Most US founders who start thinking about setting up a subsidiary in India begin with the same spreadsheet. One column has salaries in Austin or Boston. The other has salaries in Pune or Bengaluru. The gap is wide enough that the decision feels made.
Plenty of companies have made it. Zinnov counted more than 1,760 global capability centers in India at the end of 2025, and about 27% of them belong to mid-market companies.
What the spreadsheet does not show is the second set of books. An Indian subsidiary is a separate company. It has its own year end and audit, files its own tax return, and reports the money you send in to the Reserve Bank of India. It also changes what the US parent files. Neither side is hard on its own. The trouble usually sits where they meet.
This guide is for founders and finance leads doing this for the first time. It is not legal or tax advice, and several of the rules below changed in 2025 and 2026, so check the current position with your advisers.
Subsidiary, employer of record, or outsourcing partner
There are four common ways to get a team working in India: an employer of record (EOR), an outsourcing partner, a build-operate-transfer arrangement, or your own subsidiary.
| Employer of record | Outsourcing partner | Build-operate-transfer | Own subsidiary | |
|---|---|---|---|---|
| Who employs the team | The EOR's Indian entity | The partner | The partner, then you | Your Indian company |
| Your own Indian entity | Not needed | Not needed | Needed at transfer | Needed from day one |
| IP ownership | By contract with the EOR | By contract with the partner | By contract, then direct | Direct |
| Transfer pricing | Not applicable | Not applicable | From transfer | From the first intercompany invoice |
| Form 5471 for the US parent | No | No | From transfer | Yes, every year |
| Usual fit | First hires, testing the market | Work that can be separated out | Larger teams with a planned handover | A permanent team doing core work |
A subsidiary starts to make sense when the team is permanent and growing. Other signals: the work is core to the product, investors will want direct employment and clean IP, or the EOR's monthly fees start to look like the cost of running your own payroll and compliance. No single headcount settles it. Run the comparison on your own numbers, and include the time your finance team will spend on a second entity.
If you are moving off an EOR, read its notice period and exit terms before you announce anything, and transfer people with continuity of service. Processed as a termination and rehire, the move can trigger gratuity for eligible staff and leave settlements on your final EOR invoice.
Setting up a subsidiary in India: the decisions that are hard to undo
An Indian company secretary or chartered accountant will handle the incorporation forms. A few choices made in the first weeks are much harder to change later.
Shareholders and directors. The US parent is normally the main shareholder, with a founder or sister company holding a nominal second stake. At least one director must be resident in India, which under Section 149(3) of the Companies Act, 2013 means staying in India for at least 182 days in the financial year. A new company applies that test proportionately in its first year. Choose this person with care. A resident director carries real statutory liability.
US documents. The parent's documents, and the identity papers of any US directors, need to be notarized and then apostilled by the Secretary of State of the state that issued them. This is the step that slips most often. Start it on the day you decide.
Capital. There is no minimum capital for a private company. Once the parent's money arrives, the subsidiary must issue shares within 60 days and report the allotment to the Reserve Bank of India on Form FC-GPR within 30 days. That 30-day clock starts on the allotment date. Finance teams often count from the date the money arrived instead. Every year after that, the subsidiary files a Foreign Liabilities and Assets return by 15 July, even in years when no new money comes in.
Year end. India's financial year runs April to March. A subsidiary of a foreign company can ask the National Company Law Tribunal for a calendar year under company law, but the income tax year stays April to March. Many groups keep April to March in India and build a December reporting pack for the parent. Plan for two year-end closes regardless.
US tax classification. This is the decision most founders do not know they are making. Only India's public limited company is on the IRS list of foreign entities that must be treated as corporations. A private limited company is not, so the parent can elect on Form 8832 to treat it as a corporation or as a disregarded branch. With no election, it defaults to a corporation. The choice decides which US forms apply and how the Indian income reaches the parent's return. An election cannot reach back more than 75 days, so settle it with your US tax adviser at incorporation.
The India calendar after day one
Corporate tax. Most new subsidiaries choose the concessional regime, with a 22% base rate and an effective rate of about 25.17% after surcharge and cess. The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026, with a single "tax year" and new numbers for many forms.
