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Foreign Subsidiary Company Compliance

A company where 50% or more of its equity shares are owned by a foreign company is a foreign subsidiary company. The foreign company in such case is called the holding company or the parent company.

Compliances are based on the company that is incorporated. Hence, it is necessary to understand what compliances are supposed to be met according to the type of the company, the operations of the industry, annual turnover, number of employees, etc.

Foreign subsidiary companies are mandatorily required to maintain compliance according to the Income Tax Act, Companies Act, Transfer pricing guidelines, and FEMA guidelines.

The foreign subsidiary compliance includes income tax filing with the income tax department, annual return with the ministry of corporate affairs, and other filings with the authorities like the Reserve Bank of India or the securities and exchange board of India (SEBI).

All the companies even foreign subsidiaries will have to comply with other Indian tax regulations like the TDS, GST regulation, PF regulation, ESI regulations, and others. The compliance requirement for a foreign subsidiary company would differ based on the industry, state of incorporation, number of employees, and sales turnover.

Foreign Direct Investment of up to 100% is allowed into an Indian private limited company and limited company for most of the sector. The amount of FDI in India has increased manifold over the last few years due to a booming economy and welcoming environment for foreign investors.

FDI Inflow into the Company

What is the role of FDI in a foreign subsidiary company?

An Indian Company that issues shares or convertible debentures under the FDI can receive the money for such shares or debentures through the following modes:

  • Remittance through normal banking channels.
  • Debit to NRE/FCNR account of a person concerned maintained with a Bank.
  • Conversion of royalty/lump sum/ technical know-how fee due for payment or conversion of ECB shall be treated as consideration for issue of shares.
  • Conversion of import payables/pre-incorporation expenses/share swap can be treated as consideration for the issue of shares with the approval of FIPB.
  • Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

Reporting FDI Inflow into the Company

Within 30 days of receipt of share application money/ amount of consideration from the foreign investor, the Indian company must report details of the FDI inflow to the foreign exchange Department and the RBI.

The report must be submitted to the regional office at the RBI under whose jurisdiction the registered office is located. The form to be filed at this stage is the advance reporting form which should contain the following details:

  • Name and address of the foreign investor(s);
  • Date of receipt of funds and the Rupee equivalent;
  • Name and address of the authorized dealer through whom the funds have been received;
  • Details of the Government approval, if any; and
  • KYC report (Identify and Address proof) on the non-resident investor from the overseas bank remitting the amount of consideration.

Issuing Shares of Indian Company to the Foreign Investor

Money received from the foreign investor for the purchase of shares in the company will be accounted for under share application money.

The Indian Company is required to issue shares within 180 days from the date of inward remittance to the foreign investor, to avoid violation of the FEMA regulations.

FDI Reporting to RBI through Form FC-GPR

  • Within 30 days from the date of the issuance of the shares, the form FC-GPR must be filed with the RBI along with the following documents.
  • Certificate from the Company Secretary of the company accepting investment from persons who are residing outside India certifying that:
  • “The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.”;

AND

  • The investment by the Foreign Investor in the Company is within the sectoral cap/statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route;

OR

  • Shares in the company have been issued to the Foreign Investor in terms of SIA/FIPB approval number and date. A copy of the Foreign Investment Promotion Board (FIPB) must be attached.
  • Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

Download format for FC-GPR

Form FC-GPR and the company secretary / Chartered accountant certificates must be submitted by the company to the Foreign exchange department, Reserve bank of India.

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Indian Transfer Pricing

What is transfer pricing?

The Income Tax Act provides that every person entering into an international transaction or specified domestic transaction shall obtain a report from a Chartered Accountant in the prescribed form and furnish the same to the Income Tax Department. The penalty for failure to furnish a report from a Chartered Accountant in the manner provided above is Rs. 1,00,000.

Documentation Requirement for Transfer Pricing

  • A detailed description of the ownership of the entity with the details of the share and the ownership interests held therein by the other enterprises.
  • A profile of the multinational group of which the entity is a part along with the name, address, legal status, and tax residence of each of the enterprises comprised in the group with whom the domestic transaction has been entered into'
  • A detailed description of the business of the entity and the industry in which the entity operates and of the associated business enterprises with whom the entity has transacted.
  • The nature and the terms of the specified domestic transaction entered into with each associated enterprise, details of property transferred or services provided, and the quantum and the value of each of such transaction or class of such transaction.
  • Description of the function performed, risks assumed and assesses employed or to be employed by the entity and by the associated enterprises involved in the specified domestic transaction.
  • A record of the economic and market analyses, forecasts, budgets, or any other financial estimates prepared by the entity for the business as a whole and for each division or product separately, which may have a bearing on the specified domestic transactions entered into by the entity.
  • A record of uncontrolled transactions taken into account for analyzing their comparability with the specified domestic transactions entered into, including a record of nature, terms, and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the specified domestic transactions.
  • A record of the analysis was performed to evaluate the comparability of uncontrolled transactions with the relevant specified domestic transaction.
  • A description of the methods considered for determining the arm's length price concerning each specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case.
  • A record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the specified domestic transaction, and the comparable uncontrolled transactions, or between the enterprises entering into such transactions.
  • The assumptions, policies, and price negotiations, if any, have critically affected the determination of the arm's length price.
  • Details of the adjustments, if any, made to transfer prices to align them with arm’s length prices determined under the Income-tax Rules and consequent adjustment made to the total income for tax purposes.
  • Any other information, data, or document, including information or data relating to the associated enterprise, may be relevant for the determination of the arm's length price.

