Payment by foreign holding company
This query is : Resolved
15 April 2014
Hello Experts,
I would need your advise on below query.
-ABC co. has negative working capital and unable to pay overdue creditors in India.
-XYZ co. being foreign holding company of ABC co. desires to pay the creditors directly out of foreign country.
Pl advise if that is possible or if there are any legal/tax implications.
I would need your advise on below query.
-ABC co. has negative working capital and unable to pay overdue creditors in India.
-XYZ co. being foreign holding company of ABC co. desires to pay the creditors directly out of foreign country.
Pl advise if that is possible or if there are any legal/tax implications.
15 April 2014
in my opinion this can be done, there is no tax incidence for this transaction, indian govt. will welcome such type of transaction. however if amount to be paid is huge then it is better to have the transaction under the eye of FEMA consultant
15 April 2014
Thanks. But how do I close the transaction booked in Indian subsidiary if Foreign parent company pays directly to the vendor. If the vendor is service vendor dont you think tax complication arise?
15 April 2014
transaction is regarded as holding subsidiary, from accounting perspective amount paid by foreign co. will be considered as loan payable to foreign co. to the extent of over and above of holding ratio. To the extent of holding ratio, part in liability, no tax implication. Income tax liability arise under income from other sources if it is paid otherwise stated above.
15 April 2014
Is it possible for a subsidiary to raise credit note on vendors and close the books. Vendors can raise a invoice on foreign holding company for their payment. Is this permissible?
17 April 2014
Is it possible for a subsidiary to raise credit note on vendors and close the books. Vendors can raise a invoice on foreign holding company for their payment. Is this permissible?
09 August 2024
Yes, it is possible for a subsidiary to raise a credit note to vendors and close the books, and for vendors to raise an invoice on the foreign holding company for their payment, but there are specific considerations and conditions that need to be followed to ensure this process is compliant with accounting and legal standards. Here’s a detailed breakdown of how this can be managed:
### **1. Issuing Credit Notes by Subsidiary:**
- **Purpose**: A credit note is typically issued to correct an error, adjust amounts, or provide a refund. The subsidiary can issue a credit note to vendors if there is a need to adjust previously invoiced amounts.
- **Accounting Treatment**: The credit note should be recorded in the subsidiary’s accounts to reflect the reduction in liabilities. This will ensure that the subsidiary’s financial statements accurately reflect its obligations.
- **Documentation**: The credit note should be properly documented and include details such as the reason for issuance, the original invoice number, and the amount adjusted.
### **2. Vendors Raising Invoices on the Foreign Holding Company:**
- **Permissibility**: Vendors can issue invoices to the foreign holding company for their payment, provided that:
- The foreign holding company has a contractual agreement with the vendors.
- The transactions are in line with transfer pricing regulations and any applicable tax laws.
- **Transfer Pricing**: If the foreign holding company and the subsidiary are part of a multinational group, transfer pricing rules must be followed. These rules ensure that transactions between related entities are conducted at arm's length and are priced fairly.
- **Tax Compliance**: Ensure compliance with local tax laws in both the subsidiary’s jurisdiction and the foreign holding company’s jurisdiction. This includes VAT/GST implications and withholding taxes.
- **Accounting Entries**: When vendors invoice the foreign holding company, the subsidiary should adjust its records to reflect that the liability has been transferred or settled as per the new arrangement.
### **3. Closing the Books:**
- **Reconciliation**: Ensure that all accounts are reconciled before closing the books. This includes verifying that credit notes are properly recorded and that invoices from vendors are matched with the correct accounts.
- **Documentation**: Maintain proper documentation of all transactions, including credit notes, vendor invoices, and any correspondence related to these transactions.
- **Audits and Reporting**: Ensure that all financial transactions are transparent and auditable. Proper reporting in the financial statements of the subsidiary should reflect the credit note adjustments and any transactions with the foreign holding company.
### **Considerations and Compliance:**
1. **Legal and Regulatory Compliance**: Ensure compliance with legal requirements in the subsidiary’s country regarding financial transactions, credit notes, and intercompany transactions.
