All companies established in India must follow the rules and regulations set up by the government. This is in effect, regardless of whether Indian or Foreign entities or citizens own the companies. The only difference between the two is that foreign-owned subsidiary companies have more rules and regulations to regard compared to Indian owned companies.
1. What is a Foreign Subsidiary 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.
2. Essential Compliances
The following are the more important compliances that have to be met by the foreign subsidiary company as per Section 380 and 381 of the Companies Act, 2013:
- Form FC-1 under Section 380: The FC-1 form is important as the form has to be filed within thirty days of the incorporation of the subsidiary company in India. The form is not to be submitted alone, it must be accompanied by the required files, certifications etc. from other regulatory bodies in India such as the RBI.
- Form FC-3 under Section 380: This form needs to be submitted to the respective Registrar of Companies (ROC) depending upon where the company is incorporated in India. The form must contain the details of the areas where the business is going to conduct operations as well as the financial records of the company.
- Form FC-4 under Section 381: This form is concerned with the annual returns of the company. It has to be filed within sixty days from the end of the preceding financial year.
- Financial statements: The company has to submit financial statements on its Indian business and operations. This must be submitted within six months of the end of the financial year. They must contain:
– Statements on the transfer of funds
– Statements of earnings repatriated
– Statements on related party transactions such as statements on sales, transfer of property, purchases etc.
- Audit of accounts: All accounts of the foreign subsidiary company must be audited by a Practising Chartered Accountant. These accounts should be properly arranged and made available by the company for the audit.
- Authentication and translation of documents: All the documents that are submitted by the company to the ROC must be validated by a practising lawyer in India. These documents also need to be translated into English before its validation and submission.
3. Compliances under the Income Tax Act and the GST Act
There are three types of compliances based on the intermittency of these compliances:
- Periodic Compliances: Periodic compliances are compliances that have to be met by the company on a periodic basis. Unlike annual compliances, this type of compliance happens in regular intervals multiple times a year. These compliances may need to be met on a quarterly or a half-yearly basis.
- Annual Compliances: Annual compliances are compliance that needs to be met once every year. Every year the company has to meet these compliances mandatorily. For example, the company has to do the following every year:
– GST filings
– TDS filings under the Income Tax Act
– Compliances under RBI
– Compliances under SEBI’s rules and regulations
– Annual Financial Statements
- Event-based Compliances: As mentioned earlier, there are three types of compliances; one of them is event-based. This means that these compliances are only mandatory in case of a certain event or action of the company. There are two event-based compliances under the RBI regulations and FEMA guidelines, they are:
– FC-TRS: This concerns the transfer of foreign subsidiary company’s shares between an Indian resident to a non-resident investor or vice-versa. Such a transfer may be done by way of sale or gift. The Foreign Direct Investment policies require that such a transaction should be reported within sixty days from the date of the transfer. The obligation of filing this form rests upon the Indian resident, or the investee company as the case may be. This is regardless of whether the Indian resident is the transferer or the transferee.
– FC-GPR: This is concerning the remittance received by the shareholders of a foreign subsidiary company. The form specifies the mode of transfer of the remittance by the company to its shareholders.
4. Importance of Meeting Compliances
It is mandatory for a foreign subsidiary company to meet all compliances as there can be severe consequences if they fail to do so. The failure to meet required compliances may result in the company being fined, being levied penalties and can also lead to criminal charges with imprisonment under relevant provisions of applicable law(s). The following are the penalties that may be levied against a company for not meeting their compliances:
– Under Section 392 of the Companies Act 2013 (effective from April 1, 2014):
1. Notwithstanding anything given under Section 391, if a foreign company is found to have contravened any provisions under Chapter XXII of the Act, the company will be punished by way of fine that shall be no less than Rs 1 lakh and may extend up to Rs 3 lakh. If the offence is continuing, then a fine of Rs 50,000 will be added for every day, the offence continues.
2. Every officer of a foreign company who is in default is punishable by imprisonment for a period of up to 6 months and/or a fine of minimum Rs 25,000, which may extend to up to Rs 5 lakh.
It is important for a company to meet all its compliances to ensure that they are able to continue with its business operations properly without the interference of the authorities.
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