Detailed information on Setting Up a Wholly Owned Subsidiary in India as a Foreign Investor
Introduction
Setting up a Wholly Owned Subsidiary (WOS) in India is a preferred route for many foreign investors who want full operational control, local incorporation benefits, and a clear legal identity for Indian market activities. A WOS gives the parent company 100% ownership of an Indian company that is incorporated under Indian law, and it operates as an Indian legal entity subject to Indian laws, taxation and compliance.
This guide walks you through the legal framework, approvals, step-by-step incorporation process, tax considerations (including DTAA benefits), ongoing compliance, and practical issues foreign investors commonly face while establishing and operating a WOS in India.
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What is a Wholly Owned Subsidiary (WOS)?
A Wholly Owned Subsidiary is an Indian company in which the entire share capital is owned by a foreign parent company (or a single overseas shareholder). Legally, the WOS is an Indian company incorporated under the Companies Act and has its own board of directors, bank accounts, tax registrations and statutory filings. In practice, WOS is used for manufacturing, sales, R&D, distribution, and holding operations.
Structurally, a WOS differs from other entry routes like liaison offices, branch offices or project offices because it can conduct commercial activities, earn revenue in India, hire employees locally and repatriate profits subject to RBI and tax rules.
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Why Choose a WOS in India?
Foreign investors select a WOS for several reasons:
- Full control: Parent retains 100% ownership and strategic control over operations and policy decisions.
- Indian legal identity: A WOS can hold assets, enter into contracts, and sue/be sued locally as an Indian company.
- Operational flexibility: It can undertake manufacturing, sales, services, hiring and local contracting.
- Tax and funding options: Eligible for domestic tax incentives, can raise debt/equity under Indian and foreign investment rules, and use DTAAs for tax planning.
However, these advantages come with compliance responsibilities, so careful planning is essential.
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Legal & Regulatory Framework
Key laws and regulators that govern a WOS include:
- Companies Act, 2013 (incorporation, corporate governance and filings) — Ministry of Corporate Affairs (MCA)
- Foreign Exchange Management Act (FEMA), 1999 — Reserve Bank of India (RBI) and FEMA regulations for foreign investment, reporting and repatriation
- FDI Policy / Consolidated FDI Circular — Department for Promotion of Industry and Internal Trade (DPIIT) / Department of Commerce
- Income-tax Act, 1961 — corporate tax, withholding, transfer pricing and compliance
- Goods & Services Tax (GST) — CBIC for indirect tax on supplies
Sector-specific rules may apply (for example: defence, telecom, insurance) where government approval or caps on FDI exist. It is important to map the business activity to the FDI policy to determine whether the investment route is automatic or requires government approval.
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Step-by-Step Procedure to Set Up a WOS
FDI Policy & Approval Routes
India’s FDI policy provides two approval routes:
- Automatic Route: No prior government approval required — foreign investors notify the RBI and file reporting after investment is made. Most sectors fall under this route.
- Government Route: Prior approval is required from the relevant government ministry or the Foreign Investment Facilitation Portal for sectors with caps, conditionalities or strategic concerns.
Before incorporation, confirm sectoral eligibility, ownership limits, and any conditionalities (e.g., explicit government approval, minimum capitalization, local sourcing obligations). For regulated sectors, approvals may take time and require additional documentation.
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Company Incorporation with MCA (Registrar of Companies)
Core steps for incorporation under the Companies Act:
- Name reservation: Apply through RUN / SPICe+ for name reservation with the Registrar of Companies (RoC).
- Obtain DIN & DSC: Director Identification Numbers and Digital Signatures for proposed directors (foreign directors may need KYC and certified documents).
- File incorporation forms (SPICe+): SPICe+ integrates incorporation, PAN/TAN application, and certain registrations. Submit Memorandum & Articles of Association (MOA/AOA), subscriber details, proof of registered office.
- Certificate of Incorporation: RoC issues the certificate; company obtains PAN and TAN (often through SPICe+), and can commence business.
Foreign parent must provide board resolutions and KYC documents. Documents in a foreign language must be translated and notarised/attested per Indian consular requirements.
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RBI & FEMA Compliance
After subscribing to share capital, the WOS must comply with RBI/FEMA requirements:
- File Form FC-GPR: Foreign Collaboration – Report of Foreign Investments (usually within 30 days of allotment) through the Foreign Investment Reporting portal (FIRMS / RBI reporting).
- Record source of funds: Investments must come through permitted channels (normal banking/foreign inward remittance).
