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Wholly Owned Subsidiary vs. Branch Office

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While planning to set up an Indian business, a foreign company is often confused between the Wholly Owned Subsidiary (WOS) and a Branch Office. This page explains the differences between a Branch office and a Subsidiary Company in India by a Foreign Company.

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Various Options for a Foreign Corporation
Wholly Owned Subsidiary
Most suitable for full-scale operations & long term presence in India. It is at par with any Indian Company. Ideal & Only choice in case of manufacturing activity with Low tax rates
Branch Office
To establish a presence of Brand in India. It is considered a foreign entity with a higher tax rate of 40%. A Branch office can not do manufacturing activities & is highly regulated.
Liaison Office
To explore the market & 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 Indian Private Sector. The income of the PO is taxable @ 40% plus Cess & Surcharge.

India has become a favourite destination for expanding foreign corporations for apparent reasons. India offers a tax-friendly destination to do business with a young population and growing middle class. The Wholly Owned Subsidiary and a Branch Office are the two popular choices for a foreign company; we discuss the critical differentiators in the following sections, starting with the general meaning.

The Wholly Owned Subsidiary: a Wholly owned subsidiary is a Company registered in India under the Companies Act, 2013, where 100% of the equity shares are beneficially held by a foreign corporation, subject to the sectoral cap. A WOS is a separate legal entity independent of the existence of a foreign company. It is treated at par with any other Indian company concerning various laws and tax treatment.

Branch Office: Companies incorporated outside India are allowed to set up Branch Offices with specific approval of the RBI. A Branch office is considered a Foreign Entity and is subject to a higher tax rate (40%), increased regulations and control by the Indian authorities. The Branch offices function in India under two regulators, the RBI and the Registrar of Companies (ROC).

Note: Though a Wholly Owned Subsidiary can do any business activity in India, a Branch Office cannot carry out manufacturing or processing activities in India, directly or indirectly.

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

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Wholly Owned Subsidiary: Being recognized as an Indian company, it 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. Following are the permitted activities

  1. Export/import of goods.
  2. Rendering professional or consultancy services.
  3. Carrying out research work in areas in which the parent company is engaged.
  4. Promoting technical or financial collaborations between Indian companies and a parent or overseas group company.
  5. Representing the parent company in India and acting as buying/selling agent in India.
  6. Rendering services in information technology and development of software in India.
  7. Rendering technical support to the products supplied by parent/group companies.
  8. Foreign airline/shipping company.
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.
Subsidiary Company: A company is regulated by the provisions of the companies act and the rules made thereunder. The MOA and AOA are the internal documents that define and limit the board’s authority and the company perse. A company is obligated to maintain a minimum strength of two directors in case of private limited and three directors in case of public limited. The private limited company must always have two shareholders and limit the number of shareholders to 200. The private limited company is prohibited from inviting the public to subscribe for any of its shares or debentures; and; is further refused from accepting deposits from persons other than its members, directors, or relatives. A company remains in existence until the company 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 is as under
S.No Terms of Approval
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 is 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.
Various Tax and Labour Law 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

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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 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. 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
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

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