Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed quarterly against RBI, DPIIT, MCA and Income Tax Department notifications

Introduction

On ₹10 crore of Indian profit, the difference between two perfectly legal structures is roughly ₹1.2 crore a year.

A qualifying Indian domestic company electing the concessional 22% regime lands at an indicative effective rate of about 25.17% after surcharge and cess. A branch of the same foreign company, doing the same work, is taxed at foreign-company rates — around 36% to 38%. Neither is a loophole. They are simply different vehicles, and the choice is made once, usually in the first month, often by whoever is handling incorporation.

Tax is only the visible part. The structure you pick also decides whether you can invoice Indian customers at all, whether you can hire directly, whether the parent company is exposed to Indian liabilities, whether you can issue ESOPs when you need to hire senior people, whether an acquisition three years from now counts as a fresh FDI transaction, and how hard it will be to leave.

None of that is obvious from a list of entity types. It becomes obvious when you work backwards from what the business will actually do.

This guide compares every route open to a foreign company or investor — wholly owned subsidiary, joint venture, LLP, branch office, liaison office, project office, a GIFT City IFSC unit, and the options that involve no Indian entity at all. For each, it sets out what the structure can and cannot do, how it is taxed, how it is approved, and what it costs to run. It then covers how foreign capital legally enters India, the reporting that follows, the three tax risks that apply whichever structure you choose, and a seven-question framework you can run against your own plan.

About this guide

Delhi Legal Company works exclusively with foreign companies establishing and operating in India. This guide reflects what we see in practice across market-entry mandates — incorporations, branch and liaison office approvals, FDI structuring, FEMA reporting and the ongoing compliance that follows.

Where a position is settled law, we state it plainly and cite the source. Where a threshold or notification changes periodically, we say so and point you to the authority rather than to a figure that may age badly. Where a question turns on facts — permanent establishment, place of effective management, whether a distributor is genuinely independent — we describe the test rather than pretend there is a general answer.

Primary sources used throughout: the Ministry of Corporate Affairs for the Companies Act, 2013; the Reserve Bank of India for FEMA and the branch, liaison and project office framework; DPIIT for the Consolidated FDI Policy and Press Notes; the Income Tax Department for rates and forms; and IFSCA for the GIFT City IFSC framework.

The quick answer

If you only need the starting point:

• Testing the market, no Indian revenue. A liaison office — provided you genuinely will not invoice anyone.
• One contract, one end date. A project office.
• Permitted activities, no separate Indian company wanted. A branch office.
• Ongoing commercial operations. A wholly owned subsidiary, usually the most flexible, subject to sectoral FDI rules and your group’s tax position.
• You need an Indian partner. A joint venture, normally through a private limited company.
• Fund management, banking, insurance, aircraft or ship leasing, offshore-facing capability centre. Assess a GIFT City IFSC unit before defaulting to a mainland structure.
• Professional services, no external capital planned. An LLP can work, if the FDI conditions permit it.
• Not ready for an entity. A distributor or employer of record — neither of which is automatically tax-neutral.

These are starting points. The rest of this guide is about testing them.

1. Two fundamentally different ways to enter India

Every route falls into one of two families, and the distinction drives everything downstream.

Family A: create an Indian company

You incorporate an Indian company under the Companies Act, 2013. It has its own PAN, its own bank account, its own board and its own legal identity. It contracts, employs, owns assets and trades in its own name.

The foreign parent owns the shares. The company remains a separate legal person. This family includes wholly owned subsidiaries, joint ventures, and other Indian private or public companies.

The attraction is flexibility: the company can conduct any commercial activity within its objects, subject to sector-specific law and FDI policy.

Family B: register the foreign company’s presence

No new Indian legal person is created. The overseas company registers a permitted presence — a liaison office, branch office or project office — under the RBI’s framework for establishment of a place of business in India.

The Indian presence is an extension of the overseas company. Two consequences follow. The foreign parent remains directly exposed to the liabilities of the Indian operation. And the Indian operation is taxed as a foreign company, not as an Indian domestic company.

Why this matters more than it looks

The concessional 22% corporate regime is available to qualifying domestic companies. A foreign company does not access it by operating in India. That single rule explains most structuring decisions on this page.

Issue	Family A — Indian company	Family B — foreign company presence
Separate legal entity	Yes	No
Parent liability	Generally ring-fenced	Parent remains directly liable
Tax status	Domestic company	Foreign company
22% concessional regime	Available to qualifying companies	Not available
Scope of activity	Broad, within objects and FDI policy	Restricted to permitted activities
How it is approved	Incorporation plus FDI compliance	Authorised dealer bank, with RBI approval in specified cases
How it ends	Share sale or strike-off	Closure through the regulatory process

A structure that looks cheaper on day one can become expensive by year three. That is the whole reason this decision belongs at board level, not with the incorporation agent.

2. Wholly owned subsidiary

For a foreign company planning a genuine long-term Indian business, the wholly owned subsidiary is usually the most flexible starting point. It is normally incorporated as a private limited company: the foreign parent holds the shares, the Indian company does the business.

