India has become the most preferred destination for foreign companies planning long-term expansion. A large consumer base, experts, and policy reforms have made India an attractive market. So, many international companies choose to establish in India through a foreign subsidiary company.
Setting up a foreign subsidiary company in India is often seen as the first major step. Incorporation is only the beginning. Once the company is set up, it requires multiple ongoing compliances with Indian laws. These obligations are not optional. They form the legal foundation on which the subsidiary operates. This blog explains the key compliance requirements applicable to a foreign subsidiary company.
What Is a Foreign Subsidiary Company?
A foreign subsidiary company in India is incorporated under the Companies Act, 2013. In which a foreign parent company holds more than 50 percent of the share capital. Even though ownership lies with a foreign entity. The subsidiary is treated as an Indian company for legal and tax purposes.
This distinction is critical. Once incorporated, the subsidiary must follow all Indian laws applicable to domestic companies. Also, it must comply with specific regulations governing foreign investment and cross-border transactions. The foreign parent company does not protect the subsidiary from Indian regulatory obligations.
Why Compliance Matters for Foreign Subsidiaries
India maintains a well-organized regulatory system that supports transparency and sound financial practices. Foreign-owned businesses are closely monitored by Indian laws. These companies look for money flow, profits being sent abroad, and business operations.
Non-compliance can lead to serious consequences, including:
- Monetary penalties and interest
- Regulatory scrutiny and inspections
- Restrictions on business activities
- Director-level liability in certain cases
- Damage to business reputation
For a foreign subsidiary company, compliance is not a one-time need completed at incorporation. It is an ongoing responsibility that affects business continuity and long-term growth.
Key Compliance Requirements for Foreign Subsidiary Companies in India
Companies Act Compliance
Every foreign subsidiary company must follow the Companies Act, 2013, from the date of incorporation.
- Annual Filings Every year, the company needs to file its annual return. Also audited financial statements with the Registrar of Companies (ROC). These filings disclose shareholding details, director information, and financial performance.
- Board and Shareholder Meetings: A minimum number of board meetings must be held during the year. The company must also conduct an Annual General Meeting of shareholders. Proper documentation, including minutes and statutory registers, must be maintained.
- Director Requirements: At least 2 directors are required, and one must be a resident of India. Directors are responsible for ensuring that statutory obligations are met accurately and on time.
Failure to follow company law requirements results in penalties for both the company and its directors.
Foreign Exchange and FEMA Compliance
A foreign subsidiary company in India is governed by the Foreign Exchange Management Act (FEMA). All foreign investment, shareholding changes, and cross-border fund movements must follow FEMA rules. Some of the obligations include:
- Reporting foreign direct investment received from the parent company
- Filing forms for share allotment or transfer involving non-residents
- Submitting annual returns on foreign assets and liabilities
Filings provide transparency into foreign investment and allow regulators to monitor capital flows. Delays in complying with FEMA requirements can result in penalties and restrict future transactions.
Income Tax Compliance
Foreign subsidiaries are subject to Indian income tax laws. Key obligations include:
- Filing annual income tax returns
- Paying advance tax where applicable
- Taking out tax from salaries, professional fees, rent, and other payments, then depositing it with the government.
If the subsidiary does business with its foreign parent or related companies, transfer pricing rules apply. The company must keep records to show that these deals are done at fair market rates.
Proper tax compliance reduces the risk of audits, penalties, and postponed disputes.
Goods and Services Tax (GST) Compliance
If the subsidiary supplies goods or services in India, it may need to obtain GST registration. After registration, the company is required to:
- Issue GST-compliant invoices
- File periodic GST returns
- Pay GST within the prescribed timelines
GST non-compliance can result in penalties, blocked input tax credit, and working capital issues. Many foreign subsidiaries underestimate GST obligations, especially during early operations.
Statutory Audit and Financial Reporting
Every foreign subsidiary must appoint a statutory auditor registered in India. The auditor conducts an annual audit to check the accuracy of financial records and compliance.
Audited financial statements must be:
- Approved by the board of directors
- Presented to shareholders
- Filed with the Registrar of Companies
Audit compliance strengthens financial discipline and builds trust with regulators, banks, and investors.
Labour and Employment Law Compliance
Foreign subsidiaries employing staff in India must comply with applicable labour laws. Common requirements include:
- Provident Fund registration and filings
- Employee State Insurance, where applicable
- Minimum wage compliance
- Gratuity and leave policies
- Professional tax and state-specific labour filings
The applicability of these laws depends on the number of employees, salary structure, and state of operation. Employment compliance is often overlooked but carries significant risk.
Industry-Specific and Operational Licences
For different industries, a foreign subsidiary may require additional approvals or registrations, such as:
- Sector-specific licences
- Environmental approvals
- Local municipal or state authority permissions
These requirements vary by industry and location. Identifying them early helps avoid delays and operational disruptions.
Event-Based Compliances
Certain compliances arise only when specific events occur. These include:
- Issue or transfer of shares involving foreign shareholders
- Changes in directors or shareholding structure
- Foreign remittances to or from the parent company
These filings are time-sensitive and need careful monitoring.
Managing Compliance in Practice
Foreign subsidiaries that operate smoothly in India adopt a structured compliance approach. This usually includes:
- Maintaining a statutory compliance calendar
- Engaging professionals for corporate, tax, and FEMA compliance
- Conducting internal compliance reviews
- Ensuring directors understand their responsibilities
Many businesses work with experienced advisory firms such as Finguru India. To manage these obligations in a systematic way. With proper guidance, compliance becomes manageable and predictable rather than reactive.
A foreign subsidiary company in India offers opportunities for market expansion and long-term growth. At the same time, it brings extensive legal and regulatory responsibilities. Compliance with company law, tax regulations, foreign exchange rules, and labour laws is important.
Companies that invest early in structured compliance systems and professional guidance, supported by the experts of Finguru India, build credibility and scale their Indian operations with confidence. In India’s regulated business environment, compliance is not an administrative task. It is a core part of building a stable and sustainable business.
