Foreign Subsidiary Company Compliances in India: Key Compliance Requirements

Foreign company compliance in India requires you to maintain a complex set of rules and regulations under the Companies Act, 2013. If you do not follow the laws and regulations set up for a foreign subsidiary in India, you may be at risk of fines and penalties. It might even lead to a complete shutdown of business operations, followed by legal persecution.

In this blog, we will break down the compliance obligations for subsidiaries of foreign companies that a company must follow due to the Indian laws and regulations. 

What Is a Foreign Subsidiary Company?

A foreign subsidiary company (FSC) in India is a company that is incorporated in India, however, it is owned by a parent or a holding company incorporated in a foreign country. The parent or holding company owns over 50% of its equity shares. It is defined by factors such as:

• Separate legal entity: The FSC operates independently under Indian law and has its own governance structure, tax obligations, and a different set of liabilities that is different from the parent company abroad.
• Ownership: The parent company owns 50-100% of its equity shares. The FSC carries out daily operations in India while the parent company makes strategic decisions for the business.
• Financial reports: The FSC has separate financial records, however, the holding company and FSC will report together for global accounting purposes. 
• Indian talents: The FSC will hire local talent for employment laws and regulations in the country.

Recommended: Corporate Tax Filing Obligations for Foreign Companies in India

Key Compliance for a Foreign Subsidiary Company in India

A foreign subsidiary company needs to fulfill mandatory compliance under Sections 380 and 381 of the Companies Act, 2013, which includes:

Form FC-1 

The FC-1 needs to be submitted by FSCs within 30 days of incorporation in India. You also submit essential documentation along with an attested copy of approval from the Reserve Bank of India (RBI) under the Foreign Exchange and Management Act or Regulations.  If you require professional assistance with FEMA Compliance, please reach out to our consultants today.

Form FC-3

FSCs are required to file with the Registrar of Companies (ROC). The form must contain details about the financial records of the company and include information about the place of business of the FSC.

Form FC-4 

The FSC needs to file annual returns of the company in the FC-4 form within 60 days before the final day of the financial year. Documents that are to be delivered from the foreign company can be sent to the Registrar of Companies with jurisdiction over New Delhi.

Financial Statements

Every FSC registered in India needs to submit its financial statements of the Indian business operations within six months before the end of the financial year. They should furnish the following statements or information:

• Statements of transfer of funds
• Statements of repatriation of profits
• Statements of related party transactions

If you require professional guidance related to Cross Border Transactions, then contact our tax consultants today.

Audit of FSC's Accounts

Every FSC needs to properly arrange and get the accounts related to the Indian business operations audited by one of the Chartered Accountant Firms in Gurgaon in agreement with clause (a) of sub-section (1) of section 381 and rule 4.

Authentication of Translated Documents

The documents that are submitted by the FSC to the Registrar of Companies should be in English and need to be authenticated by a practicing lawyer in India. 

Read Also: ⁠Disclosures and Penalties of Foreign Assets in Income Tax Return

Other Compliances under the GST Act and Income Tax Act

Compliances under the GST Act and the Income Tax Act in India for FSC can be subdivided into three types:

Event-Based

Under the FEMA guidelines and RBI regulations, two types of event-based compliance need to be fulfilled by FSCs:

• FC-TRS: According to the policies under the Foreign Direct Investment, this needs to be reported within sixty days from the date of the transfer of FSC's shares between a non-resident investor and an Indian resident(or vice versa). This transfer can be a gift or a sale. This form needs to be filed by the investee company or the Indian resident, where it does not matter whether the Indian resident is the transferee or transferer.
• FC-GPR: This form requires the FSC to specify the mode of transfer of the remittance to the shareholders by the company. This is to be filed when the shareholders of the FSC receive a remittance. 

Periodic

Compliance that needs to be met by the FSC periodically (quarterly or half-yearly basis) are known as periodic compliances. These need to be filed multiple times throughout the year.

Annual

The compliances that need to be fulfilled only once a year by the FSC are known as annual compliances. These include compliances under the RBI, GST filings, TDS filings under the Income Tax Act, and other such compliances.

Consequences of Non-Compliance for Foreign Subsidiary Companies

Non-compliance by foreign subsidiary companies in India can lead to severe consequences, such as:

1. Damage to the Company's Reputation

Non-compliance can lead to a loss of credibility and trust from customers, investors, and suppliers. This can damage the reputation of the company and may impact the growth and future success of the FSC in the long run.

2. Disruption in Business Operations

Non-compliance by an FSC can lead to disruptions in business operations due to the shutdown of operations or because seizure of goods. This can damage the company's workflow and cause a loss in overall revenue due to the disruption of the flow of goods and services to the company.

3. Penalties and Fines

The government of India may impose penalties and fines on the FSC due to failure to comply with the Indian laws and regulations. This can greatly impact the financial status of the company on a long-term basis.

4. Legal Persecution

The government may take legal action against the FSC in India if there is proof of non-compliance by the company. This may lead to endless lawsuits and may result in poor financial health for the company in India.

5. No More License

If there is an extreme case of non-compliance by the foreign subsidiary company in India, then they may lose all rights to practice trade in the country. Their license will no longer be valid, leading to them ceasing operations in India.

Read More: FEMA Compliance Requirements: Everything You Need to Know

Conclusion

A foreign subsidiary company in India needs to carefully navigate a complex set of laws and regulations due maintain compliance in India. To ensure that you are safe from legal consequences, it's advisable to reach out to a chartered accountant firm in India to meet compliance standards without any chances of failure.