Top Regulatory Requirements for Foreign Subsidiaries to Know

Introduction to Regulatory Compliance for Foreign Subsidiaries

Operating a foreign subsidiary involves more than expanding business presence across borders. It requires a clear understanding of regulatory requirements for foreign subsidiaries in the host country to ensure smooth operations and long-term sustainability. Regulatory compliance refers to adhering to the legal, financial, operational, and ethical standards set by local authorities. For foreign subsidiaries, these requirements often differ significantly from those in the parent company’s home jurisdiction, making compliance a critical business priority.

From company registration and foreign investment approvals to tax filings, employment laws, and sector-specific regulations, foreign subsidiaries must navigate a complex regulatory landscape. Non-compliance can lead to penalties, legal disputes, reputational damage, and even restrictions on business activities. As governments worldwide continue to strengthen regulatory oversight, compliance expectations for foreign-owned entities have become more detailed and closely monitored.

Effective regulatory compliance also supports transparency, corporate governance, and risk management. It helps foreign subsidiaries build trust with regulators, investors, employees, and local partners while enabling stable and lawful business growth. By establishing robust compliance frameworks and staying informed about evolving regulations, foreign subsidiaries can minimize legal risks and focus on achieving their strategic and commercial objectives in the host market.

Understanding the compliance requirements for foreign subsidiaries begins with choosing the correct legal structure and completing entity registration in the host country.

1. Permissible Legal Structures: Foreign companies can operate in India through a wholly owned subsidiary, joint venture, liaison office, branch office, or project office. A private limited company is the most common structure for long-term operations.
2. Compliance with the Companies Act, 2013: A foreign subsidiary incorporated in India must comply with the Companies Act, 2013, including rules related to incorporation, governance, disclosures, and annual filings.
3. Minimum Shareholders and Directors: A private limited company requires at least two shareholders and two directors. At least one director must be a resident of India, having stayed in the country for a minimum of 182 days in the previous calendar year.
4. Name Approval and Incorporation: The proposed company name must be approved by the Ministry of Corporate Affairs (MCA). Incorporation is completed by filing the SPICe+ form along with the Memorandum and Articles of Association.
5. Foreign Direct Investment (FDI) Compliance: The shareholding structure must comply with India’s FDI policy. Certain sectors require prior government approval, while others fall under the automatic route.
6. Permanent Account Number (PAN) and Tax Registration: After incorporation, the company must obtain a PAN and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department.
7. Goods and Services Tax (GST) Registration: GST registration is mandatory if the subsidiary undertakes taxable supplies or crosses prescribed turnover thresholds.
8. Registration with the Reserve Bank of India (RBI): Foreign investment must be reported to the RBI through the FIRMS portal within prescribed timelines.
9. Local Office Address and Registered Office: The subsidiary must maintain a registered office in India and inform the Registrar of Companies of its address within the specified period.
10. Sector-Specific Licenses and Approvals: Depending on the nature of the business, additional registrations or licenses from regulatory bodies may be required.

Foreign Direct Investment (FDI) Regulations and Approvals

FDI compliance is one of the most critical regulatory requirements for foreign subsidiaries that foreign subsidiaries must address before commencing operations.

1. FDI Policy Framework: Foreign Direct Investment in India is governed by the consolidated FDI policy issued by the Department for Promotion of Industry and Internal Trade and the Foreign Exchange Management Act, 1999, along with related RBI regulations.
2. Automatic Route vs. Government Approval Route: Under the automatic route, foreign investors do not require prior approval from the government. Sectors under the government route need approval from the concerned ministry through the Foreign Investment Facilitation Portal.
3. Sectoral Caps on Foreign Investment: Each sector has a prescribed maximum percentage of foreign investment. Foreign subsidiaries must ensure their shareholding structure is within these limits.
4. Prohibited Sectors for FDI: Certain sectors such as lottery business, gambling and betting, chit funds, and real estate trading are prohibited for FDI.
5. Pricing Guidelines for Share Issuance: Shares issued to foreign investors must comply with RBI pricing guidelines and be valued by a registered valuer or merchant banker.
6. Mode of Investment and Instruments: FDI can be made through equity shares, compulsorily convertible preference shares, or debentures. Other instruments are not treated as FDI.
7. Reporting Requirements to RBI: All foreign investments must be reported on the RBI FIRMS portal. Form FC GPR must be filed within the prescribed timeline after the allotment of shares.
8. Downstream Investment Compliance: Foreign-owned Indian subsidiaries making further investments in other Indian entities must comply with downstream investment norms under FDI regulations.
9. Restrictions on Transfer of Shares: Transfer of shares between residents and nonresidents must follow RBI pricing norms and reporting requirements.
10. Annual FDI Compliance and Monitoring: Foreign subsidiaries must ensure ongoing compliance with FDI conditions, sector-specific requirements, and periodic disclosures to avoid penalties.

Corporate Governance and Board Compliance

Corporate governance norms form a core part of the ongoing regulatory requirements for foreign subsidiaries applicable to foreign subsidiaries operating in India.

