Introduction
India is one of the fastest growing economies globally. It has
– Substantial human potential and
– A large market comprising over 1.2 billion people.
The opportunities present in India have attracted a large amount of Foreign Direct Investment (FDI) into the country.
Each year, the FDI inflow increases due to many foreign businesses establishing their operations in India
Foreign companies have to follow rules and guidelines laid down in
- Companies Act 2013
- Companies (Registration of Foreign Companies) Rules, 2014
- RBI Guidelines
- FEMA guidelines
To form a company in India
Definition of Foreign Company
As per Section 2(42) of Companies Act 2013 “foreign company” means any company or body corporate incorporated outside India which
- a) has a place of business in India whether by itself or through an agent ,physically or through electronic mode ; and
- b) conducts any business activity in India in any other manner
A foreign National can establish a foreign company as a private limited company. Forming Private limited company id the fastest way to set up a company in India as it also qualifies for 100% Foreign Direct Investment(FDI) under the automatic approval of RBI i.e. compliances are very minimal, only reporting of funds will take place
Challenges faced by Foreign Companies
India has recently jumped from 142nd position to 63rd in World Bank’s Ease of Doing Business Ranking. This is mainly because of the introduction of Goods and Services Tax that streamlines all State level taxes into one consolidated tax, making compliances n Indirect Taxes very simple for the businesses. However, there is a huge jump in the overall ranking, there are still certain challenges that a foreign companies faces while incorporating an entity in India. Have highlighted few of the challenges below:
- Disclosure of UBO: The governments has recently made rules and regulations around Ultimate Beneficial Ownership(UBO) wherein they want disclosures of the last real person behind the companies. If Person A holds 100% shares of company B; Company B holds 100% of shares of Company C and Company C holds shares of Company Y in India, then the whole chain of ownerships have to be disclosed till we find details of Person A being the real person behind all the companies. The rules are still in process and government is introducing lot of forms around these disclosure requirements. – This is an annual compliance and have to be reported
- Out of Pocket Expenses: The incorporation or various tasks requires departmental visits frequently. All these activities sometimes require some out of pocket expenses to be incurred that can be discussed separately.
- Taking funds out of India: Whenever funds are remitted outside India, certain Income Tax forms duly attested by a Chartered Accountant are required – Form 15CA and Form 15CB. The main purpose is to identify and deposit the taxation liabilities, if any before the funds are sent outside India.
- Withholding taxes / Tax deducted at source(TDS): If any transfer is made from the company accounts whether inside India or Outside India in nature of expense, a tax at source is deducted before transferring to the recipient. For example if Mr A has provided professional services to our company amounting INR 100,000, then a 10% TDS is deducted and consequently Mr.A will get INR 90,000 in his bank account and INR 10,000 we will have to deposit to his Tax account i.e. Permanent Account Number(PAN) to the government directly on his behalf.
- Payment of Taxes in India on global income if you become resident under Income Tax Laws: If a person spends more than 120 days / 182 days in India, then he/she becomes Indian resident for taxation purposes and accordingly the person’s global income is chargeable to tax. However, there are certain methods to safeguard the global income being charged to tax in certain cases.
Major Compliances
Reserve Bank of India(RBI Compliances)
- Obtaining KYC from the transferor bank ( this is done by the recipient bank to verify the originating source entity of the funds)
- Obtaining login credentials from the RBI to various portals
- Filing of certain forms with RBI, one of them being Form – FCGPR, that goes to the receiving bank for approval, which further goes to RBI for its subsequent approval. The purpose of this form is to provide a detailed breakup of shares to be allotted to the transferor and share valuation.
- Various valuation reports, Chartered Accountant(CA) or Company Secretary(CS) certificates are also required to determine the Fair Value of the shares being bought / subscribed by the transferor company
Ministry of Corporate Affairs(MCA) Compliances
- Annual accounts along with the list of all principal places of business in India established by foreign company – Form FC – 3
- Information for Services to be filed by Foreign Company — Form FC – 1
- Annual Return – Form FC-4
- Notice of situation or change of situation or discontinuation of situation, of place where foreign register shall be kept– Form MGT -3
- Return to the Registrar in respect of declaration under section 90 i.e declarations pertaining to Ultimate Beneficial Ownership (UBO) – Form BEN -1 , Form BEN – 2 and Form BEN -3. There are various other forms containing the disclosure requirements for Beneficial Ownerships
- Issue of shares on receipt of funds and recording them under appropriate heads of share capital and premium on issue of shares according to the valuation report received from merchant banker