper awareness of their differences. The right knowledge of their pros, cons, and suitability will help you decide which entity to opt for, by accurately weighing the risks and challenges of doing so. Our elaborate discussion on the differences between Subsidiary and Branch Companies will help you with this. For more guidance and information, you can consult our experts directly.
CA, CS, CMAAdvocateTax PractitionersFinancial Consultants