See our service pages on wholly owned subsidiary setup and private limited company incorporation.

What is required

• At least two shareholders and two directors
• At least one resident director
• A registered office in India
• Capitalisation planned around the actual business — there is no universal statutory minimum, which is not the same as saying a token amount is sensible

The resident director requirement is substantive, not cosmetic. Under Section 149(3) of the Companies Act, 2013, at least one director must stay in India for a total of not less than 182 days during the financial year. For a newly incorporated company, the requirement applies proportionately at the end of the financial year in which the company is incorporated.

That second sentence is worth pausing on. A great deal of published material still says “previous financial year” — a pre-2018 position that makes no sense for a company that did not exist last year. If an advisor tells you the test looks backwards, check the current section.

Where the group has nobody in India at the outset, this is met through resident director services alongside a registered office address.

The director nationality point most groups miss

Where a proposed director is a national of a country sharing a land border with India, security clearance from the Ministry of Home Affairs is required before a Director Identification Number can be obtained, and that clearance must accompany the consent to act.

This is separate from, and additional to, the Press Note 3 analysis on the investment itself (see section 16). Both belong in the project timeline at planning stage, not at signing.

Two deadlines that stop new subsidiaries

A company must have a registered office capable of receiving communications within 30 days of incorporation and verify it with the Registrar. Failure can trigger action to strike the company off the register.

Separately, a company with share capital cannot commence business or exercise borrowing powers until a declaration is filed with the Registrar within 180 days of incorporation, confirming that every subscriber has paid for the shares taken.

Both are administrative. Both stop the business if missed.

What you get

A properly structured subsidiary can invoice Indian customers, hire directly, import and export, lease premises, own assets, hold licences, raise capital, issue ESOPs where permitted, admit investors, and be sold as a standalone business.

It also ring-fences liability at the Indian entity level — subject to guarantees, fraud, regulatory breach and the other circumstances in which separation does not hold.

What it costs

The heaviest compliance load of any structure: statutory audit, board meetings, annual ROC filings, income-tax filings, GST compliance, payroll, and — because of the foreign shareholding — FEMA reporting and transfer pricing on top.

A warning about nominee directors

A resident director carries statutory responsibilities under Indian company law regardless of how the appointment was characterised commercially. They should receive board papers, understand what the company is doing, and participate in governance.

An arrangement that looks harmless at incorporation becomes uncomfortable the first time the company misses a filing or receives a notice, and the person named on the register is asked to account for decisions they never saw.

3. Joint venture with an Indian partner

A joint venture is not a separate species of Indian company. It is usually a private limited company owned by the foreign investor and an Indian partner. The corporate form is identical to a wholly owned subsidiary. What differs is ownership and, critically, what the shareholders have agreed between themselves.

See joint venture company services.

A JV makes sense when the partner brings something you cannot reproduce from overseas: distribution, regulatory relationships, licences, manufacturing capability, land, established customers, procurement access. It does not make sense simply because someone “knows the market.”

Where JVs actually fail

Not at incorporation. In the shareholders’ agreement. It should deal squarely with board composition, reserved matters, funding obligations, deadlock, transfer restrictions, tag-along and drag-along rights, exit mechanics, IP ownership, brand licensing, non-compete and related-party transactions.

Where the parent contributes technology or brand, see brand licensing agreements and technology licensing agreements.

Design the exit before the entry

Foreign investors routinely spend weeks on how the JV starts and minutes on how it ends. That is backwards.

If the relationship breaks down in year five, the agreement should already answer: who buys whom out, what happens if neither side wants to sell, what breaks a board deadlock, whether a shareholder can sell to a third party, and whether the put, call, tag and drag provisions are permitted under FEMA.

Assured-return and guaranteed-exit provisions in favour of a foreign investor are constrained under FEMA. An exit mechanism drafted without Indian input may simply be unenforceable when you need it.

The layering issue

If the JV is owned or controlled by non-residents, any investment it later makes into another Indian company is indirect foreign investment — downstream investment — with its own sectoral caps, entry route, pricing rules and reporting. See section 17. Map this before designing an acquisition strategy, not during diligence.

4. Public limited company

Rarely the right first structure. A public limited company requires seven or more members and at least three directors, against two and two for a private company, with materially heavier governance.

It fits where an Indian listing is planned, where broad public ownership is expected, where a regulator requires the form, or where there is a specific capital-markets objective. Otherwise incorporate private and convert later.

5. LLP for foreign investors

An LLP combines limited liability with partnership flexibility and lighter corporate formalities. For some professional services businesses that is genuinely useful.

The constraint is FDI eligibility. Under the Consolidated FDI Policy, foreign investment in an LLP under the automatic route is permitted only where the sector allows 100% FDI under the automatic route with no FDI-linked performance conditions. Check the sector before assuming the vehicle is available.

Our full treatment is in LLP registration in India: a foreign investor’s guide; the service page is here.

