Foreign subsidiary companies are mandatorily required to maintain compliance as per Income Tax Act, Companies Act, transfer pricing guidelines and FEMA guidelines. Hence, maintaining compliance for a foreign subsidiary company would includes filing of income tax return with the Income Tax Department, annual return with the Ministry of Corporate Affairs and other filings with authorities like Reserve Bank of India or Securities & Exchange Board of India (SEBI). Finally, like all companies, foreign subsidiaries would also have to comply with other Indian tax regulations like TDS regulations, GST regulations, PF regulations, ESI regulations and others. The compliance requirement for a foreign subsidiary company would vary based on the industry, state of incorporation, number of employees and sales turnover.
FDI Inflow into the Company
- An Indian company that is issuing shares or convertible debentures under FDI, can receive the money for such shares or debentures through one of the following modes:
- Remittance through normal banking channels.
- Debit to NRE/FCNR account of a person concerned maintained with a Bank.
- Conversion of royalty/lump sum/ technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.
- Conversion of import payables/pre incorporation expenses/share swap can be treated as consideration for issue of shares with the approval of FIPB.
- Debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.
Reporting FDI Inflow into the Company
Within 30 days of receipt of share application money/amount of consideration from the foreign investor, the Indian company must report details of the FDI inflow to the Foreign Exchange Department, Reserve Bank of India. The report must be submitted to the Regional Office of the Reserve Bank of India under whose jurisdiction its Registered Office is located. The form to be filed at this stage is the Advance Reporting Form, containing the following details :
- Name and address of the foreign investor(s);
- Date of receipt of funds and the Rupee equivalent;
- Name and address of the authorised dealer through whom the funds have been received;
- Details of the Government approval, if any; and
- KYC report (Identify and Address proof) on the non-resident investor from the overseas bank remitting the amount of consideration.
Issuing Shares of Indian Company to the Foreign Investor
The money received from the foreign investor for purchase of shares in the Indian Company will be accounted under share application money. The Indian Company is required to issue shares within 180 days from the date of inward remittance to the foreign investor, to avoid violation of the FEMA regulations.
FDI Reporting to RBI through Form FC-GPR
Within 30 days from the date of issue of shares, form FC-GPR must be filed with the RBI along with the following documents.
1. Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that:
2. “The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.”; AND
3. The investment by the Foreign Investor in the Company is within the sectoral cap/statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route; OR
4. Shares in the company have been issued to the Foreign Investor in terms of SIA/FIPB approval number and date. A copy of the Foreign Investment Promotion Board (FIPB) must be attached.
5. Certificate from Statutory Auditors/ SEBI registered Merchant Banker / Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
Documentation Requirement for Transfer Pricing
1. A detailed description of the ownership of the entity with details of shares or other ownership interests held therein by other enterprises.
2. A profile of the multinational group of which the entity is a part along with the name, address, legal status and tax residence of each of the enterprises comprised in the group with whom specified domestic transactions have been entered into by the entity and ownership linkages among them.
3. A broad description of the business of the entity and the industry in which the entity operates, and of the business of the associated enterprises with whom the entity has transacted.
4. The nature and terms (including prices) of specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each of such transaction or class of such transaction.
5. A description of the functions performed, risks assumed and assets employed or to be employed by the entity and by the associated enterprises involved in the specified domestic transaction.
6. A record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the entity for the business as a whole and for each division or product separately, which may have a bearing on the specified domestic transactions entered into by the entity.
7. A record of uncontrolled transactions taken into account for analysing their comparability with the specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the specified domestic transactions.
8. A record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant specified domestic transaction.
9. A description of the methods considered for determining the arm’s length price in relation to each specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case.
10. A record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the specified domestic transaction, and the comparable uncontrolled transactions, or between the enterprises entering into such transactions.
11. The assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm’s length price.
12. Details of the adjustments, if any, made to transfer prices to align them with arm’s length prices determined under the Income-tax Rules and consequent adjustment made to the total income for tax purposes.
Any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm’s length price
Penalty for Failing to Furnish Chartered Accountant Report
Entities entering into an international transaction are required to obtain a report from a chartered accountant. Failure to furnish a report from chartered accountant can attract a penalty of Rs. 1,00,000.
Penalty for Not Maintaining Documents
As mentioned above, entities entering into international transactions are required to maintain certain documents as listed above. Failure to maintain such document or failure to report or furnishing incorrect information can attract a penalty of upto 2% of the value of each transaction, where non compliance exists.
Penalty for Not Producing Documents
Tax authorities may, in the course of any proceeding, require any person who has entered into international transactions to furnish any related information or document. The taxpayer must furnish such information or document within a period of 30 days from the date of receipt of a notice. Failure to furnish information can attract a penalty equal to 2% of the value of the specified transaction for each such failure.