Difference between Indian Subsidiary Company and Branch Office of Foreign Company| WOS Vs BO of Foreign Company

Expanding a foreign business in India can be complicated, and choosing the proper entity structure is crucial. This page offers an in-depth analysis of the differences between a Wholly Owned Subsidiary and a Branch Office. It helps foreign corporations make informed decisions that align with their business objectives. The page also provides detailed information about the various options available to foreign corporations, including the Liaison Office and Project Office. Educating them about the governing laws, permitted activities, and criteria to set up a Subsidiary Company or a Branch Office in India can help them confidently establish their business presence in India.

BRIEF SUMMARY

India Entry Options for Foreign Companies

Wholly Owned Subsidiary (WOS)

Most suitable for full-scale operations and long-term presence in India. It is at par with any Indian Company. Ideal and Only choice in case of manufacturing activity with Low tax rates.

Branch Office

To establish a brand presence in India. It is considered a foreign entity with a higher tax rate of 40%. A Branch office can not do manufacturing activities and is highly regulated.

Liaison Office

To explore the market and create Brand Awareness, a LO can not do any income-generating activity in India. All the expenses of LO need to be financed by the parent company.

Project Office

To complete one or more projects awarded to the foreign corporation by the government or the Indian Private Sector. The PO’s income is taxable at 40% plus Cess and Surcharge.
Foreign companies interested in establishing their presence in India can choose between two popular options: the Wholly Owned Subsidiary (WOS) and the Branch Office of such a foreign company. A WOS is a company incorporated under the Companies Act of 2013, where a foreign corporation owns 100% of the equity shares, subject to sectoral limitations. It’s treated similarly to other Indian companies regarding laws and tax treatment. 
On the other hand, foreign companies can set up a branch office in India with the approval of the Reserve Bank of India. A branch office is subject to higher tax rates (40%), increased regulations, and oversight by Indian authorities. It operates under the dual oversight of the RBI and the Registrar of Companies. However, while a WOS can engage in any business activity in India, subject to the sectoral cap on FDI, a branch office is prohibited from directly or indirectly carrying out manufacturing or processing activities in India.
Comparison Points
  1. Permitted Activities
  2. Governing Law
  3. Criteria to Set up
  4. Terms of Approval
  1. Government Registrations
  2. Taxation
  3. Annual Reporting
  4. Other Differences

Permitted Activities

A Wholly Owned Subsidiary, being recognised as an Indian company, can do all kinds of business activities subject to the sectoral limits of FDI in India. However, the activities must be prescribed in the main object of the MOA.
Permitted Activities for Branch Office: Normally, the Branch Office of a foreign corporation is permitted to perform the activity in which the parent company is engaged. However, it can not engage in manufacturing or processing activities in India directly or indirectly. The following are the permitted activities:

List of Countries Affected by Pres Note No. 3

Governing Law

When a foreign company sets up a business entity in India, it has two popular options: a wholly owned subsidiary (WOS) or a branch office. While both entities have their own advantages and limitations, they are governed by different laws and regulations in India. The subsidiary company is incorporated under the Companies Act of 2013 and is treated as an Indian company, subject to sectoral limitations on foreign direct investment (FDI). On the other hand, the branch office is established under the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000. It is subject to higher tax rates, increased regulations, and dual oversight by the Reserve Bank of India (RBI) and the Registrar of Companies.
Subsidiary Company Branch Office
  1. The Companies Act, 2013. which prescribes the method of incorporation of a company in India.
  2. The Rules Framed under the above act.
  1. The Companies Act, 2013. which prescribes the method of incorporation of a company in India.
  2. The Rules Framed under the Companies act.
  3. The Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000.
  4. Foreign Exchange Management Act
  5. Circulars and Notifications Issued by RBI

Criteria to Setup a WOS vs Branch Office

A Subsidiary Company requires a minimum of two subscribers and directors for registration, one of whom must be an Indian resident. The minimum or maximum capital induction criteria are not specified, and the parent company’s track record is not required. On the other hand, a Branch Office does not require the creation of a separate legal entity, and it must operate under the same name as the parent company. However, it is limited to engaging in specified activities. To establish a Subsidiary Company, the parent company must have a profit-making track record in the home country for the preceding five financial years. The parent company’s net worth must be at least USD 100,000 or its equivalent.
Subsidiary Company Branch Office
  1. There shall be a minimum of Two subscribers & directors for registration of a Private Limited Company, and one director shall be resident in India.
  2. Resident means a stay of 182 days or more in the preceding financial year.
  3. There are no minimum or maximum criteria for capital induction.
  4. There is no requirement of the track record of the parent company.
  1. Parent Company shall have a profit-making track record in immediately preceding five financial years in the home country.
  2. Net Worth of the Parent Company shall not be less than USD 100,000 or its equivalent.

Terms of Approval

Subsidiary Company: A company is regulated by the provisions of the Companies Act and the rules made thereunder. The Memorandum of Association (MOA) and Articles of Association (AOA) are the internal documents that define and limit the board’s authority and the company itself. For a private limited company, a minimum of two directors is mandatory, while for a public limited company, a minimum of three directors is necessary. Additionally, a private limited company must always have two shareholders and limit the number of shareholders to 200. The company is not allowed to invite the public to subscribe for any of its shares or debentures. It is also prohibited from accepting deposits from anyone other than its members, directors, or relatives. Finally, a company remains in existence until it decides to close down.
Branch Office: The approval for a Branch Office is granted for three years from the date of approval, which can be further extended; the terms of approval are as under
  1. Not to expand its activities or undertake any new trading, commercial or industrial activity other than that is expressly approved by the RBI.
  2. The Branch Office expenses in India are to be met either out of the funds received from the head office through normal banking channels or through income generated by it in India.
  3. The Branch Office will not accept any deposits in India.
  4. The commission earned by the Branch Office from parties abroad for any agency business will be repatriated to India through normal banking channels.
  5. Not to undertake any retail trading activity.
  6. A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.