Two structural limits usually decide the question.

Tax. Alternate Minimum Tax applies, and the concessional 22% corporate regime does not. An LLP does not reach the roughly 25.17% effective rate a qualifying company can.

Capital. An LLP cannot issue ESOPs or convertible instruments, cannot run a conventional equity funding round, and cannot be sold through a conventional share transaction.

Verdict: viable for a small foreign-owned professional services operation with no external funding plans. Wrong vehicle for anything that will raise money, hire at scale, or be sold.

6. Liaison office

A liaison office is a representative presence, not a business. Its permitted activities are limited to representing the parent or group companies, promoting exports and imports, promoting technical or financial collaboration between the group and Indian companies, and acting as a communication channel.

The central rule: a liaison office cannot earn income in India. No invoicing, no commercial contracts, no revenue. Expenses are met from permitted inward remittances.

See liaison office setup in India.

When RBI approval is required

Applications generally go through a bank designated as an authorised dealer by the RBI. The authorised dealer bank requires prior RBI approval in specified cases, including where:

• the applicant’s principal business is in defence, telecom, private security or information and broadcasting, and the requisite approval from the relevant Ministry or sectoral regulator has not already been obtained;
• the applicant is a citizen of, or registered or incorporated in, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau, or the application relates to Jammu and Kashmir, the north-east region, or the Andaman and Nicobar Islands;
• the applicant is a non-government organisation or not-for-profit not registered under the Foreign Contribution (Regulation) Act, 2010.

Applications by foreign banks go directly to the RBI; by foreign insurance companies, to IRDAI.

A liaison office also has continuing obligations including tax filings and the applicable Annual Activity Certificate.

Where it fits, and where it stops fitting

A European manufacturer considering India puts two people in Delhi to understand the market, meet distributors and attend industry events. That is a genuine liaison office.

Six months later those two are negotiating prices, accepting orders and closing contracts. That is not.

The shift creates two problems at once. A FEMA issue, because the office is operating outside its permitted scope. And an Indian tax issue, because the activity can support a permanent establishment or business connection argument against the parent — with tax on attributable profits for the period concerned.

The rule is simple: if the office has started behaving like a sales operation, change the structure before someone else notices.

7. Branch office

A branch office is also an extension of the foreign company, but unlike a liaison office it can undertake specified commercial activities and earn income.

A branch should generally be engaged in the activity the parent is engaged in. Permitted activities extend to exporting and importing goods; professional or consultancy services other than the practice of the legal profession; research the parent is engaged in; promoting technical or financial collaborations; representing the parent and acting as a buying or selling agent; IT and software development services and technical support for group products; and representing a foreign airline or shipping company.

See branch office setup in India.

The SEZ exception worth knowing

A branch cannot generally manufacture or process goods in India directly. But RBI approval is not required for a foreign company to establish a branch office in a Special Economic Zone to undertake manufacturing and service activities, subject to conditions including that the sector permits 100% FDI and the branch can function on a standalone basis.

For a manufacturer weighing India entry, that is worth examining before defaulting to a subsidiary.

The tax position

Foreign companies pay a base rate of 35%, reduced from 40% by the Finance Act, 2024, with surcharge and 4% cess taking the effective rate to roughly 36% to 38% on business income attributable to a permanent establishment. Current rates are published by the Income Tax Department.

Against a qualifying subsidiary on the concessional regime, that is a headline gap of twelve to thirteen percentage points — but on the Indian leg only. Home-country treatment of branch versus subsidiary profits, treaty relief, loss utilisation and profit attribution can all move the consolidated result, sometimes materially. Our corporate tax team models both before incorporation, not after.

When a branch is still right

Where the regulator expects or requires it. Where the activity is narrow and clearly within permitted scope. Where parent-level liability is commercially acceptable. Where home-country treatment favours branch profits. Where a separate Indian company genuinely adds nothing.

What a branch is not is a lighter-compliance subsidiary. Head office to branch transactions are international transactions, so the foreign company undergoes a transfer pricing audit and files Form 3CEB. Branch and project offices file ITR-6.

8. Project office

A branch with an expiry date, built around one Indian contract.

An overseas engineering group wins a large infrastructure contract. It needs a presence for the duration and has no intention of staying. That is the fact pattern a project office is designed for. See project office setup.

The foreign company must satisfy the applicable conditions on the project and its funding, including the prescribed financing or approval routes. The office is tied to the project, closes on completion, and cannot be repurposed into a general trading presence.

The test is blunt. “One contract, then we leave” is a project office. “One contract now, several more expected” is a branch or a subsidiary, and pretending otherwise creates a problem two years out.

9. GIFT City IFSC: the structure most guides skip

For certain financial and offshore-facing businesses, GIFT City changes the analysis entirely.

The International Financial Services Centre at GIFT City, Gandhinagar, operates under IFSCA — a unified regulator within the IFSC perimeter, in place of the RBI, SEBI, IRDAI and PFRDA.

