Subsidiary Company
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
21 July 2010
An Indian Company has a Foreign Subsidiary.The Indian Company is a partner in a Partnership Firm based in India.
Can the Foreign Subsidiary of the Indian Company be a partner in the Partnership Firm and induct Capital in it? If so,what shall be the tax implications of the interest payable to the Foreign Company on its Capital in the Partnership Firm?
Can the Foreign Subsidiary of the Indian Company be a partner in the Partnership Firm and induct Capital in it? If so,what shall be the tax implications of the interest payable to the Foreign Company on its Capital in the Partnership Firm?
Querist : Anonymous
Querist :
Anonymous
(Querist)
22 July 2010
Can an Indian Company and its Foreign Subsidiary based at Singapore both be partners in another Partnership Firm ? If so,what are the legal implications?
26 July 2025
You've asked a **very relevant and complex query**, touching on **foreign investment, partnership law, and tax implications** in India.
Let’s break it down into clear parts:
---
## 🔹**Scenario:**
An **Indian Company** has a **Foreign Subsidiary** (say, in Singapore), and:
1. The **Indian company is already a partner** in a **Partnership Firm in India**.
2. Now the question is: Can the **foreign subsidiary also become a partner** in that firm and invest capital?
---
## ✅ **1. Can a Foreign Company (Subsidiary) be a Partner in an Indian Partnership Firm?**
### Under Indian Law:
* Under the **Indian Partnership Act, 1932**, there is **no express restriction** on a foreign entity becoming a partner.
* However, **foreign direct investment (FDI)** into a **partnership firm** in India is **regulated** under FEMA (Foreign Exchange Management Act) and requires **government approval**.
---
## 🚫 **Important FEMA Restrictions:**
### Under **FEMA regulations** (as per current policy):
* \*\*FDI is ***not permitted*** in an **Indian partnership firm** (non-LLP) by a foreign entity **unless**:
* The investment is through a structure like **LLP (Limited Liability Partnership)**, and
* The sector is **open to 100% FDI** under the **automatic route**, and
* **No performance-linked conditions** are attached to FDI in that sector.
> Therefore, a **foreign company (even a foreign subsidiary of an Indian company)** **cannot directly become a partner in a traditional Indian partnership firm** unless it gets **prior approval** from the **Government of India** (FIPB route—now through DPIIT/FDI policy portal).
---
## ✅ **Alternative Route: LLP Structure**
* If the partnership is converted to an **LLP**, and if it falls under a sector where 100% FDI is allowed via the **automatic route**, then the foreign subsidiary **can invest as a partner**.
* **LLP must comply with FDI norms**, report capital contribution, and valuation norms under FEMA.
---
## 💰 **2. Tax Implications: Interest Paid to Foreign Subsidiary on Capital Contribution**
If permitted and if the foreign subsidiary contributes capital and earns **interest on capital**, here's the **tax treatment**:
### 🔹 **Indian Tax Implications (Income Tax Act, 1961):**
* The interest paid by the firm to the foreign partner (subsidiary) will be treated as **income taxable in India**.
* It will be treated as **Interest Income** under section 9(1)(v) of the Income Tax Act – **deemed to accrue or arise in India**.
* Subject to **TDS (Tax Deducted at Source)** under **section 195**.
### 🔹 **Applicable Withholding Tax Rate:**
* Typically around **20% + surcharge + cess**, unless:
* There is a **DTAA** (Double Taxation Avoidance Agreement) with the country (e.g., Singapore).
* Then the **lower rate in DTAA** may apply (often around **10%**), subject to furnishing a **TRC (Tax Residency Certificate)**.
### 🔹 **Transfer Pricing:**
* Since this is a transaction between **related parties** (Indian company and its foreign subsidiary), **Transfer Pricing regulations** under Indian Income Tax Act may also apply.
---
## ✅ **3. Can Indian Company and its Foreign Subsidiary be Partners in the Same Partnership Firm?**
From a **legal standpoint:**
* **Yes**, there is **no bar** under Indian Partnership Act.
* However, from a **regulatory and FEMA perspective**, the **foreign subsidiary** cannot become a partner in an **Indian partnership firm** **without prior government approval**.
So, while the **Indian company can be a partner**, the **foreign subsidiary needs to comply with FDI restrictions** — failing which, the partnership would be **in violation of FEMA**, attracting penalties and potential reversal of the investment.
