Under Indian law, foreign investors are able to establish wholly owned subsidiary companies in the form of private limited companies if they operate in sectors that permit 100% foreign direct investment (FDI).
With India’s recent loosening of FDI caps, companies are now also able to establish wholly foreign-owned subsidiary companies in the telecom services and asset reconstruction sectors.
But establishing a private limited company in India can be a lengthy and complicated process that involves multiple steps. We discuss the process in this article.
Two directors and a name
First, a minimum of two directors must be appointed and registered through India’s e-filing system to acquire Director Identification Numbers (DIN). The minimum requirements for the establishment of a private limited company include the existence of two directors, two shareholders (who may be the same persons as the directors), and a minimum share capital of 100,000 rupees (1 lakh or US$1,600 at the current exchange rate).
Second, a suitable name must be selected that indicates the main objectives of the company, and submitted to the Registrar of Companies, along with a brief description of the business’s proposed functions to verify both the name’s appropriateness and availability.
Upon successful name registration, the applicant company has 60 days to file its Memorandum of Association (MOA) and Articles of Association (AOA), and to proceed with formal incorporation filings.
Both the MOA and AOA must be stamped with the appropriate duty after the needed Registrar of Companies fees and stamp duty have been paid. Both forms must also be signed by at least two subscribers with a witness.
Within this 10-day time window, the following documents must also be filed with the Ministry of Corporate Affairs web portal along with the requisite filing fees:
- Form 1 – Application for incorporation along with the MOA and AOA
- Form 18 – Notice of situation for the registered office (proof of address, etc.)
- Form 32 – Details of the company’s board of directors
Upon successful submission of the above documents, the Registrar of Companies will issue a Certificate of Incorporation and a Corporate Identification Number (Corporate Identity). The process generally takes 7 to 8 weeks to complete.
Private limited companies are permitted to commence business immediately following their successful incorporation.
While India has been liberalizing its governing policies since 1991, the country’s tax structure remains among the most complex and difficult to navigate in the world.
Understanding the wide variety of laws, regulations and procedures can be confusing for even the savviest of business operators. Foreign companies run the risk of overpaying on taxes or having to pay associated penalties and interest.
What follows is a brief description of the various taxes which should be taken into consideration when incorporating a private limited wholly foreign-owned company in India.
Tax on Distribution of Dividends. Corporate entities are subject to a tax on the distribution of dividends. However, in the case of shareholder dividends, the associated income is exempt from tax.
The current effective rate of the Dividend Distribution Tax (DDT) is 16.995% (15% plus a 10% surcharge and an education cess of 3%). No exemption from payment of the DDT is granted for the profits relating to Special Economic Zone developers.
To avoid a situation of double taxation being created by the DDT, it is permitted that, for the purpose of computing the tax, any dividend received by a domestic company during any financial year from its subsidiary shall be allowed to be deducted from the dividend to be distributed.
This is provided the dividend received by the domestic company has been subject to DDT and the domestic company is not the subsidiary of any other company.
Minimum Alternate Tax. All companies declaring low or zero profits are subject to the Minimum Alternate Tax (MAT). Presently, MAT is levied at 18.5% of book profits plus the applicable surcharges and education cess.
The MAT is levied on companies whose tax payable under normal income tax provisions is less than 18.5% of book profits. Additionally, MAT is applicable to Special Economic Zone developers/units for income arising on or after April 1, 2012.
Taxation of Royalties/Technical Fees. Under domestic tax law, the royalties/technical fees that are payable to non-residents with a permanent establishment in India are taxed on a different basis compared with non-residents without permanent establishment in India.
Concessional tax rates apply if the agreement relates to a matter that has been approved by the government of India. The payments made are subject to tax avoidance agreements entered into by the non-resident’s country.
Wealth Tax. Wealth tax is calculated on March 31 of every year (referred to as the valuation date). Wealth tax is charged on both individuals and companies at the rate of 1% of the amount by which the “net wealth” exceeds 3 million rupees (US$48,000).
The term “net wealth” is basically defined as the excess value of certain assets over accumulated debt.
Assets include guest and residential houses, motorcars, jewelry/bullion/utensils of gold and silver, yachts, boats, aircraft, urban land and cash in hand. A debt is an obligation to pay a defined sum of money arising from the assets included in “net wealth.”
In general, foreign companies are taxed at higher rates on income compared with domestic companies, as shown by the table below. The rates are also progressive – the higher the taxable income, the higher the income tax due.
About the Author
Dezan Shira & Associates is a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in India Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.
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