GST. Services the subsidiary supplies to the US parent are usually zero-rated exports, provided the conditions in Section 2(6) of the IGST Act are met, including payment in foreign currency. File a Letter of Undertaking each year so the company can export without paying IGST first. The Finance Act, 2026 also removed the rule that treated "intermediary" services as supplied in India, from 30 March 2026. Subsidiaries doing sales or marketing support for a foreign parent had often been caught in disputes under that rule.
The flow in the other direction catches people too. When the US parent charges the subsidiary for anything, such as a management fee or a share of software licenses, the subsidiary pays GST under reverse charge. That alone makes GST registration compulsory, whatever the turnover.
Payroll. India's four labour codes came into force on 21 November 2025. Appointment letters are now mandatory, and fixed-term employees qualify for gratuity after one year. Each state where you have employees needs its own Shops and Establishments registration, and many states also levy professional tax.
Audit and annual filings. Every Indian company needs a statutory audit, whatever its size. After the audit come the annual filings with the Registrar of Companies, the income tax return, and a transfer pricing report certified by a chartered accountant (Form 48, which replaces Form 3CEB from tax year 2026-27).
Employee data. India's Digital Personal Data Protection Rules were notified in November 2025 and phase in through May 2027. Build privacy notices and data agreements with payroll and HR vendors into the setup plan.
Transfer pricing: one price, read by two tax authorities
For a captive team, the usual model is cost-plus. The subsidiary bills the US parent for its costs plus a mark-up. India and the US both test that mark-up.
India wants enough profit left in India. From tax year 2026-27, India's safe harbour for IT and IT-enabled services is a 15.5% mark-up on operating costs, for transactions up to ₹2,000 crore (roughly $220 million), under a five-year election. Opting in buys certainty on the Indian side. The figure comes from Budget 2026 and the Income-tax Rules, 2026, so confirm the final notified version before relying on it.
The US applies Section 482 to the same transaction, and the IRS wants the parent's deduction to be no more than an arm's length price. Contemporaneous documentation protects the parent from penalties under Section 6662(e) if the IRS adjusts it. A well-supported mark-up can usually be defended in both countries, but someone has to write the analysis down for both.
Sign the intercompany agreement before the first invoice. It should say what the subsidiary does, which risks it bears, who owns the IP and how the price is set. If the paper calls the subsidiary a routine service provider while the Indian team is in practice making product decisions, the agreement will not hold up in an audit.
If the subsidiary pays the parent a royalty or a fee for included services, India withholds tax, generally at 15% under the India-US treaty. The parent needs a US residency certificate, IRS Form 6166, to claim that rate.
What changes for the US parent
Form 5471. A US company that controls a foreign corporation files Form 5471 with its return every year. The penalty for a missing or substantially incomplete form is $10,000 per form per year, with up to $50,000 more if it stays unfiled after IRS notice. A missing 5471 can also keep the statute of limitations open on the parent's return. If the parent elected disregarded treatment, the filing is Form 8858.
Net CFC tested income, formerly GILTI. For tax years beginning after 31 December 2025, the One Big Beautiful Bill Act renamed GILTI, cut the deduction to 40%, and raised the credit for foreign taxes from 80% to 90%. A cost-plus subsidiary paying Indian tax at around 25% will usually leave little or no residual US tax. The calculation still has to be done, and expense allocation at the parent can change the result.
Foreign research spending under Section 174. For software and product companies, this has the largest cash effect. The 2025 law restored immediate expensing for domestic research spending from tax years beginning after 31 December 2024. Foreign research spending is still amortized over 15 years, which under the half-year convention means about 3.3% of the cost is deductible in year one. If the Indian team writes code for the parent under a cost-plus contract, what the parent pays is likely to count as foreign research spending. A developer in Pune costs less than one in Texas, but the deduction for that work arrives far more slowly. Model both before deciding where development sits.
FBAR. A US company owning more than 50% of a foreign subsidiary has a financial interest in the subsidiary's bank accounts. If those accounts together exceed $10,000 at any point in the year, the parent files FinCEN Form 114.