Permitted activity includes IFSC banking units, fund management, alternative investment funds, insurance and reinsurance, aircraft leasing, ship leasing, financing activities, global in-house and capability centres, and capital-market and ancillary services.

The attraction is a combination of tax incentives, foreign-currency treatment of transactions, and one regulator instead of four.

The qualification that matters

GIFT City is not a general substitute for a mainland subsidiary, and it is not a tax shortcut.

A foreign software company selling to Indian customers does not become a GIFT City business by registering there. A manufacturer running an Indian plant is a mainland operating business. Eligibility, minimum capital, substance and licensing conditions vary by activity and are set by IFSCA regulations for each business line.

The right filter: is the business international, financial or offshore-facing, and does IFSCA license it? If yes, examine it seriously. If no, it is not relevant however attractive the incentives sound.

10. Do you need an Indian entity at all?

Sometimes not. But “no Indian entity” does not mean “no Indian tax exposure.”

Distributor or reseller

An Indian distributor buys and resells. Legitimate, if the arrangement is genuinely principal-to-principal.

The exposure arises where the distributor habitually concludes contracts in your name, or plays the principal role leading to their conclusion — which can create dependent-agent permanent establishment risk. Business connection, GST on the flows and withholding all need separate assessment. The label on the contract does not settle the tax position; the conduct of the parties does.

Employer of record

An EOR lets a foreign company hire a small Indian team without incorporating. The provider employs the individuals and handles employment administration. It is fast, reversible, and genuinely useful for a market test.

Two limits. It does not by itself eliminate PE risk. And it does not let you invoice Indian customers.

What the employees actually do is the variable that matters. Two engineers building product for overseas customers is a very different fact pattern from two salespeople negotiating with Indian buyers.

Digital sales and Significant Economic Presence

You can sell digital services into India with no office at all. Two domestic concepts can still pull you into the net.

Business connection is the general test, triggered by a dependent agent or a habitual sales presence.

Significant Economic Presence extends business connection to digital models, applying where transactions with persons in India exceed a prescribed revenue threshold, or a prescribed number of Indian users are subject to systematic and continuous solicitation or interaction. The notified thresholds have been in the order of ₹2 crore of revenue or around 3 lakh users. These are set by rule and change; confirm the current notified position before relying on them.

The layer that decides most cases is the treaty. Where an applicable treaty gives a more favourable rule and its permanent establishment article has not been correspondingly amended, the treaty position generally prevails. SEP therefore bites hardest on businesses in non-treaty jurisdictions. If your group sells into India digitally from a jurisdiction without a favourable treaty, assess this before revenue scales, not after.

11. The comparison that actually decides it

Most comparison tables list attributes. This one lists the questions that change the answer.

Decision question	Subsidiary	Joint venture	LLP	Branch	Liaison	Project office	GIFT City
Can it invoice Indian customers?	Yes	Yes	Yes	Yes, within permitted activities	No	Project only	Permitted activities only
Can it hire employees directly?	Yes	Yes	Yes	Yes	Yes, for liaison work	Yes, for the project	Yes
Can it manufacture?	Yes	Yes	Yes	Only in an SEZ	No	Project-specific	No
Indicative effective tax rate	~25.17% on the 22% regime	Same	Standard rates, AMT applies	~36–38%	No revenue to tax	~36–38%	Conditional IFSC regime
Is the parent ring-fenced?	Yes	Yes	Yes	No	No	No	Yes
Can it raise capital or issue ESOPs?	Yes	Yes	No	No	No	No	Yes, subject to structure
How is it approved?	Mostly automatic route	Automatic or approval	Restricted sectors only	AD bank; RBI in specified cases	AD bank; RBI in specified cases	AD bank; RBI in specified cases	IFSCA authorisation
Indicative setup time	2–4 weeks	4–8 weeks	3–5 weeks	6–12 weeks	6–12 weeks	6–12 weeks	Licence-dependent
Verdict in one line	The default for a real India business	Same vehicle, different governance problem	Only if FDI permits and you will never raise equity	Higher tax, narrower scope, parent exposed	Presence without commerce — and nothing more	One contract, then closure	Right answer for the wrong business is still wrong

The same comparison in prose

If the table is hard to read on a phone:

Wholly owned subsidiary. Domestic company for tax, with access to the 22% regime. Full commercial freedom. Can manufacture. Parent ring-fenced. Can raise capital and issue ESOPs. Heaviest compliance. The default for a long-term operating business.

Joint venture. Legally identical to a subsidiary. The difference is ownership and the shareholders’ agreement. Right where an Indian partner brings capability you cannot reproduce; the legal work should focus on making a failed relationship exitable.

LLP. Limited liability with lighter formalities, but no 22% regime, AMT applies, and FDI is restricted to sectors allowing 100% automatic route with no performance conditions. No ESOPs, no convertibles. Fits eligible professional services with no funding plans.

Branch office. Not a separate entity; the parent is liable and taxed at foreign-company rates. Can earn revenue within permitted activities. Cannot manufacture on the mainland, can in an SEZ. Full transfer pricing obligation on head office dealings.