---
## 🧾 **Conclusion / Summary:**
| Question | Answer |
| -------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- |
| Can a foreign subsidiary be a partner in an Indian partnership firm? | ❌ **Not under automatic route.** Needs **government approval** under FEMA. |
| Can both Indian Co. and its foreign subsidiary be partners? | ✅ Legally yes, but **subject to FDI approval**. |
| Can foreign subsidiary invest capital and earn interest? | ✅ If allowed by FEMA. But **interest is taxable in India**; subject to **withholding tax** under section 195. |
| Is there an easier route? | ✅ Consider converting the firm to an **LLP**, where **FDI may be allowed** under automatic route in permitted sectors. |
---
Let me know if you'd like a format for application to RBI/DPIIT or help interpreting a specific DTAA (e.g., India–Singapore)!
Let’s break it down into clear parts:
---
## 🔹**Scenario:**
An **Indian Company** has a **Foreign Subsidiary** (say, in Singapore), and:
1. The **Indian company is already a partner** in a **Partnership Firm in India**.
2. Now the question is: Can the **foreign subsidiary also become a partner** in that firm and invest capital?
---
## ✅ **1. Can a Foreign Company (Subsidiary) be a Partner in an Indian Partnership Firm?**
### Under Indian Law:
* Under the **Indian Partnership Act, 1932**, there is **no express restriction** on a foreign entity becoming a partner.
* However, **foreign direct investment (FDI)** into a **partnership firm** in India is **regulated** under FEMA (Foreign Exchange Management Act) and requires **government approval**.
---
## 🚫 **Important FEMA Restrictions:**
### Under **FEMA regulations** (as per current policy):
* \*\*FDI is ***not permitted*** in an **Indian partnership firm** (non-LLP) by a foreign entity **unless**:
* The investment is through a structure like **LLP (Limited Liability Partnership)**, and
* The sector is **open to 100% FDI** under the **automatic route**, and
* **No performance-linked conditions** are attached to FDI in that sector.
> Therefore, a **foreign company (even a foreign subsidiary of an Indian company)** **cannot directly become a partner in a traditional Indian partnership firm** unless it gets **prior approval** from the **Government of India** (FIPB route—now through DPIIT/FDI policy portal).
---
## ✅ **Alternative Route: LLP Structure**
* If the partnership is converted to an **LLP**, and if it falls under a sector where 100% FDI is allowed via the **automatic route**, then the foreign subsidiary **can invest as a partner**.
* **LLP must comply with FDI norms**, report capital contribution, and valuation norms under FEMA.
---
## 💰 **2. Tax Implications: Interest Paid to Foreign Subsidiary on Capital Contribution**
If permitted and if the foreign subsidiary contributes capital and earns **interest on capital**, here's the **tax treatment**:
### 🔹 **Indian Tax Implications (Income Tax Act, 1961):**
* The interest paid by the firm to the foreign partner (subsidiary) will be treated as **income taxable in India**.
* It will be treated as **Interest Income** under section 9(1)(v) of the Income Tax Act – **deemed to accrue or arise in India**.
* Subject to **TDS (Tax Deducted at Source)** under **section 195**.
### 🔹 **Applicable Withholding Tax Rate:**
* Typically around **20% + surcharge + cess**, unless:
* There is a **DTAA** (Double Taxation Avoidance Agreement) with the country (e.g., Singapore).
* Then the **lower rate in DTAA** may apply (often around **10%**), subject to furnishing a **TRC (Tax Residency Certificate)**.
### 🔹 **Transfer Pricing:**
* Since this is a transaction between **related parties** (Indian company and its foreign subsidiary), **Transfer Pricing regulations** under Indian Income Tax Act may also apply.
---
## ✅ **3. Can Indian Company and its Foreign Subsidiary be Partners in the Same Partnership Firm?**
From a **legal standpoint:**
* **Yes**, there is **no bar** under Indian Partnership Act.
* However, from a **regulatory and FEMA perspective**, the **foreign subsidiary** cannot become a partner in an **Indian partnership firm** **without prior government approval**.
So, while the **Indian company can be a partner**, the **foreign subsidiary needs to comply with FDI restrictions** — failing which, the partnership would be **in violation of FEMA**, attracting penalties and potential reversal of the investment.
---
## 🧾 **Conclusion / Summary:**
| Question | Answer |
| -------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------- |
| Can a foreign subsidiary be a partner in an Indian partnership firm? | ❌ **Not under automatic route.** Needs **government approval** under FEMA. |
| Can both Indian Co. and its foreign subsidiary be partners? | ✅ Legally yes, but **subject to FDI approval**. |
| Can foreign subsidiary invest capital and earn interest? | ✅ If allowed by FEMA. But **interest is taxable in India**; subject to **withholding tax** under section 195. |
| Is there an easier route? | ✅ Consider converting the firm to an **LLP**, where **FDI may be allowed** under automatic route in permitted sectors. |
---
Let me know if you'd like a format for application to RBI/DPIIT or help interpreting a specific DTAA (e.g., India–Singapore)!
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