Dividends. India withholds 15% on dividends under the treaty where the parent holds at least 10% of the voting stock. Whether the parent can credit that in the US depends on how the earnings were already taxed. In some cases it is simply a cost, so model it before the board declares anything.
Permanent establishment: the risk that stays with the parent
A subsidiary reduces permanent establishment (PE) risk for the US parent. It does not remove it.
If subsidiary staff habitually conclude contracts or secure orders for the parent, India can treat them as a dependent agent PE of the US company. Keep sales authority with the parent's own people, and make the paperwork match what actually happens.
The India-US treaty adds a second exposure. Article 5(2)(l) creates a service PE when a US enterprise furnishes services in India through its own employees for more than 90 days in a twelve-month period. Where the services are for a related enterprise, there is no day count at all. US staff seconded to the subsidiary, or visiting for long stretches to run it, need a plan before they travel. India's Supreme Court found a service PE in this kind of deputation in the Morgan Stanley case in 2007.
What a subsidiary will not fix
A subsidiary does not make a team productive. If the India team has no clear owner on the US side and no clear brief, the entity changes who signs the payslips and little else.
At small headcounts it rarely saves money. For three or four people with no plan to grow, an EOR is usually simpler once you count the audit and the filings on both sides. The comparison works much like the one in What a Full Finance Function Actually Costs.
Nor does it keep the books in order. You now have two ledgers in two currencies, and most small Indian subsidiaries keep statutory books under Indian accounting standards rather than US GAAP. The intercompany balance has to agree every month in both. Left to year end, the differences get hard to trace. Month-End Close in 5 Days covers that monthly discipline, and Consolidated Reporting for a Multi-National E-Commerce Business shows the consolidation side.
The cross-border questions also stay with you. Splitting the work between an Indian CA and a US CPA is common, and each usually does their own part well. The gaps are in the work that touches both, such as the transfer price or the timing of cash between the two companies. We wrote about this pattern in Founder-Level CFO Support for a Dual US–India Structure. Investors tend to find those gaps during diligence, as covered in Investor-Ready in 90 Days.
Frequently asked questions
How long does it take a US company to incorporate in India?
Usually a few weeks once the apostilled documents are ready. A first payroll run takes longer, because the bank account, capital receipt, share allotment, GST and state registrations all follow incorporation.
Does an Indian subsidiary need a resident director?
Yes. At least one director must stay in India for 182 days or more in the financial year, under Section 149(3) of the Companies Act, 2013, with a proportionate test in the first year.
Is there a minimum capital requirement for an Indian private limited company?
No. There is no statutory minimum paid-up capital, though the capital should cover working capital until the first intercompany payments arrive.
Does the US parent file Form 5471 for its Indian subsidiary?
Yes, if the subsidiary is treated as a corporation for US tax, which is the default for an Indian private limited company. If the parent elects disregarded treatment on Form 8832, it files Form 8858 instead.
Does the Indian subsidiary charge GST to its US parent?
Usually not. Services supplied to a parent outside India and paid for in foreign currency normally qualify as zero-rated exports, and the subsidiary files a Letter of Undertaking so it can export without paying IGST upfront.
What transfer pricing mark-up should an Indian subsidiary charge its US parent?
It depends on what the subsidiary does and which risks it bears. For IT and IT-enabled services, India's safe harbour from tax year 2026-27 is a 15.5% mark-up on operating costs, and the same mark-up has to be defensible under US Section 482.
Does a subsidiary remove permanent establishment risk for the US parent?
Not entirely. Risk returns if subsidiary staff conclude contracts for the parent, or if US employees perform services in India for the subsidiary, which under the India-US treaty can create a service PE without the usual 90-day threshold.
Where CFOLogic fits
CFOLogic has a US company and an Indian company, with senior finance leaders in the US and a delivery team in Pune. For clients with a dual US–India structure, one team covers both entities: the books, the intercompany process, the compliance calendar in both countries, and CFO-level support on the decisions above, alongside the client's legal and tax advisers.
If you are weighing an Indian entity, or you already have one and the cross-border questions still land on your desk, a short conversation is a reasonable place to start.