Editor's note (updated 27 Sep 2026). This post was first published on 4 May 2026. We have corrected or updated the following points.
- Branch tax rate corrected. A foreign company is taxed at 35%, reduced from 40% from FY 2024-25. Surcharge is 2% above ₹1 crore and 5% above ₹10 crore, and the 4% health and education cess applies. The "2% education cess" was abolished in 2018.
- "Branch profits tax" removed. India does not levy a branch profits tax on remitting branch profits to head office. The original statement was wrong.
- Dividend taxation. Dividend Distribution Tax was abolished from 1 April 2020. A subsidiary's dividends are now taxed in the parent's hands through withholding: 20% plus surcharge and cess, or the lower treaty rate. The comparison below reflects this.
- The 15% regime (old s.115BAB, now s.201 of the Income-tax Act 2025) is not available to new entrants, because manufacturing had to begin by 31 Mar 2024. The 22% regime is now s.200.
- Approval route clarified. Branch offices are approved by an AD Category-I bank under RBI's Master Direction No. 10/2015-16 and the FEMA 22(R) Regulations 2016. Prior RBI or Government involvement is needed only in specified cases. The "Master Circular" reference has been updated.
One of the first decisions a foreign company makes about India is its legal structure. For commercial operations, the two usual choices are a Branch Office (BO) and a private limited company (subsidiary). This article compares them on tax, liability, permitted activities, FEMA and flexibility.
What is a branch office?
A branch office is an extension of the foreign company in India. It is not a separate legal entity. Its establishment is governed by FEMA, the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations 2016, and RBI's Master Direction No. 10/2015-16.
Permitted activities:
- export and import of goods
- professional or consultancy services
- research in the parent's line of business
- technical or financial collaboration
- representing the parent and acting as buying or selling agent
- IT and software development
- technical support for the parent's products
- airline and shipping operations
Eligibility: generally a 5-year profit track record and a net worth of at least US$100,000.
What is a subsidiary?
A private limited company is a separate legal entity under the Companies Act 2013, with its own PAN and CIN. The foreign parent holds equity, up to 100% in most automatic-route sectors. The subsidiary may carry on any lawful business in its objects, within FDI sectoral conditions.
Key comparison
Tax treatment
Branch office
- Taxed as a foreign company at 35% on profits attributable to India.
- Surcharge: 2% above ₹1 crore, 5% above ₹10 crore.
- Plus 4% cess.
- Effective rate: roughly 36.4% to 38.2%.
- No further Indian tax when branch profits are remitted to head office.
- Head-office expense allocations are deductible only within statutory limits.
Subsidiary
- Taxed as a domestic company, usually at 22% under s.200 of the Income-tax Act 2025 (formerly s.115BAA).
- 25.17% after the 10% surcharge and 4% cess.
- Dividends paid to the parent are then taxed through withholding: 20% plus surcharge and cess under domestic law, or the treaty rate. For example, the India–US treaty gives 15% for 10%+ corporate shareholders, and many treaties give 5–15%.
Worked comparison. India profit is ₹10 crore, and the subsidiary distributes everything. The parent qualifies for a 15% treaty rate.
| Branch (profit ₹1–10 crore band) | Subsidiary + full dividend | |
|---|---|---|
| Corporate tax | 35% × 1.02 × 1.04 = 37.1% | 22% × 1.10 × 1.04 = 25.2% |
| Tax on distribution or remittance | Nil | 15% × 74.8 = 11.2% |
| Total Indian tax on ₹100 of profit | ≈ ₹37.1 | ≈ ₹36.4 |
| If profits are retained in India | ₹37.1 | ₹25.2 |
The subsidiary's advantage is largest when profits are reinvested in India. With full repatriation at a 15% treaty rate the gap narrows. At the domestic dividend rate, a subsidiary can even cost more. Foreign tax credit in the home country, and treaty eligibility (tax residency certificate, beneficial ownership and the principal purpose test), decide the real answer. Model it before you choose.
Liability
- Branch office: the foreign company is directly liable for everything the branch does. Indian claims and judgments run against the parent itself.
- Subsidiary: liability is generally limited to the capital invested. The exceptions are guarantees and comfort letters given by the parent, and piercing of the corporate veil for fraud.
Permitted activities
- Branch office: limited to the activities in its approval. No manufacturing (except by a BO set up in an SEZ, under conditions), no retail trading, and no activities outside the permitted list.
- Subsidiary: full flexibility within FDI rules. It can manufacture, trade, provide services, hire, acquire assets and borrow, including ECB from the parent.
Set-up time and ongoing compliance
Branch office
- Apply in Form FNC through an AD Category-I bank.
- The application is referred to RBI and the Government where the applicant is from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau, or the sector is under the government route or sensitive (for example defence, telecom, private security, information and broadcasting).
- After approval, register with the ROC in Form FC-1 within 30 days and obtain a PAN.
- Realistic timeline: 4–8 weeks or more.
- Ongoing: an Annual Activity Certificate to the AD bank and RBI by 30 September, and an audited India income-tax return.
Subsidiary
- About 10–15 business days to incorporate through SPICe+.
- No prior approval for automatic-route sectors.
- Then FC-GPR within 30 days of allotment, and full Companies Act compliance.
When to choose a branch office
A branch office suits you when:
- operations are limited in scope or duration, such as a specific project or an early market test
- activities fit the permitted list (representation, technical services, export or import)
- losses are likely in the early years and the parent can use them at home, or the group wants a single legal entity for contracting reasons
When to choose a subsidiary
A subsidiary suits almost all scalable operations: technology and capability centres, distribution, manufacturing, financial services, and any business that will employ significant staff or earn Indian-source income over the medium term. Limited liability, operational flexibility and the lower rate on reinvested profits usually tip the balance. Model the total tax on repatriation, as shown above, before you decide.
Not sure which structure is right for your India entry? Shardhan provides structure advisory as part of our India Market Entry engagement. Speak with our India Entry team.
General information, not legal advice. Last reviewed 27 Sep 2026.