Setting Up an Indian Subsidiary: A Tax Checklist

Before incorporation

• Confirm the entity structure — wholly-owned subsidiary, joint venture, or branch/liaison office — since each carries different tax and regulatory implications
• Understand FDI sector rules applicable to your business activity — some sectors permit automatic-route investment, others require prior approval
• Plan the capital structure — equity vs. debt funding from the parent has different tax and FEMA reporting consequences

At the time of funding

• FC-GPR reporting once shares are allotted against the foreign investment received
• Valuation certificate supporting the share issue price
• If funded partly by intercompany debt, ensure the terms are arm's-length and properly documented for transfer pricing purposes

Ongoing compliance to plan for

• Transfer pricing documentation (Form 3CEB) for all transactions with the foreign parent — management fees, royalty, cost allocations, and intercompany billing
• Annual FLA return, reporting the subsidiary's foreign liabilities and assets
• Statutory audit and standard ROC filings, same as any Indian company
• Withholding tax on payments to the foreign parent (royalty, fees, dividends), factoring in applicable DTAA relief

Decisions worth getting right from day one

• Intercompany agreements (management services, royalty/licensing, cost-sharing) documented properly and priced on an arm's-length basis, not informally
• A clear transfer pricing policy the subsidiary can consistently apply, rather than pricing intercompany transactions ad hoc
• Repatriation strategy — how and when profits will eventually flow back to the parent, and the tax cost of doing so

Businesses that plan the intercompany structure and documentation properly at setup avoid a considerably more expensive retrofit exercise once the transfer pricing team (or an assessing officer) starts asking questions years later.

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