By Manu Rao | Updated March 2026
When a foreign company decides to do real business in India — not just explore, not just liaison — it has two structural options. Open a Branch Office (an extension of the parent) or incorporate a Wholly Owned Subsidiary (a separate Indian company). The choice affects your tax rate, liability exposure, fundraising ability, and exit flexibility.
Most foreign companies that start with a branch office eventually convert to a subsidiary. Understanding why saves you from doing the same conversion later at additional cost.
Quick Comparison Table
| Criterion | Branch Office | Wholly Owned Subsidiary (WOS) |
|---|---|---|
| Legal Status | Extension of the foreign parent — not a separate legal entity | Separate Indian company — distinct legal entity under Companies Act 2013 |
| Governing Law | FEMA 1999 + FEM (Establishment) Regulations 2016 | Companies Act 2013 + FEMA Non-Debt Instruments Rules 2019 |
| Liability | Parent company bears full liability for branch operations | Limited to the subsidiary's assets — parent liability is capped at investment |
| Corporate Tax Rate | 40% + surcharge + 4% cess (foreign company rate) | 22% under Section 115BAA or 25-30% standard rates (domestic company) |
| FDI Route | RBI approval through AD Bank required | Automatic route for most sectors — no prior approval (DPIIT FDI Policy Para 3.1.1) |
| Revenue Generation | Yes — within permitted activities | Yes — any lawful business per MOA |
| Fundraising | Cannot raise capital independently — funded by parent | Can issue equity, debentures, accept investments from third parties |
| Indian Directors | Not required — operates under parent's management | At least 1 Indian resident director (Section 149(3)) |
| Contracts | Signed on behalf of parent company | Signed by the subsidiary as its own legal entity |
| Profit Repatriation | Free remittance of profits to parent (after tax) | Via dividends — no DDT since FY 2020-21, but withholding tax on dividend to non-resident (Section 195) |
| Transfer Pricing | Applicable (Sections 92-92F IT Act) | Applicable (Sections 92-92F IT Act) |
| Closure | RBI approval + ROC strike-off | Voluntary liquidation under Section 59 of IBC 2016 or strike-off under Section 248 |
The Tax Gap Is the Headline
A branch office pays 40% corporate tax on its Indian income. A subsidiary pays 22% if it opts for the Section 115BAA regime — or 25% under the standard rates for companies with turnover up to INR 400 crore. The difference is 15-18 percentage points.
On INR 1 crore of taxable profit, the branch office pays approximately INR 42.4 lakh in tax (40% + surcharge + cess). The subsidiary pays approximately INR 25.2 lakh (22% + surcharge + cess under 115BAA). That is INR 17.2 lakh saved every year on the same profit level.
The branch office rate exists because Indian tax law treats it as a foreign company earning income in India. The subsidiary, being incorporated in India, qualifies as a domestic company regardless of who holds its shares.
DTAA relief can reduce withholding on dividend payments from the subsidiary to the foreign parent. For example, the India-US DTAA caps dividend withholding at 15% (Article 10). The India-UK treaty also caps it at 15%. The India-Singapore treaty allows 10% if the beneficial owner holds at least 25% equity. These treaty rates apply on top of the lower corporate tax — making the subsidiary structure more efficient for after-tax repatriation in most cases.
Liability Shield
This matters more than people realize. A branch office is not a separate legal entity. It is the foreign parent company operating in India. If the branch office faces a lawsuit, a contract dispute, or a regulatory penalty in India, the parent company's global assets are potentially at risk.
A subsidiary is a separate company incorporated under Indian law. Its liabilities are its own. If the subsidiary faces a claim, the parent company's exposure is limited to its equity investment. Courts can pierce the corporate veil in cases of fraud (Section 339 of Companies Act), but this is rare and requires clear evidence of misuse.
For foreign companies with significant assets globally, this liability distinction alone can justify the subsidiary structure.
Operational Freedom
A branch office operates within the activities approved by the RBI at the time of establishment. These activities are defined in the FEM (Establishment) Regulations and include export/import, professional services, R&D, IT services, and technical support. Manufacturing is generally not permitted without specific RBI approval.
A subsidiary can carry on any lawful business activity specified in its Memorandum of Association. Want to manufacture? Fine. Want to do retail? Fine (subject to FDI sectoral caps). Want to pivot from consulting to product sales? Amend the MOA objects clause and proceed. No RBI activity restrictions apply.
This flexibility matters for companies whose India plans may evolve. A tech company that starts with services may later want to build and sell a product. A subsidiary accommodates that. A branch office may not.
Fundraising Ability
A branch office cannot raise capital in India. It cannot issue shares, accept equity investment from Indian or foreign investors, or issue debentures. All its funding comes from the parent company via inward remittance.
A subsidiary can raise capital from any source permitted under the Companies Act and FEMA. It can bring in minority investors, issue preference shares, accept convertible notes (from DPIIT-recognized startups), and even plan for a future IPO on Indian stock exchanges. Joint ventures become possible — a foreign parent can hold 51-99% while an Indian partner holds the rest.
If your India operation might need independent funding, the subsidiary is the only viable path.
Setting Up the Structure
Branch Office Setup
Apply through an Authorized Dealer Category-I Bank (typically your parent company's banking partner in India). Submit Form FNC with parent company financial statements, board resolution, and activity details. The AD Bank forwards to RBI. Approval takes 4-8 weeks in straightforward cases. Register with the ROC after RBI approval. Obtain PAN and TAN from the Income Tax Department.
Subsidiary Setup
Apply for Digital Signature Certificate and Director Identification Number (DIN) for the directors. Reserve a company name via RUN service on MCA portal. File SPICe+ (INC-32) with the ROC — this is the integrated incorporation form that also covers PAN, TAN, EPFO, ESIC, and GST registration. Typical timeline: 7-15 business days. After incorporation, file FC-GPR with the RBI within 30 days of share allotment to report the foreign investment.
The subsidiary setup process is actually faster and more straightforward than the branch office in most cases. The SPICe+ form has streamlined what used to be multiple separate applications.
Profit Repatriation
A branch office can remit profits freely to the parent company after paying Indian taxes. No additional tax layer applies — the 40% rate covers it.
A subsidiary distributes profits via dividends. Since FY 2020-21, Dividend Distribution Tax (DDT) has been abolished. Dividends are now taxable in the hands of the shareholder. For a non-resident parent company, the subsidiary must deduct tax at source under Section 195 — typically at the rate specified in the applicable DTAA (10-15% in most treaties) or 20% under domestic law, whichever is lower.
Net-net: the subsidiary pays lower corporate tax (22% vs 40%) and adds a 10-15% dividend withholding — total effective rate of roughly 31-35%. The branch office pays 40% with no additional layer. The subsidiary still comes out ahead in most scenarios.
Which Should You Choose?
Choose Branch Office if:
- Your India presence is temporary or project-specific
- You are providing technical support for parent company products only
- You do not need independent fundraising in India
- You want simpler setup (no board composition requirements)
Choose Subsidiary if:
- You plan a long-term India presence
- You want the lower domestic tax rate (22-25% vs 40%)
- You need liability protection for the parent company
- You may raise independent capital or bring in Indian partners
- You want operational flexibility beyond predefined activities
- You plan to hire a large team in India
The majority of foreign companies entering India for long-term operations choose the subsidiary structure. The branch office is a niche tool for specific situations — project-based work, export facilitation, and technical support centers.
Ready to set up your India entity? Contact Beacon Filing for a structure recommendation based on your specific business plan.