Other Government Registrations

The Branch office or WOS of a foreign company must comply with the same set of tax laws and labour laws; here is a list of various registrations applicable in both cases as per the table below.
Subsidiary Company Branch Office
  1. Indian Company Registration (ROC)
  2. PAN / TAN of the Company
  3. Shops and Establishment Act Registration
  4. Professional Tax Registration
  5. Import Export Code
  6. GST
  7. Trade License or Factory License
  1. Approval of RBI
  2. Indian Company Registration (ROC)
  3. Registration with Local Police
  4. PAN / TAN of the Company
  5. Shops and Establishment Act Registration
  6. Professional Tax Registration
  7. Import Export Code
  8. GST
  9. Trade License or Factory License

Taxation of Subsidiary Company Vs Branch Office

The indirect taxes (GST) on the supply of goods or services and the withholding tax provisions apply in the same manner to both the subsidiary company and the Branch office. However, the income tax rates are higher in the case of the Branch Office. The following table summarises the relevant tax provisions.
Particulars Subsidiary Company Branch Office
Income Tax Rate
The income tax for manufacturing companies is 15%, whereas, for other categories, it is 22%. A nominal cess and surcharge are applicable on the tax amount.
The income tax rate on foreign corporations is 40%. The cess and surcharge are also applicable.
Tax on Dividend
Dividend Distribution Tax- NIL Royalty/technical service fees- As per DTAA
Profits can be freely repatriated to the Parent Company subject to payment of applicable taxes as per the Indian Income-tax Act, i.e, 40%+surcharge (if applicable) + cess.
GST
The GST Rate is ranging from 1% to 28%. GST Paid on inputs can be claimed

Unique Reporting Requirements

The Subsidiary Company or Branch Office of a foreign corporation are subject to different reporting requirements to comply with Indian laws and regulations. These requirements vary between the two types of entities, and it is important to understand them to ensure proper compliance. In this regard, both a subsidiary company and a branch office are required to make certain filings and reports to the Reserve Bank of India (RBI) and Registrar of Companies (ROC). Let’s take a closer look at the reporting requirements of each entity.
Subsidiary Company Branch Office
1. FDI Reporting to RBI (FC-GPR)
1. ROC Yearly filings of BO and World Accounts
2. Annual Return - Foreign Liabilities and Assets (FLA)
2. Annual Activity Reporting to RBI through AD

Regular Compliance Requirements

S.No Type of Compliance When to do?
1
GST Payment (Return in GSTR-3B)
Monthly
2
GST Return
Monthly or Quarterly
3
TDS Payment
7th of Next Month
4
TDS Return
Quarterly
5
PF and ESIC Payment & Return
Monthly
6
Professional Tax Payment & Return
Monthly
7
Statutory Audit
Annual
8
Annual Income Tax Return
Annual
9
Annual Return to ROC
Annual

Other Differences between the Subsidiary & Branch Office

In addition to the main differences already mentioned, the table below presents other significant contrasts between a wholly-owned subsidiary and a branch office in India. The table highlights differences in areas such as operation and management, audit requirements, the process of sending outward remittances of profit to the parent company, borrowing powers, permitted incomes, and liabilities of the parent company/head office.
Particulars Subsidiary Company Branch Office
Management
Managed by the board of directors. There should be at least two directors on the board and one of them should be an Indian Resident Person while all other director may have a foreign origin.
BO is managed by an Authorised Representative, resident in India (Country Manager)
Audit
Financials would be liable to Statutory Audit by a Chartered Accountant. And Internal audit and Tax audit are also applicable subjects to certain terms and conditions.
Financials would be liable to Statutory Audit by a Chartered Accountant and tax audit also applicable subject to certain terms and conditions.
Remittance of profit to parent company
  1. By way of Dividend - There is no dividend distribution tax
  2. By way of Royalty/ fees for technical services
  3. By way of Management Fees
  4. Related party transactions are subject to Transfer pricing Regulations
Profits can be freely repatriated to the Parent Company subject to payment of applicable taxes and remit funds outside India, within the applicable guidelines under FEMA
Borrowing
  1. Local borrowings are allowed subject to guidelines issued by the companies act, 2013
  2. External Commercial Borrowings are subject to guidelines issued by the RBI.
The Branch Office is not allowed to borrow locally unless the prior approval of RBI is taken
Permitted Incomes
All income arising out of its business activities.
The entire expenses of the BO in India will be met either out of the funds received from Head Office through normal banking channels or through income generated by it in India.
Liabilities Of Parent Company/Head Office
The liability of the Parent company is limited to the extent of its shareholding in the WOS. The assets of the foreign company are not subject to any attachments
The liability of the Branch is unlimited. The assets of the parent company are at risk of attachment in case the liabilities of the branch exceed its assets

In conclusion, setting up a branch office in India can be a lucrative option for foreign companies looking to expand their businesses. However, it is important to be aware of the regulations and guidelines set by the Indian government, such as having at least one Indian Resident Person on the board of directors, complying with statutory audit and transfer pricing regulations, and adhering to guidelines for borrowing and remitting profits to the parent company. By following these guidelines, foreign companies can establish a successful branch office in India and tap into the country's growing economy.

Conclusion