Liaison office. Cannot earn Indian income at all. Representation, promotion and communication only. Still needs a PAN, tax filings and an Annual Activity Certificate. For genuine market testing and nothing beyond.

Project office. Taxed as a foreign company, tied to one approved project, closes on completion. For a defined contract with an identifiable end date.

GIFT City IFSC unit. Separate entity under the IFSCA framework rather than the mainland regime, with different tax and regulatory treatment for qualifying activities. Restricted to what IFSCA licenses.

12. Tax comparison: subsidiary versus branch

	Qualifying Indian subsidiary	Branch or project office
Base rate	22%	35%
Surcharge	10%	2% on income ₹1–10 crore; 5% above ₹10 crore
Cess	4%	4%
Indicative effective rate	~25.17%	~36% to 38%

Rates as published by the Income Tax Department. Figures are illustrative and depend on the applicable provisions.

On ₹10 crore of taxable profit, that is roughly ₹1.1 to ₹1.3 crore a year in Indian tax alone.

Decisive? Not necessarily. If the parent’s home country treats branch and subsidiary income differently, or if treaty relief, foreign tax credits or loss utilisation change the consolidated result, the gap narrows — occasionally it reverses. Model the group outcome, not the Indian line.

13. The other domestic corporate tax tracks

Regime	Base rate	Broad application
Concessional	22%	Qualifying domestic companies that elect it and forgo specified deductions
Turnover-linked	25%	Domestic companies below the prescribed turnover threshold
Default	30%	All other domestic companies

The commonly cited ₹400 crore turnover threshold relates to a specified prior year. The figure has been stable; the reference year moves annually. Confirm both for the tax year you are filing.

The 22% election

The election is made in the prescribed form by the return due date for the first tax year it applies to, and once exercised it cannot be withdrawn for that or any later year. The company also gives up specified deductions and exemptions.

For a new foreign-owned subsidiary this is straightforward, because there is no historical MAT credit at stake. For an existing company it is not: switching means MAT credit is lost.

The 15% manufacturing rate

You will still find this quoted online. For a company being planned today, do not assume it is available. The original conditions included incorporation and commencement requirements tied to dates that have passed.

Model on the 22% regime unless a current tax analysis establishes otherwise. An advisor still presenting 15% as a live option for a greenfield project is working from outdated material.

Tax Year, and what the 2025 Act changed

The Income-tax Act, 2025 applies from 1 April 2026, with earlier tax years continuing under the previous framework. The period concept is now the Tax Year — a single 12-month period from 1 April to 31 March, replacing the financial year and assessment year pairing.

The rate tracks, surcharge and cess structure above carry forward. What changed is the numbering and the terminology, not the rates. Older material refers to these regimes by their section numbers under the 1961 Act; check the current statutory provision rather than relying on a section number quoted in an older article.

14. Three risks that apply whichever structure you choose

Picking a subsidiary over a branch does not solve these. They depend on conduct, not on the entity chart.

Permanent establishment

PE is a question of facts: dependent agents, contract-concluding activity, certain service arrangements, seconded employees, business premises, or the specific thresholds in the applicable treaty. A foreign company can have a tax problem while its corporate structure looks perfectly clean.

Significant Economic Presence

Relevant to digital and remote models with substantial Indian commercial activity and no Indian presence at all. Assess Indian revenue and user activity before assuming that no office means no exposure. See section 10.

Place of effective management

POEM runs the other way. The question is whether an offshore company is actually managed from India.

The classic pattern: an overseas holding company with little real substance in its home jurisdiction, whose directors are formally offshore but whose major commercial decisions are consistently taken by executives sitting in India. If POEM is in India, the foreign company becomes Indian tax-resident — and its worldwide income enters the Indian net.

The control is easy to state and hard to do: if a company is meant to be managed outside India, its board must actually meet, decide and minute there, with directors exercising genuine judgement rather than ratifying decisions made elsewhere.

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Not sure which of these applies to you?

Most groups discover a PE or POEM issue during an audit, not during planning. A one-hour structuring review before incorporation is cheaper than an assessment three years later. Tell us what your India team will actually do and we will tell you which structure fits — and which risks you have already created.

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15. Bringing foreign capital into India

Once the structure is chosen, the next question is how the money legally arrives. The framework sits in India’s FDI policy and FEMA — see DPIIT. This is also where an Indian private limited company with foreign shareholding needs planning at the outset, not after incorporation.

Automatic route

No prior government approval, provided the investment complies with the applicable sectoral conditions. Most sectors sit here, though the exact position depends on the activity.

Government route

Prior approval where the sector carries FDI caps, ownership requirements, security restrictions or performance conditions. Note that the government route can also be triggered by who the investor is rather than what the sector is — see section 16.

Prohibited sectors

Foreign direct investment is prohibited in lottery business including government, private and online lotteries; gambling and betting including casinos; chit funds; Nidhi companies; trading in transferable development rights; real estate business or construction of farmhouses; tobacco manufacturing; and sectors not open to private investment, such as atomic energy and railway operations.