Compliances

The following are the more important compliances that a foreign subsidiary company needs to comply with as per Section 380 and 381 of the Companies Act, 2013:

Form FC-1 under Section 380

This form is to be filed within thirty days of the incorporation. The form should be submitted with the required files and certifications etc that are given by RBI.

Form FC-3 under Section 380

Form FC-3 under Section 380 to the respective Registrar of the Companies depending on where the company is incorporated in India. The form must contain the details of the place of the business as well as the financial records of the company.

Form FC-4 under Section 381

This form concerned with the annual returns of the company has to be filed within 60 days from the end of the preceding financial year.

Financial statements

The Foreign subsidiary company has to submit the financial statements of the Indian business and operations. The statement must be submitted within six months of the end of the financial year.

The financial statements must include:

  • Statements on the transfer of the funds
  • Statements of the earnings repatriated
  • Statements on related party transactions such as a statement on sales.
  • Transfer of property purchases.

Accounts audit

The accounts of the foreign subsidiary company must be audited by a practicing chartered accountant. It should be properly arranged and made available by the company for the audit.

Authentication and translation of documents

The documents that are submitted to the ROC must be validated by a practicing lawyer. The documents also need to be translated into English before their validation and submission.

Compliances under the Income Tax Act and the GST Act

Periodic Compliances

These compliances are to be met periodically as these compliances happen at regular intervals multiple times a year. These Compliances may need to be met on a quarterly or half-yearly basis.

Annual Compliances

Annual Compliances are to be met once a year and they are mandatory. For instance, the company has to comply with the following compliances:

  • GST filings
  • TDS filings under the Income-tax Act
  • Compliances under RBI
  • Compliances under rules and regulations of SEBI
  • Annual financial statements

Event-based Compliances

These types of compliances are mandatory in case of a certain event or action of the Company. There are two event-based compliances under RBI regulations and FEMA guidelines they are:

  • FC-TRS: This is concerning the transfer of Foreign subsidiary company's between the Indian resident and an NRI or vice versa. Such transfer may be done by way of sale or gift. The FDI policies require that these transactions should be reported within 60 days from the date of transfer.
  • FC- GPR: Concerned with the remittance received by the shareholders of a foreign subsidiary company. This form specifies the mode of transfer of the remittance by the company to its shareholders.

Importance of meeting the Compliances

What are the penalties for non-compliance?

  • 1

    Penalty for Failing to Furnish Chartered Accountant Report

    Entities that enter into an International transaction are required to obtain a report from a Chartered Accountant. Failing to furnish a report from the CA can lead to a penalty of Rs. 1 lakh.

  • 2

    Penalty for Not Maintaining Documents

    Suppose the entity fails to maintain the documents or failure to report or even furnishing incorrect information can attract a penalty of 2 % of the value of each transaction where the non-compliance exists.

  • 3

    Penalty for Not Producing Documents

    The tax authorities may in any proceeding require any person who has entered into the international transactions to furnish any related information or document.

    The document must be furnished within 30 days from the date of receipt of a notice.

    Failure to furnish can attract a penalty equal to 2 % of the value of the transaction specified for each failure.

Frequently Asked Questions

How to audit a Foreign Subsidiary?

The accounts of the foreign subsidiary company should be audited by a practicing CA, these accounts are to be properly arranged and should be made available by the company for the audit.

What is a foreign subsidiary?

A foreign subsidiary company is a business entity owned by another entity from a country to a certain extent. The company that owns the subsidiary is the holding company or the parent company.

What are the major benefits of the Foreign Subsidiary company?

The major benefits of the foreign subsidiary company are the tax benefits, risk reduction, and increased efficiency.

What is the role of foreign subsidiaries?

The major activities of the Foreign Subsidies involved marketing and sales, manufacturing, research, and development, there is after-sales service too. The sales focus of the foreign subsidiary is international.

What are the essential compliances for the Foreign subsidiaries?

The foreign subsidiaries are required to file Form FC 1 and FC 3 under section 380, Form FC 4 under Section 381, financial statements, accounts audit, authentication, and translation of documents.

What is FC Form 1 under section 380?

The FC 1 Form is very important as the form has to be within 30 days of incorporating the foreign subsidiary. The form is to be submitted with the necessary files and the certifications.

What is FC Form 3 under section 380?

This form is to be submitted to the ROC depending upon where the company is incorporated in India. This form must include the details of the area where the business is going to conduct the operations as well as the financial records of the company.

What is FC Form 4 under section 381?

The annual returns of the company are in this Form. It has to be filed within sixty days from the end of the preceding financial year.

Last updated: July 05, 2021

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