A foreign subsidiary company functions as an autonomous business entity. Its formation occurs when a company from another country holds a minimum of 50% of its equity shares. In this setup, the foreign company that possesses the majority of these shares is commonly denoted as the “holding company” or “parent company.” In this blog, we shall see what are the foreign subsidiary company compliances in India.
Regulatory Framework for Foreign Subsidiary Companies
Foreign subsidiary companies in India fall under the purview of various legislations and orders, including but not limited to:
- Companies Act, 2013
- Income Tax Act, 1961
- Goods and Services Tax Act, 2017
- Securities and Exchange Board of India rules and regulations
- Foreign Exchange Management Act, 1999
- Reserve Bank of India (RBI) compliance regulations
These legislations and regulations collectively govern the operations and compliance obligations of foreign subsidiary companies operating in India.
Major Foreign Subsidiary Company Compliances in India
Foreign subsidiary companies in India must adhere to a set of crucial compliances outlined in Section 380 and 381 of the Companies Act, 2013. These compliances are essential to ensure legal and regulatory adherence for the smooth operation of the subsidiary company. The primary compliances include:
1. Form FC-1 Submission (Section 380)
The Form FC-1 must be filed within a span of thirty days from the incorporation of the subsidiary company in India.
2. Form FC-3 Submission (Section 380)
Form FC-3 is to be submitted to the Registrar of Companies (ROC) corresponding to the location of the company’s incorporation in India.This form should encompass details regarding the areas where the business intends to conduct operations and the financial records of the company.
3. Form FC-4 Filing (Section 381)
Form FC-4 pertains to the submission of annual returns by the company.
Annual returns must be filed within sixty days from the end of the preceding financial year.
4. Submission of Financial Statements
Financial statements concerning the Indian business and operations must be submitted within six months of the end of the financial year. These financial statements must include information on fund transfers, repatriated earnings, and details on related party transactions, such as sales, property transfers, and purchases.
5. Audit of Accounts
All accounts of the foreign subsidiary company must be subjected to an audit conducted by a practising Chartered Accountant.The company is required to maintain and provide properly organised financial records for the audit.
6. Authentication and Document Translation
All documents submitted by the company to the ROC must be validated by a practicing lawyer in India.
These documents should be translated into English before validation and submission to ensure compliance with the language requirements.
Adhering to these critical compliances is vital for foreign subsidiary companies operating in India, as they help maintain transparency, regulatory adherence, and a smooth operational environment.
Compliances under the Income Tax Act and the GST Act
Foreign subsidiary company compliances in India are categorised into three types based on their frequency and timing under IT Act and GST Act:
1. Periodic Compliances
Periodic Foreign subsidiary company compliances necessitate regular adherence and occur multiple times a year, typically on a quarterly or half-yearly basis.
2. Annual Compliances
Annual compliances are obligatory once every year, and they encompass various essential activities, such as:
- Filing of GST returns
- Submission of TDS filings under the Income Tax Act
- Compliances stipulated by the RBI
- Adherence to rules as well as regulations established by the Securities and Exchange Board of India
- Preparation and submission of Annual Financial Statements
3. Event-based Compliances
Event-based compliances are only triggered by specific events or actions taken by the company. Within this category, two key event-based compliances pertain to RBI regulations and FEMA guidelines:
FC-TRS (Transfer of Shares)
This compliance requirement’s need comes when shares of a foreign subsidiary company change hands between an Indian resident and a non-resident investor, or the reverse. According to the regulations set out in the Foreign Direct Investment policies, it is mandatory to report such transactions within a timeframe of sixty days from the actual date of the transfer.
The duty of submitting this form rests with the Indian resident or the investee company. This holds true regardless of whether the Indian resident is the one transferring or receiving the shares.
FC-GPR (Remittance to Shareholders)
FC-GPR pertains to the remittance received by the shareholders of a foreign subsidiary company. It outlines the specific method by which the company disburses this remittance to its shareholders.
Importance of Meeting Foreign Subsidiary Company Compliances
In accordance with Section 392 of the Companies Act 2013, companies may incur a minimum fine of Rs 1 lakh, with as high fines as Rs 3 lakh.
In cases of non-compliance further, an additional penalty of Rs 50,000 is applied for each day that the violation persists.
Adhering to these foreign subsidiary company compliances is paramount for ensuring the uninterrupted operation of the business. Non-compliance can disrupt business proceedings, tarnish the company’s reputation, and impede its ability to conduct its affairs seamlessly.
Final Thoughts
For foreign subsidiary companies operating in India, adherence to legal and regulatory requirements is absolutely essential. Neglecting these responsibilities can lead to substantial penalties, legal repercussions, and operational disruptions. Compliance isn’t just a matter of financial wisdom; it’s critical for upholding the company’s integrity and reputation. By conforming to the foreign subsidiary company compliances, these companies can mitigate risks, cultivate a stable operational environment, and steer clear of potential legal implications.
Ultimately, meeting foreign subsidiary company compliances is a fundamental aspect of responsible corporate governance, contributing to the sustained success and credibility of foreign subsidiary companies in the Indian business sector.
