Incorporation of Subsidiaries in US by Indians – USA and India CFO


Take your Business across the Atlantic

Incorporation is when a company is legally recognized as its own entity, separate from the owners. It is essential for a company to get incorporated as it brings many advantages like tax gains, establishing perpetual existence, ease of transfer of ownership and many more. It is beneficial for the owners and shareholders as well, as their own personal savings and assets will be protected in case of external parties reclaiming debts.

Considering that US economy is the largest in the world, and is a great sandbox for a lot of businesses, setting up a subsidiary in the US is something that a lot of India-based companies look at. What entails is a lot of deliberations that the Indian company’s owners/shareholders must go through to make sure everything is legally air-tight.  Some of them include what type of subsidiary to set up, which state to set it up in, what are the various formalities involved, etc.

Types of business entities allowed in US

Deciding the type of subsidiary to be set up, the structure it would have, needs one to know what is actually allowed and what is not. This decision is essential in the purview of taxation and future expansion. It is suggested that an advisor be consulted to make sure a suitable decision is made with all bases covered.

A sole proprietorship is when one owns the business oneself. There is no distinction between the company’s finances and one’s personal finances. Similarly, in a partnership, there is no distinction between the company’s liabilities and the partners’ liabilities. A sole proprietorship and partnership are not incorporated and have a relatively informal structure. They have fewer requirements and the costs are low. But since they are not legally separate, liabilities can cross over.

A Limited Partnership is a registered partnership i.e. a partnership that goes through a fair amount of paperwork. Here, the partners can be general partners who are responsible for liabilities, and sleeping partners (limited partners) who act only as investors and are not involved in the day-to-day activities.

When a corporation is taxed separately from the owners/shareholders, it is called a C-corporation. The debts of the company do not translate as debts of the owners. Since the owners have limited liability, they can afford to take risks when it comes to expanding the business.

They can also sell stocks and there is no limit on the number of shareholders that it can have. A disadvantage that this type of corporation carries is that it has to pay a corporate tax on its returns, and the shareholders need to pay a tax on the dividends that they earn.

An S-corporation is wherein it passes all the corporate income, losses and credit through its shareholders for the purpose of federal taxes and to avoid double taxation, which makes this model very appealing. The corporation needs to have 100 or fewer shareholders. But, the corporation must be domiciled in the US and all the shareholders must be residents of US. So and Indian company can’t choose to have an S-corp subsidiary

A Limited Liability Company has the best of a partnership and a corporation. It has the limited liability of a corporation and tax benefits of a partnership (no double taxation).

Each type has its own share of pros and cons. What may be suitable for one particular industry may not be suitable to another.

Registration and incorporation requirements

Before setting up a subsidiary, there are a few things that need to be checked off on the checklist. One of them is getting approval from the Reserve Bank of India if the company is involved in the finance sector.

Having a Registered Agent in the US is vital as this agent will be a liaison between the parent company in India and the government before the subsidiary is set up.

Name– The US does not register two companies with the same name. So it needs to be made sure that the name your company carries is unique and there is no clash.

Place– Each of the 50 states in the US has different rules, and the federation as such has some rules as well. A thorough analysis of the rules needs to be done if you want to have a smooth ride.

Number- You will need to apply for a Federal Employer Identification Number and a State Tax Identification. These unique numbers allotted to each entity make transactions with banks and the government easy.

Apart from the aforementioned elements, it is also essential you open a bank account in the US that has online service, you have a US address and a phone number just to make it easier to receive any important communication from the government.

You will have to provide documents like “Articles of Incorporation” or “Articles of Formation”, Share Certificate for each shareholder or a Member Certificate for each member depending on the type of company.

The application for the EIN, which is the IRS Form SS4, also needs to be submitted for taxation purposes.

All of these need to be filed in the state filing offices. Additional procedures will be required based on the state the subsidiary is being set up in.

Form BE-13 needs to be filled within 45 days of incorporation. This is done with the US Bureau of Economic Analysis. It asks for various information like the level of investment, the location, the industry etc.

Accounting and Repatriation of profits to India

Repatriation is when profits earned in a foreign jurisdiction are transferred back to the country in which the HQ is located.

There are multiple ways in which repatriation can be done. First method is wherein after tax is imposed on local profits, cash can be sent back to India as a dividend on profits. Second, royalty payments can be made for use of trademarks and patented technology. Third, a service fee can be charged which can be sent back to India. The cost of the method must be analyzed against the profits expected. A cocktail of these methods needs to be decided on to get optimal output based on the company and various other factors.

In India, evidence of investment in the subsidiary must be submitted to the designated Authorized Dealer. All dividends, royalties must be repatriated to India within 60 days of it falling due. Normal banking channels can be used to repatriate profits in the form of Dividends to Indian Party.

An Annual Performance Report must be submitted to RBI. This report needs to contain all the details pertaining to repatriation.

A tax rate of flat 15%, apart from any cess and surcharge, is applied on Foreign Dividends.

Delaware Corporation

Delaware is a state in the US on the West Coast. A unique advantage that this state provides is that any company legally registered and incorporated in the state of Delaware can conduct its business in any state. Hence, Delaware is legally home to many companies listed on S&P500, even though most of them are located outside its borders.

The financial sector is especially attracted to this state. This is because Delaware’s Usury laws (laws regarding the cap on interest charged on loans) allows financial companies and banks to charge a higher interest on loans than the other states.

For example, a bank is incorporated in Delaware and is operating out of Florida. Let’s assume that according to usury Laws, the interest cap is higher in Delaware than in it is in Florida. The said bank can still charge the interest rate as per Delaware laws and need not stick to Florida’s usury laws. This is exceedingly profitable to the bank.

Indian companies can also make use of these opportunities and get their subsidiaries incorporated in Delaware. As stated before, a financial company will require additional approval from RBI.

Another advantage is that if the company is not operating out of Delaware, it need not pay the state’s corporate income tax. It needs to pay only the Franchise tax. The franchise tax is a flat fee that is imposed based on whether it’s an LLC or a C-corporation and the number of authorized shareholders it has.

A company entering a new market overseas, engaging new customers and clientele, and an untapped ecosystem can boost revenue much more than it would from staying local. It also gives access to a ton of local talent bringing new ideas to the table. Not to mention, putting India on the business map of the world is a merit that every entrepreneur will take pride in.

The conditions mentioned here are all subject to change as regulations are dynamic. It is suggested that professional help be sought right from step 1!