US Clients Private Limited Co vs 100% Foreign Subsidiary in India: A Practical Guide

Entity Structure and Ownership

Indian Private Limited Company:

• Can have a mix of Indian and foreign shareholders
• Minimum of 2 shareholders and 2 directors required
• At least one director must be an Indian resident

100% Foreign Subsidiary:

• Wholly owned by the foreign parent company
• Minimum of 2 directors required, one must be Indian resident
• No requirement for Indian shareholders

The key difference is that a 100% foreign subsidiary allows complete ownership and control by the US parent company 1.

Incorporation Process

Both entity types follow a similar incorporation process, including:

1. 1. Obtaining Digital Signature Certificates (DSC) for proposed directors
2. 2. Applying for Director Identification Numbers (DIN)
3. 3. Reserving company name
4. 4. Filing incorporation documents with Registrar of Companies
5. 5. Obtaining Certificate of Incorporation and PAN/TAN

The subsidiary route may require additional RBI approval for certain sectors 1.

Capital Requirements

Indian Private Limited Company:

• No minimum capital requirement
• Capital can be in INR or foreign currency

100% Foreign Subsidiary:

• No statutory minimum, but practical minimum of $100,000 USD recommended
• Capital must be brought in as foreign direct investment (FDI) 1

Taxation

Both entity types are subject to similar corporate tax rates:

• 25% for turnover up to INR 400 crore
• 30% for turnover above INR 400 crore

However, 100% foreign subsidiaries face an additional dividend distribution tax of 15% on repatriated profits 1.

Operational Flexibility

Indian Private Limited Company:

• More flexibility in local decision-making
• Easier to attract local talent and partnerships

100% Foreign Subsidiary:

• Tighter control by US parent company
• Easier technology and resource transfer from parent 1

Compliance Requirements

Both entities must comply with various regulations, including:

• Annual filings with Registrar of Companies
• GST returns and income tax filings
• Labour law compliance

100% foreign subsidiaries have additional requirements:

• Annual filing of Form FC-GPR
• Compliance with FEMA regulations on foreign exchange 3

Practical Considerations

1. 1. Long-term vision: If you plan to eventually sell to local partners or go public in India, a private limited company may be preferable.
2. 2. Industry sector: Some sectors have FDI caps, making a 100% subsidiary impossible. Research sector-specific regulations.
3. 3. Funding needs: Subsidiaries may find it easier to receive funding from the parent company, while private limited companies can more easily raise local capital.
4. 4. Brand perception: A local private limited company may be viewed more favorably by Indian customers and partners.
5. 5. Technology transfer: If protecting intellectual property is crucial, a subsidiary offers tighter control.
6. 6. Management control: Consider whether you want hands-on control from the US or prefer empowering local management.
7. 7. Tax planning: Consult with tax experts to determine the most efficient structure for your specific situation 1.

In conclusion, both entity structures have their merits, and the right choice depends on your specific business goals, industry, and operational needs. A 100% foreign subsidiary offers tighter control and easier resource sharing with the parent company, while an Indian private limited company provides more flexibility and potentially better local market integration. Carefully consider your long-term strategy and consult with legal and tax experts familiar with Indian regulations before making your decision.