When expanding a business into India, companies often face the decision of whether to establish a branch office or a subsidiary company. Both structures offer distinct advantages and limitations in terms of legal identity, taxation, compliance, and operational flexibility. Understanding these differences is essential for making an informed business decision.
This article will provide a detailed comparison between a branch office and a subsidiary company, helping businesses choose the best structure based on their expansion strategy in India.
What is a Branch Office?
A branch office is an extension of a foreign company that operates in India. It is not a separate legal entity but acts as a representative of the parent company. A branch office can conduct commercial activities but is limited in scope as it cannot engage in retail trade or manufacturing.
Key Features of a Branch Office in India:
- Owned by the parent company and remains under its direct control.
- Does not have a separate legal identity from the parent company.
- Can engage in activities like export/import, consultancy, professional services, and research.
- Requires approval from the Reserve Bank of India (RBI) and the Registrar of Companies (ROC).
- Subject to corporate tax rates applicable to foreign companies.
What is a Subsidiary Company?
A subsidiary company is a separate legal entity incorporated under the Companies Act, 2013. It can be a wholly-owned subsidiary (100% ownership by the parent company) or a joint venture with local stakeholders.
Key Features of a Subsidiary Company in India:
- Separate legal entity from the parent company.
- Can conduct all business operations, including manufacturing, trading, and service-based activities.
- Requires registration under the Companies Act, 2013.
- Taxed as an Indian domestic company, often benefiting from lower corporate tax rates.
- Greater flexibility in raising local funding and expanding operations.
Key Differences Between a Branch Office and a Subsidiary
| Aspect | Branch Office | Subsidiary Company |
| Legal Identity | Extension of the parent company | Separate legal entity |
| Ownership | 100% owned by the foreign company | Can be wholly owned or a joint venture |
| Control | Direct control by the parent company | Independent management possible |
| Business Scope | Limited activities, no manufacturing | Full-fledged operations, including manufacturing |
| Taxation | Taxed as a foreign entity (higher rates) | Taxed as an Indian company (lower rates) |
| Compliance | RBI & ROC approval required | MCA & ROC regulations apply |
| Financial Liability | Parent company responsible for liabilities | Liability limited to the subsidiary |
| Repatriation of Profits | Subject to higher taxation & restrictions | Easier repatriation with lower tax implications |
Which Option is Better for Business Expansion in India?
The choice between a branch office and a subsidiary company depends on:
- Business Goals: If a company wants full control but limited operations, a branch office is suitable. If it aims for long-term growth and expansion, a subsidiary is preferable.
- Legal & Tax Considerations: A subsidiary company enjoys tax benefits and has a lower risk exposure, while a branch office is directly taxed at a higher rate.
- Operational Independence: A subsidiary offers autonomy, making it easier to secure local funding and enter partnerships.
Conclusion
Both branch offices and subsidiary companies offer unique advantages, but their choice should align with a company’s business strategy, taxation preferences, and long-term goals.
- If a foreign company needs limited operations with direct parent company control, a branch office is a better option.
- If a company wants full-fledged operations with local benefits and tax advantages, a subsidiary company is the best choice.
At Taxwise Consultant, we specialize in providing expert guidance on company incorporation, regulatory compliance, taxation, and business structuring in India. Our experienced team of Chartered Accountants can assist you in making the right business decision.
FAQs
- Can a branch office in India generate revenue?
Yes, but it is limited to specific business activities approved by the RBI. - Does a subsidiary company in India need local directors?
Yes, an Indian subsidiary must have at least one resident director as per the Companies Act, 2013. - What is the corporate tax rate for a subsidiary in India?
Indian subsidiaries enjoy a lower tax rate of 22% (without exemptions) or 30% (with exemptions). - Can a foreign company repatriate profits from a branch office?
Yes, but profit repatriation is subject to high taxation and RBI regulations. - How long does it take to set up a subsidiary in India?
It usually takes 4-6 weeks to register a subsidiary, depending on documentation and approvals.