Setting Up Subsidiary Abroad explained: this guide covers what Setting Up Subsidiary Abroad means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Setting Up a Subsidiary Abroad — Guide for Indian Companies Going Global
As Indian businesses expand globally, setting up a Wholly Owned Subsidiary (WOS) or Joint Venture (JV) in a foreign country has become increasingly common. The process involves compliance with Indian regulations (FEMA ODI framework), host country corporate laws, tax planning using DTAAs, and ongoing transfer pricing documentation. This guide covers the end-to-end process for Indian companies establishing overseas subsidiaries.
Why Set Up an Overseas Subsidiary
Operational reasons include market access (serving local customers without cross-border logistics), regulatory compliance (certain countries require local incorporation for operating licences, government contracts, and banking relationships), tax efficiency (lower corporate tax rates in some jurisdictions, DTAA benefits, and participation exemptions on dividends), IP protection (registering and holding IP in jurisdictions with strong IP regimes), and risk management (isolating overseas business risks from the Indian parent through separate corporate identity).
Country Selection Factors
Market size and growth potential, corporate tax rate and DTAA with India, ease of incorporation and ongoing compliance costs, availability of skilled workforce, political and economic stability, currency stability and foreign exchange regulations, bilateral investment protection (BIT/BIPA), and time zone and cultural alignment with Indian operations. Singapore consistently ranks as the top choice for Indian companies due to its 17 per cent corporate tax rate, comprehensive DTAA with India, English-speaking business environment, robust legal system, and strategic location as an Asia-Pacific hub.
Process — Step by Step
Step 1 — FEMA/ODI Compliance (India side): Board resolution approving the overseas investment. Ensure total financial commitment within 400 per cent of net worth. File Form ODI with AD Bank. Obtain FIRC (Foreign Inward Remittance Certificate) for the outward remittance.
Step 2 — Incorporation (Host Country): Choose entity type (typically private limited or LLC equivalent). Prepare constitutional documents (MOA/AOA or equivalent). Appoint local directors (if required by host country law — many jurisdictions require at least one local resident director). Register with the local registrar/companies authority. Obtain tax registration (VAT/GST equivalent, income tax). Open local bank account.
Step 3 — Capital Infusion: Remit investment amount from India through the AD Bank. The overseas subsidiary issues shares to the Indian parent. Maintain documentary evidence of the share subscription and allotment.
Step 4 — Operational Setup: Hire local employees (comply with local employment laws). Register for social security and pension contributions. Set up office space and infrastructure. Obtain sector-specific licences (if applicable).
Step 5 — Ongoing Compliance: File APR with RBI annually. Maintain transfer pricing documentation for all inter-company transactions. File annual returns and tax returns in the host country. Consolidate financials of the subsidiary with the Indian parent's accounts (Ind AS 110 — Consolidated Financial Statements).
Tax Planning and DTAA Considerations
India has DTAAs with 95+ countries. Key planning opportunities include: choosing a jurisdiction with a lower withholding tax rate on dividends (e.g., India-Singapore DTAA: 10 per cent vs domestic rate of 20 per cent), structuring management fees and royalty payments from the subsidiary to the parent to utilise DTAA reduced rates, ensuring transfer pricing compliance to avoid double taxation, and utilising the Mutual Agreement Procedure (MAP) under the DTAA for dispute resolution.
The Indian parent must declare income from the overseas subsidiary (dividends, interest, capital gains on sale of subsidiary shares) in its Indian income tax return and claim credit for foreign taxes paid under Section 90/91 of the Income Tax Act. The Foreign Tax Credit Rules 2016 prescribe the methodology for claiming credit.
Latest Updates
The OECD Pillar Two Global Minimum Tax (15 per cent minimum effective tax rate for MNEs with consolidated revenue above EUR 750 million) is being implemented globally — Indian companies with overseas subsidiaries may need to assess the impact of top-up taxes in low-tax jurisdictions. India has not yet enacted domestic legislation implementing Pillar Two but has endorsed the OECD framework. The RBI's 2024 clarification on ODI in digital assets and virtual digital assets (prohibited) and the government's push for internationalisation of the Indian Rupee (bilateral trade settlement in INR with 22 countries) are relevant developments for overseas subsidiary planning.
Disclaimer: This article is for informational purposes only and does not constitute legal or professional advice. Please consult a qualified CA/CS for advice specific to your situation.