1. Foreign subsidiaries incorporated in India are treated as Indian companies and must comply fully with the Companies Act, 2013, along with applicable rules and amendments.
2. A private limited company must have a minimum of two directors. At least one director must be a resident of India, having stayed in the country for at least 182 days in the previous calendar year.
3. Depending on paid-up capital and turnover thresholds, the company may be required to appoint key managerial personnel such as a managing director, chief financial officer, and company secretary.
4. The board must meet at least four times in a year, with a maximum gap of 120 days between two meetings. Quorum requirements must be met for decisions to be valid.
5. Certain companies are required to constitute committees such as the audit committee, nomination and remuneration committee, and stakeholder relationship committee based on statutory thresholds.
6. Companies must maintain statutory registers related to directors, shareholders, charges, and contracts and keep them updated at the registered office.
7. An annual general meeting must be held each year within the prescribed timelines to approve financial statements and other statutory matters.
8. Transactions with parent companies or group entities must comply with related party transaction provisions and require board or shareholder approval where applicable.
9. Directors must disclose interests, shareholdings, and changes therein. The company must ensure transparent reporting and timely statutory filings with the Registrar of Companies.
10. Failure to comply with corporate governance requirements can lead to monetary penalties, disqualification of directors, and regulatory action against the company.

FDI compliance is one of the most critical legal requirements for foreign subsidiaries that foreign subsidiaries must address before commencing operations.

1. A foreign subsidiary incorporated in India is governed by the Companies Act, 2013, and must follow all provisions applicable to Indian companies, including rules on governance, disclosures, and reporting.
2. The company must prepare financial statements as per Indian accounting standards and file them with the Registrar of Companies using Form AOC-4 within the prescribed timeline.
3. An annual return containing details of shareholders, directors, and key management must be filed in Form MGT-7 or MGT-7A within the statutory due date.
4. Any appointment, resignation, or change in directors must be reported to the Registrar of Companies through Form DIR-12 within the specified period.
5. Statutory auditors must be appointed, and the appointment must be filled using Form ADT-1. Auditor rotation rules apply where prescribed.
6. Certain resolutions passed by the board or shareholders must be filed with the Registrar of Companies in Form MGT-14.
7. The company must maintain statutory registers related to members, directors, charges, and contracts at the registered office and keep them updated.
8. Changes such as alteration of share capital, registered office address, or Memorandum and Articles of Association require timely filing of relevant forms.
9. Directors must obtain a Director Identification Number and complete annual DIR-3 KYC filings to remain compliant.
10. Delays or failures in statutory filings can result in additional fees, penalties, and potential disqualification of directors.

Tax compliance and transfer pricing rules are among the most closely monitored foreign subsidiary compliance regulations for foreign subsidiaries.

1. Foreign subsidiaries incorporated in India are treated as domestic companies and are subject to corporate income tax on their global income at applicable rates.
2. The subsidiary must obtain a Permanent Account Number and comply with all income tax registration and reporting requirements.
3. Taxes must be deducted at the source on specified payments such as salaries, professional fees, interest, royalties, and payments to the foreign parent or affiliates.
4. Foreign subsidiaries engaged in the supply of goods or services must comply with GST registration, returns, invoicing, and payment requirements.
5. Transactions between the Indian subsidiary and its foreign parent or group entities must comply with Indian transfer pricing rules to ensure arm’s-length pricing.
6. Transfer pricing documentation, including local file and master file where applicable, must be maintained. Form 3CEB must be filled annually by a chartered accountant.
7. All international transactions with associated enterprises must be reported, including management fees, royalties, cost sharing, and intercompany loans.
8. Foreign subsidiaries may opt for advance pricing agreements or safe harbor provisions to reduce transfer pricing disputes and provide tax certainty.
9. Subsidiaries may be subject to tax audits, transfer pricing assessments, and scrutiny by Indian tax authorities.
10. Noncompliance with tax and transfer pricing regulations can lead to interest, penalties, and prolonged litigation.

Employment and Labor Law Compliance

Employment-related obligations are key legal requirements for foreign subsidiaries, particularly due to India’s state-specific labor laws and social security rules.

1. Foreign subsidiaries operating in India are fully subject to Indian labor and employment laws, regardless of the policies followed by the parent companies.
2. Written employment contracts must comply with local laws covering wages, working hours, leave, termination, and confidentiality. HR policies should align with statutory requirements.
3. Employers must comply with minimum wage notifications issued by state governments and ensure timely payment of salaries as per wage laws.
4. Working hours, weekly offs, and overtime payments must comply with applicable laws such as the Factories Act or Shops and Establishments Acts.
5. Mandatory contributions under the Employees’ Provident Fund, Employees’ State Insurance, gratuity, and other applicable schemes must be made for eligible employees.
6. Statutory benefits such as paid leave, maternity benefits, bonuses, and gratuity must be provided as per applicable legislation.
7. Employers must ensure a safe working environment and comply with health and safety standards prescribed under relevant laws.
8. Foreign subsidiaries must comply with the POSH Act by constituting an Internal Complaints Committee and implementing workplace policies.
9. Termination, layoffs, and retrenchment must follow due process, notice periods, and compensation requirements under labor laws.
10. Required registrations, periodic returns, and inspections under labor laws must be completed within prescribed timelines.