The real estate prohibition is narrower than it first reads. It targets dealing in land and immovable property with a view to earning profit. It does not extend to development of townships, construction of residential or commercial premises, roads or bridges, educational institutions, recreational facilities, city and regional infrastructure, real estate broking services, SEBI-registered REITs, or earning rent or lease income not amounting to a transfer.

Caps also move. The FDI limit in insurance was raised from 74% to 100%, subject to the condition that the entire premium is invested domestically. Check the current policy before committing funds.

16. Press Note 3 and beneficial ownership

Press Note 3 changed the analysis for investors connected with countries sharing a land border with India. Where the beneficial ownership condition is triggered, investment requires the government route — in any sector, regardless of the sectoral position.

Three things groups get wrong:

1. It is not limited to the name on the immediate shareholder register. Beneficial ownership anywhere up the chain can trigger it.
2. It captures transfers of existing holdings that result in such ownership, not only fresh investment.
3. Approval timelines are materially longer than the automatic route.

For multi-layered holding structures, review the ownership chart before the investment documents are finalised. Discovering a Press Note 3 issue after signing creates a closing problem that no amount of drafting fixes.

17. Downstream investment

A foreign-owned or foreign-controlled Indian company does not get a free pass to acquire another Indian company.

Downstream investments by Indian entities majority owned or controlled by persons resident outside India are treated as indirect foreign investment and governed substantially as direct foreign investment. Entry route, sectoral caps, pricing rules and attendant conditions apply to the downstream transaction, with separate reporting.

Two points are missed regularly.

Ownership and control are tested separately. A company can be below 50% foreign-owned and still be foreign-controlled through board rights or shareholder agreement vetoes — which brings the downstream rules into play.

Funding is constrained. Domestically borrowed funds cannot be used for downstream investment. Internal accruals and funds brought in from abroad can.

For any group planning an Indian holding company above a portfolio of operating businesses, this shapes the structure. Design it in at the start.

18. FEMA reporting after investment

Reporting does not end when the money lands.

• FC-GPR — generally within 30 days of allotment to a non-resident
• FC-TRS — generally within 60 days for qualifying transfers between resident and non-resident
• FLA return — generally by 15 July each year where applicable
• Downstream investment reporting within the prescribed period
• Valuation documentation where required

We run these as a single workstream — see FC-GPR, FC-TRS and RBI documentation and FEMA compliance and FDI reporting.

Two failures recur.

The FC-GPR clock runs from allotment, not from the date the investor decided to send money. Boards approve, funds arrive, and the 30 days are half gone before anyone opens the file.

The FLA return is annual and continues even in years with no fresh investment. It sits with the RBI rather than the tax authority or the MCA, which is exactly why it falls between advisors. Give it a named owner.

19. Which structure is actually easier to run?

The assumption that a branch or liaison office means less compliance is only half true.

Compliance area	Subsidiary or JV	LLP	Branch or PO	Liaison
Statutory audit	Yes	Subject to rules	Yes	Yes
Income-tax return	Yes	Yes	ITR-6	Yes
Transfer pricing	Where applicable	Where applicable	Significant, on head office dealings	Generally limited
Board meetings	Yes	No company board	No Indian board	No
ROC annual filings	Yes	LLP filings	No	No
Dematerialisation of securities	Yes, unless a small company	Not applicable	Not applicable	Not applicable
Significant beneficial owner filings	Yes	Yes, under the LLP SBO rules	Not applicable	Not applicable
FEMA reporting	Yes	Yes	Regulatory reporting	Regulatory reporting
FLA return	Applicable	Applicable	Not in the same format	Not in the same format
Annual Activity Certificate	Not applicable	Not applicable	Branch: yes. Project office differs — confirm with your AD bank	Yes
GST	If registered	If registered	If registered	Generally not, absent taxable supply
Payroll, PF, ESI	Yes	Yes	Yes	Yes, if staff employed

Two rows are newer than most foreign investors expect.

Dematerialisation. Private companies other than small companies must now facilitate dematerialisation of their securities and issue and transfer them only in demat form. For a foreign-owned subsidiary planning a share transfer, bonus issue, rights issue or buy-back, this must be in place before the corporate action.

Significant beneficial ownership. An individual holding at least 10% of shares, voting rights or distributable dividend indirectly, or exercising significant influence or control other than through direct holdings, is a significant beneficial owner and must be identified, declared and reported. For a layered foreign group, working out who that individual actually is can take longer than the incorporation. Equivalent rules apply to LLPs.

So the useful question is not which structure has the least compliance. It is which compliance system matches the business you intend to run. Many groups use virtual CFO services rather than building an India finance function in year one.

20. Getting profits out of India

Design the repatriation route before the first capital goes in, not after the business becomes profitable.

