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.
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:
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:
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.
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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Annual return filing, income tax return filing, secretarial services, LEDGERS accounting software and compliance management for foreign subsidiary company with a turnover of less than Rs.10 lakhs per annum.
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Annual return filing, income tax return filing, secretarial services, LEDGERS accounting software and compliance management for foreign subsidiary company with a turnover of less than Rs.50 lakhs per annum.
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Annual return filing, income tax return filing, secretarial services, LEDGERS accounting software and compliance management for foreign subsidiary company with a turnover of less than Rs.100 lakhs per annum.
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.
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:
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 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.
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.
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:
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.
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.
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 are to be met once a year and they are mandatory. For instance, the company has to comply with the following 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:
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.
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.
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.
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.
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.
The major benefits of the foreign subsidiary company are the tax benefits, risk reduction, and increased efficiency.
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.
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.
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.
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.
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