- Repatriation compliance: Profit repatriation, dividend remittance and capital repatriation require RBI/authorized dealer reporting and tax compliance (Form 15CA/15CB as applicable).
Failure to report or non-compliance under FEMA can attract penalties; timely reporting protects the investor’s rights and simplifies future inbound and outbound transactions.
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Tax Registrations (PAN/TAN/GST)
Early tax registrations are essential:
- PAN (Permanent Account Number): Required for tax returns, banking, and many commercial transactions. Often applied via SPICe+ at incorporation.
- TAN (Tax Deduction Account Number): Required when deducting tax at source (TDS) on payments.
- GST registration: If the WOS supplies taxable goods or services in India and exceeds threshold limits, register under the Goods and Services Tax (GST) law. Digital and cross-border supplies may have specific place-of-supply rules.
Obtain professional tax advice to structure the capital base (equity vs debt), understand withholding obligations on cross-border payments, and plan transfer pricing documentation for related-party transactions.
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Other Registrations & Practical Steps
- Bank account in India: Open a current account with an authorized dealer bank for operational transactions and capital inflows.
- Employees & payroll: Register for local labour compliance where applicable (Provident Fund, Professional Tax, ESIC) depending on headcount and payroll.
- Intellectual Property & licenses: Apply for trademarks, patents or licences required for regulated activities.
- Statutory registers & accounting: Maintain statutory registers, conduct statutory audits and hold board and shareholder meetings as per Companies Act timelines.
These operational steps ensure the WOS is fully functional and compliant from the start.
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Taxation & DTAA Benefits
Taxation is a central consideration when setting up a WOS. Key points:
- Corporate tax: Indian-resident companies (including WOS) are taxed on worldwide income at rates set by the Finance Act; rates and surcharges change annually via the Budget. Assess eligibility for concessional rates, including turnover-based incentives.
- Withholding taxes: Payments to non-residents (royalties, interest, fees) may attract withholding taxes (TDS). DTAAs (Double Taxation Avoidance Agreements) between India and the parent’s residence country can reduce withholding rates or provide credits.
- Transfer pricing: Related-party transactions must follow arm’s-length principles and be supported by TP documentation to avoid adjustments and penalties.
- Indirect taxes: GST may apply on supplies within India. Input credit, place-of-supply rules and registration obligations must be handled carefully.
Use DTAA benefits where applicable, but ensure correct documentation (Tax Residency Certificate, Form 10F, etc.) and PAN to avoid higher domestic withholding.
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Ongoing Compliance Requirements
After incorporation, continuous compliance is required:
- Annual statutory filings with the RoC (Annual Return, Financial Statements)
- Statutory audit and board meetings (including annual general meeting)
- Income-tax return filings and advance tax where applicable
- GST returns and TDS filings on time
- Maintenance of minutes, statutory registers and records for inspections
- Foreign investment reporting updates for fresh capital/changes
Non-compliance can lead to penalties, restrictions on bank accounts, and reputational risk. Build a compliance calendar and engage local company secretarial and tax advisors for ongoing governance.
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Key Challenges & Practical Considerations
Common challenges for foreign investors:
- Sectoral restrictions: Some sectors have caps or require local partners — confirm eligibility early.
- Approval timelines: Government approvals (if required) can add delay; plan timelines accordingly.
- Documentation & KYC: Certifying and apostilling foreign documents, board resolutions, and director KYC can take time.
- Complex tax rules: Transfer pricing, indirect taxes and tax incentives are technical — specialist advice is essential.
- Banking & repatriation: Foreign exchange rules and bank processes for remittances require strict compliance under FEMA/RBI guidance.
Mitigate risks by engaging professional advisors, using experienced local counsel and maintaining transparent governance processes.
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Conclusion
A Wholly Owned Subsidiary is a powerful structure for foreign investors seeking full control in India. It offers operational flexibility, legal identity and access to Indian markets — but it also requires careful attention to sectoral rules, FDI policy, RBI/FEMA reporting, tax planning and ongoing compliance. With careful planning, accurate reporting, and professional support, a WOS can be a robust vehicle to grow and sustain business operations in India.
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Suggested Reading (Internal Links)
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Authoritative Links
Ministry of Corporate Affairs (MCA), Government of IndiaDepartment for Promotion of Industry and Internal Trade (DPIIT) / FDI PolicyReserve Bank of India (RBI)Income Tax Department of IndiaCentral Board of Indirect Taxes & Customs (CBIC) — GST
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