Dividend

An Indian subsidiary or JV can distribute profits as dividends. Under FEMA, dividends are freely repatriable, net of applicable tax deducted at source. Withholding and treaty provisions apply to the foreign shareholder.

Note the corporate-law constraint: dividend may generally be paid only out of profits for the year or undistributed profits of previous years after providing for depreciation, or out of accumulated profits transferred to free reserves subject to conditions. A company cannot pay dividends out of reserves other than free reserves, and carried-over losses and unprovided depreciation must be set off first.

Royalty

Legitimate where the parent owns genuine IP and licenses it. The agreement must be real, commercially supportable and documented for transfer pricing. See royalty agreements.

Management or service fees

A parent can charge for genuine services, but the arrangement cannot exist merely to move cash offshore. You need a clear agreement, actual deliverables, evidence of performance, arm’s-length pricing and a withholding analysis.

Treaty rules matter here, particularly where the technical services article carries a make-available requirement. Our guide on TDS on payments to a foreign parent works through that analysis.

Interest, branch remittance and share sale

Parent loans are possible but must comply with the external commercial borrowing framework and FEMA. A branch can remit eligible surplus through the applicable banking and regulatory process after tax. A foreign shareholder can exit by selling shares, subject to capital gains, treaty relief, valuation and FEMA pricing rules.

Whichever route, the withholding analysis comes first. These payments generally require a Tax Residency Certificate and Form 10F for treaty rates, and the prescribed remittance forms before the bank releases funds — see TDS return filing.

21. The decision framework

Seven questions, in order. Stop at the first clear answer.

1. Is the business financial or offshore-facing? Fund management, banking, insurance, aircraft or ship leasing, or an offshore-facing capability centre — assess GIFT City IFSC first. Otherwise continue.

2. Will it earn Indian revenue? If not, and the purpose is genuine market research or representation, a liaison office may fit. If no Indian entity is needed at all, a no-entity model may work.

3. Is the activity tied to one project? A defined contract with a clear completion point points to a project office.

4. Does the sector dictate a structure? Some regulated sectors do. Follow the sector rule before choosing the corporate form.

5. Do you need an Indian partner? If yes, a JV — and spend as much time on the shareholders’ agreement as on incorporation.

6. Will it hire at scale, raise capital, issue ESOPs, acquire Indian businesses or eventually be sold? A private limited subsidiary is usually the most flexible fit. Confirm against your sector’s FDI position and your group’s home-country treatment.

7. Is it a small professional-services operation with no funding plans? An LLP may work, if the FDI conditions permit.

Where the subsidiary is not the answer

Regulated financial services often require a branch by law. A group whose home jurisdiction taxes foreign subsidiary profits unfavourably may find a branch more efficient overall. A fixed-term contract belongs in a project office. A genuine market test with no revenue belongs in a liaison office, or nowhere at all.

22. Setup time and cost drivers

Structure	Indicative setup time	Main cost drivers
Wholly owned subsidiary	2–4 weeks	Incorporation, DSC and DIN, PAN and TAN, GST, professional fees, audit
Joint venture	4–8 weeks	Incorporation plus shareholders’ agreement negotiation — usually the largest line item
LLP	3–5 weeks	Incorporation and ongoing compliance
Branch, liaison or project office	6–12 weeks	AD bank and RBI process, documentation, Annual Activity Certificate
GIFT City unit	Licence-dependent	IFSCA authorisation, minimum capital, substance requirements
Employer of record	1–2 weeks	Per-employee provider fees, no setup cost

Incorporation is faster than most foreign investors expect. A single online application through the SPICe+ service covers name reservation, incorporation, DIN allotment for up to three directors, PAN, TAN, GSTIN, ESIC and EPFO registration, bank account opening, and professional tax registration in certain states.

What extends timelines is rarely the Registrar. It is document readiness, apostille or legalisation in the shareholder’s jurisdiction, sector licensing, AD bank or RBI workload, and beneficial ownership review.

And setup is the small number. Tax and recurring compliance are the large ones. A structure that saves ₹1 lakh at incorporation and costs twelve percentage points of profit for five years is not a cheap structure.

23. Eleven mistakes that are expensive to reverse

1. Choosing a branch because it looks simpler. Model the Indian and home-country positions together first.
2. Treating the 22% regime as automatic. The company must qualify and elect correctly, and cannot withdraw later.
3. Letting a liaison office drift into selling. This creates FEMA and permanent establishment exposure simultaneously.
4. Checking Press Note 3 at closing instead of at term sheet. Beneficial ownership runs up the chain.
5. Treating a foreign-owned holding company’s acquisitions as ordinary M&A. They are downstream investments.
6. Running an offshore company from India. POEM brings worldwide income into the Indian net.
7. Scaling Indian digital revenue from a non-treaty jurisdiction without assessing SEP.
8. Choosing an LLP before thinking about funding. No ESOPs, no convertibles, no conventional round.
9. Treating the resident director as a formality. The role carries statutory liability.
10. Missing FC-GPR’s 30 days, which run from allotment, not from receipt of funds.
11. Never filing the FLA return, because it sits with the RBI and belongs to no advisor by default.