Foreign exchange controls under FEMA represent critical foreign subsidiary compliance regulations governing cross-border fund movement.

1. The foreign exchange transactions of foreign subsidiaries in India are governed by the Foreign Exchange Management Act, 1999, along with rules and regulations issued by the Reserve Bank of India.
2. All foreign capital flows must comply with FEMA and FDI regulations and be reported to the RBI through the FIRMS portal within prescribed timelines.
3. Foreign subsidiaries must conduct all foreign exchange transactions only through RBI-authorized dealer banks.
4. Profits and dividends can be freely repatriated outside India after payment of applicable taxes and completion of statutory filings.
5. Payments such as royalties, technical fees, and management fees to the foreign parent must comply with FEMA regulations and transfer pricing norms.
6. Borrowings from foreign lenders must comply with RBI guidelines on external commercial borrowings, including limits, end use, and reporting.
7. Foreign subsidiaries may open and operate foreign currency accounts in India or abroad as permitted under RBI regulations.
8. Repatriation of capital on disinvestment or exit must follow RBI pricing guidelines and reporting requirements.
9. The subsidiary must file the annual return on foreign liabilities and assets with the RBI within the prescribed timeline.
10. Noncompliance with foreign exchange regulations can lead to monetary penalties and compounding proceedings under FEMA.

Banking, Reporting, and Financial Disclosure Requirements

Transparent banking practices and financial disclosures are essential compliance requirements for foreign subsidiaries for maintaining regulatory credibility.

1. Foreign subsidiaries must open bank accounts with RBI-authorized dealer banks to conduct business transactions and handle foreign exchange dealings.
2. Banks require completion of KYC documentation for the subsidiary, directors, and shareholders before operational accounts are activated.
3. The subsidiary must maintain proper books of accounts at its registered office in accordance with the Companies Act, 2013.
4. Financial statements must be prepared in compliance with Indian accounting standards and reflect a true and fair view of the company’s financial position.
5. Accounts must be audited annually by a chartered accountant appointed under the Companies Act.
6. Periodic financial and compliance reporting must be made to authorities such as the Registrar of Companies, the Income Tax Department, and the RBI.
7. Transactions with the foreign parent or group entities must be properly disclosed in financial statements as per statutory requirements.
8. Audited financial statements and related documents must be filed with the Registrar of Companies within prescribed timelines.
9. Financial disclosures related to foreign investments, loans, and remittances must comply with FEMA and RBI reporting requirements.
10. Failure to meet banking, reporting, or disclosure obligations can lead to penalties, additional scrutiny, and regulatory action.

Best Practices for Staying Compliant in a Foreign Jurisdiction

1. Invest time in understanding the host country’s legal, tax, and regulatory framework before setting up operations.
2. Select an appropriate entity structure and governance model that aligns with local regulations and business objectives.
3. Track all statutory filings, renewals, and reporting deadlines in one place to avoid missed compliances.
4. Engage qualified local professionals who understand regulatory nuances and practical compliance expectations.
5. Adapt parent company policies to meet local labor, tax, data protection, and governance laws.
6. Establish clear approval processes, documentation standards, and audit mechanisms to reduce compliance risks.
7. Stay updated on legal and regulatory developments that may impact business operations.
8. Regular internal and external audits help identify gaps and corrective actions before issues escalate.

Conclusion: Building a Strong Compliance Framework for Foreign Subsidiaries

Building a strong compliance framework is essential for foreign subsidiaries to operate smoothly and sustainably in a new jurisdiction. A well-structured approach to compliance helps businesses manage legal risks, meet regulatory expectations, and maintain operational stability. By understanding local laws, setting up clear governance processes, maintaining timely filings, and seeking local expertise, foreign subsidiaries can avoid penalties and reputational risks.

Regular monitoring, internal audits, and employee awareness further strengthen compliance efforts. A proactive and disciplined compliance framework not only supports regulatory adherence but also builds trust with authorities, partners, and employees, enabling long-term business growth. A proactive approach to understanding and meeting regulatory requirements for foreign subsidiaries enables foreign subsidiaries to operate confidently, reduce risks, and build long-term trust with regulators.

We help businesses set up foreign subsidiaries with clarity and confidence. From legal structuring and registrations to regulatory compliance, taxation, and ongoing filings, our team supports you at every step. Expand into new markets smoothly while we handle the compliance complexities.

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Frequently Asked Questions (FAQs) –

A foreign subsidiary is a company incorporated in another country where a foreign parent company holds a controlling ownership stake.

They include company registration, FDI approvals, FEMA compliance, taxation, labor laws, corporate governance, and statutory filings.

Foreign subsidiaries must comply with corporate tax, GST(if applicable), transfer pricing regulations, and annual tax filings.

Yes, they must comply with applicable central and state labor laws, including wages, social security, and employee benefits.

Yes, ongoing compliance is essential due to regular filings, audits, and changes in regulatory requirements.