Both the branch and the subsidiary are ways in which a foreign company can enter the Indian market, however, investors are encouraged to carefully evaluate their characteristics before making their choice.
Commencing the operations under a subsidiary may seem more straightforward, although the branch is the one that is traditionally preferred by companies in the financial sector, for example.
The branch is merely an extension of a parent company abroad while the subsidiary is an Indian resident company that is wholly or partly owned by a foreign legal entity.
When choosing the branch and the subsidiary in India in 2023, the main differences lie in the parent company’s liability and the limitations that may be in place in terms activities.
Our team of lawyers in India assists foreign investors who wish to open a branch or a subsidiary. This article highlights the main differences between the two business forms, however, should you need more details, our team will be ready to answer your questions.
Branch and subsidiary comparison
The table below summarizes the main differences between the branch and the subsidiary in India:
|Legal status||Not a separate legal entity||Has legal personality|
|Liability||The foreign company is fully liable for the debt and obligations of its Indian branch||The foreign company has limited liability, to the extent of its shareholding in the Indian subsidiary|
|Activities||Performs the same activities as the parent company||Can engage in the same or in additional activities as the parent company|
|Taxation||The branch tax rate||The corporate income tax rate|
When considering these differences, investors are also advised to take into account the incorporation and registration processes for both forms. While the subsidiary is the one for which the full procedures for registration apply, as per the Indian company formation laws, the branch will need to obtain the approval for functioning in India.
In addition to the issues mentioned above, when opening a branch office in India, its net worth cannot be lower than USD 100,000. Our attorneys in India can give you more details about this requirement.
Choosing between the branch and the subsidiary in 2023
As seen above, there are a number of differences between the two business forms. When choosing to incorporate one or another, investors should first consider the aspect of liability.
Most foreign banks are present on the Indian market through branches, and these are set up as per the guidelines provided by the Reserve Bank of India. All bank branches need o obtain licenses prior to commencing their activities.
Foreign companies other than those activating in the financial sector can choose to open a subsidiary and set up the shareholding structure in a manner that will allow the foreign corporation to own the majority of the Indian subsidiary’s capital.
One issue to take into account when opening a subsidiary is that it will follow the general registration process which starts with checking if the chosen business name is available. Unlike the branch, which will submit the parent company’s constitutive documents, the subsidiary will prepare its own Articles of Association and Memorandum and will file them for registration with the Registrar of Companies.
Another important issue to take into account is the fact that branches are taxed as foreign corporations and subsidiaries are taxed as resident Indian companies (due to the fact that the place of effective management is in the country).
Some of the most important taxes for branches and subsidiaries are listed below by our tax lawyers:
- Corporate income tax rate: applicable in case of subsidiaries at rates if 15%, 22%, 25%, 30% (with a maximum of 34.944% including surcharge);
- Branch tax rate: a rate of 40%, effectively 43.68% after including surcharge and cess;
- Withholding tax: dividends paid to a nonresident company are subject to a 20% tax; this can be lower in some cases;
- Goods and services tax: the equivalent of the Indian value-added tax, with 5 general rates: 0%/5%/12%/18%/28% and three special rates of 0.1%, 0.25% and 3%.
A foreign company that has a branch in India will need to prepare the financial statements on the activities of its branch as well as the annual activity certificates. The branch office will also need to submit the annual activity certificate for income tax purposes.
Resident Indian companies, such as a subsidiary incorporated in the form of a limited liability company, will pay the income tax in the year following the one for which the assessment is made. All companies provide adequate documentation relating to their income, expenses, and other information.
Foreign investors who are interested in other matters, such as residency in India, can also reach out to our team. We provide complete guidance on the options to remain in the country, depending on the purpose of stay or the length of stay. All foreign nationals who wish to remain in India for long periods will need to be duly registered with the authorities within a minimum amount of time.
Foreign subsidiary owners or branch managers can reach out to our team if they have questions about residence permits in India and the mandatory registration with the authorities (the Foreigners Regional Registration Office). We specialize in immigration to India and are able to answer any questions, as well as assist foreign nationals who are already in the country.
If you are interested in other matters, such as citizenship in India, our team can answer your questions. Whether it is by registration, by naturalization or, in some cases, by descent, adult foreign nationals who wish to become Indian citizens will need to follow a number of steps. We can give you more details upon request and assist you during the application process.
Contact our law firm in India if you are interested in setting up a branch or a subsidiary in 2023. Do you want to open a company in another country, such as Bahrain? We can put you in contact with our partners.