24. Frequently asked questions

Q1. What is the best business structure in India for a foreign company?

For most foreign companies planning ongoing commercial operations, a wholly owned subsidiary incorporated as a private limited company is the most flexible structure. It provides domestic company tax status, limited liability, the ability to invoice and hire directly, and a clean exit. Branch, liaison and project offices suit narrower or shorter-term purposes and are taxed at higher foreign-company rates.

Q2. What is the difference between a subsidiary and a branch office in India?

A subsidiary is a new Indian company with its own legal identity, taxed as a domestic company, with the parent’s liability ring-fenced. A branch office creates no new entity: the foreign parent operates directly in India, remains liable, and is taxed at foreign-company rates without access to the concessional 22% regime. A branch also cannot manufacture outside an SEZ.

Q3. How much tax does a foreign-owned Indian subsidiary pay?

A qualifying domestic company electing the concessional regime pays a 22% base rate with a 10% surcharge and 4% cess, giving an indicative effective rate of approximately 25.17%. MAT does not apply under that regime. The alternative tracks are 30%, or 25% for companies below the prescribed turnover threshold. The election is irrevocable once made.

Q4. Can a liaison office earn revenue in India?

No. A liaison office cannot earn income in India under any circumstances. Its permitted activities are limited to representing the parent, promoting exports and imports, promoting technical or financial collaboration, and acting as a communication channel. All expenses must be met from inward remittances. An office that begins invoicing or concluding contracts risks being treated as an unregistered permanent establishment.

Q5. Can a foreign company be taxed in India without an Indian subsidiary?

Yes. Permanent establishment, business connection and Significant Economic Presence can each create Indian tax exposure with no Indian entity at all. A dependent agent concluding contracts in your name, seconded staff performing the parent’s business, or digital revenue and user numbers above the notified SEP thresholds can all trigger it. Facts determine this, not the entity chart.

Q6. Can an offshore holding company become an Indian tax resident?

Yes, if its place of effective management is in India. POEM asks where key management and commercial decisions necessary for conducting the business as a whole are in substance made. Indian residence brings the company’s worldwide income into the Indian tax net, not just Indian-source income. The typical trigger is an offshore holding company whose real decisions are taken by executives in India.

Q7. Do I need an Indian resident director?

Yes. Under Section 149(3) of the Companies Act, 2013, at least one director must stay in India for not less than 182 days during the financial year. For a newly incorporated company, the requirement applies proportionately at the end of the financial year of incorporation. Note that the test looks at the current financial year, not the previous one.

Q8. Our proposed director is a Chinese national. Is that a problem?

It is an additional step, not a bar. Where a proposed director is a national of a country sharing a land border with India, security clearance from the Ministry of Home Affairs is required before a Director Identification Number can be obtained, and the clearance must accompany the consent to act. Press Note 3 may separately apply to the investment itself. Build both into the timeline.

Q9. Can a foreign-owned Indian company acquire another Indian company?

It can, but the acquisition is treated as indirect foreign investment, or downstream investment, if the acquiring company is owned or controlled by non-residents. The target sector’s FDI cap, entry route, pricing rules and reporting apply to that transaction independently. Domestically borrowed funds cannot be used. Assess this before signing a term sheet.

Q10. When is GIFT City better than a mainland subsidiary?

When the business is international, financial or offshore-facing and falls within an activity IFSCA licenses — fund management, banking, insurance and reinsurance, aircraft or ship leasing, or an offshore-facing capability centre. It is not a general tax shortcut. A company selling to Indian customers or manufacturing in India belongs on the mainland regardless of the incentives available.

Q11. How long does it take to set up in India?

Typically two to four weeks for a private limited subsidiary once documents are apostilled and available, and six to twelve weeks for a branch, liaison or project office because those go through an AD bank with RBI approval in specified cases. Bank account opening is usually the slowest single step. These are indicative planning ranges, not guarantees.

Q12. What happens if we appoint a nominee resident director but never involve them?

The director retains statutory responsibilities under Indian company law regardless of how the appointment was described commercially. Problems surface at the point of default — a missed filing, a regulatory query, a dispute — when the person on the register is asked to account for decisions they never saw. Document the arrangement, indemnify properly, and send them board papers.

Q13. We are only hiring two people in India. Do we need a subsidiary?

Not necessarily. An employer of record can place a small Indian team within one to two weeks with no incorporation, no audit and a reversible exit. Two constraints apply: you cannot invoice Indian customers, and the arrangement does not by itself eliminate permanent establishment risk. What those two people actually do decides the tax analysis.

Q14. Should we plan the exit before incorporation?

Yes, particularly for joint ventures and multi-tier structures. A subsidiary can be sold through a share transaction with treaty relief potentially available on capital gains. A JV exit depends entirely on provisions negotiated at the outset, and FEMA constrains assured-return mechanisms. Branch and liaison office closure runs through the AD bank. Easy to build is not easy to unwind.