2. **Foreign Exchange Controls**: If the foreign holding company is in a different currency zone, consider any foreign exchange controls or currency conversion rules that may apply.
3. **Intercompany Agreements**: Ensure that intercompany agreements clearly outline the terms of transactions, including how payments and credits are handled between the subsidiary and the foreign holding company.
4. **Documentation and Record-Keeping**: Keep detailed records of all transactions, including the issuance of credit notes and intercompany invoices, for audit and compliance purposes.
### **Summary:**
- **Credit Notes**: Subsidiaries can issue credit notes to vendors to adjust previously recorded liabilities.
- **Vendor Invoices**: Vendors can raise invoices on the foreign holding company, provided there is a valid arrangement and compliance with transfer pricing and tax regulations.
- **Closing Books**: Proper accounting practices and documentation must be followed to ensure accurate financial reporting and compliance.
By ensuring these considerations are met, you can effectively manage credit notes and vendor invoices in a way that complies with both accounting standards and legal requirements.
### **1. Issuing Credit Notes by Subsidiary:**
- **Purpose**: A credit note is typically issued to correct an error, adjust amounts, or provide a refund. The subsidiary can issue a credit note to vendors if there is a need to adjust previously invoiced amounts.
- **Accounting Treatment**: The credit note should be recorded in the subsidiary’s accounts to reflect the reduction in liabilities. This will ensure that the subsidiary’s financial statements accurately reflect its obligations.
- **Documentation**: The credit note should be properly documented and include details such as the reason for issuance, the original invoice number, and the amount adjusted.
### **2. Vendors Raising Invoices on the Foreign Holding Company:**
- **Permissibility**: Vendors can issue invoices to the foreign holding company for their payment, provided that:
- The foreign holding company has a contractual agreement with the vendors.
- The transactions are in line with transfer pricing regulations and any applicable tax laws.
- **Transfer Pricing**: If the foreign holding company and the subsidiary are part of a multinational group, transfer pricing rules must be followed. These rules ensure that transactions between related entities are conducted at arm's length and are priced fairly.
- **Tax Compliance**: Ensure compliance with local tax laws in both the subsidiary’s jurisdiction and the foreign holding company’s jurisdiction. This includes VAT/GST implications and withholding taxes.
- **Accounting Entries**: When vendors invoice the foreign holding company, the subsidiary should adjust its records to reflect that the liability has been transferred or settled as per the new arrangement.
### **3. Closing the Books:**
- **Reconciliation**: Ensure that all accounts are reconciled before closing the books. This includes verifying that credit notes are properly recorded and that invoices from vendors are matched with the correct accounts.
- **Documentation**: Maintain proper documentation of all transactions, including credit notes, vendor invoices, and any correspondence related to these transactions.
- **Audits and Reporting**: Ensure that all financial transactions are transparent and auditable. Proper reporting in the financial statements of the subsidiary should reflect the credit note adjustments and any transactions with the foreign holding company.
### **Considerations and Compliance:**
1. **Legal and Regulatory Compliance**: Ensure compliance with legal requirements in the subsidiary’s country regarding financial transactions, credit notes, and intercompany transactions.
2. **Foreign Exchange Controls**: If the foreign holding company is in a different currency zone, consider any foreign exchange controls or currency conversion rules that may apply.
3. **Intercompany Agreements**: Ensure that intercompany agreements clearly outline the terms of transactions, including how payments and credits are handled between the subsidiary and the foreign holding company.
4. **Documentation and Record-Keeping**: Keep detailed records of all transactions, including the issuance of credit notes and intercompany invoices, for audit and compliance purposes.
### **Summary:**
- **Credit Notes**: Subsidiaries can issue credit notes to vendors to adjust previously recorded liabilities.
- **Vendor Invoices**: Vendors can raise invoices on the foreign holding company, provided there is a valid arrangement and compliance with transfer pricing and tax regulations.
- **Closing Books**: Proper accounting practices and documentation must be followed to ensure accurate financial reporting and compliance.
By ensuring these considerations are met, you can effectively manage credit notes and vendor invoices in a way that complies with both accounting standards and legal requirements.
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