Foreign Subsidiary Company

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The Foreign Subsidiary Company

e foreign subsidiary company is an organization, which is wholly-owned or partly owned by the parent company, operating in one country with its parent company situated in another country. Example, a company incorporated in the USA (Parent company) is executing the same business operation through a subsidiary company in India

However, this foreign subsidiary company should abide by the rules and regulations of the domestic law of the corresponding country where it is situated. It should not follow the laws applicable to their parent company.

A foreign subsidiary company is any company, where 50% or more of its equity shares are owned by a company that is incorporated in another foreign nation. The said foreign company in such a case is called the holding company or the parent company.

For a company to be a foreign subsidiary company in India, the company itself must be incorporated in India. It does not matter which country the parent company is incorporated in.

Compliances are based on many aspects of the company. One must understand what all compliances are supposed to be met according to the type of company that is incorporated, the industry of operations, annual turnover, number of employees. A foreign company is defined under section 2(42) of the Companies Act, 2013, such a company must follow regulations and rules established under multiple legislations and orders such as:

  • Companies Act, 2013 – Income Tax Act, 1961
  • GST, 2017 – SEBI rules and regulations
  • FEMA (Foreign Exchange Management Act), 1999 – RBI compliances etc.
Checklist for establishing a foreign subsidiary company
  • To incorporate a private company in India,
      Two directors
  • Two members (Shareholders).
  • With these two directors, at least one should be an Indian citizen a person who stayed in India at least 182 days in the previous year).
  • It should have a minimum paid-up share capital of Rs 1 lakh or higher paid-up capital as determined by the Articles of Association (AOA).
  • AOA will restrict the right to transfer the shares.
  • Any private company registered under the Companies Act, 2013, will prohibit the promotion to subscribe for any shares or debentures of the company, by the public.
  • Similarly, it will prohibit the entity to accept the deposits from persons other than the members, directors, and relatives.
  • Control also becomes a concern when a company is partly owned by another external organization.
  • The parent company needs to guarantee the loan obtained by its subsidiaries. So it shows the liability of the parent company to pay off the debts.
  • As a subsidiary company, the decision-making process is a little bit time-consuming. Always, before making any decision, it should be consulted with the parent organization.
  • The parent company can not have complete access to the subsidiary’s cash flows, depending upon the management structure and the overall control of its exercises.