1. Understanding Wholly Owned Subsidiaries (WOS)

A wholly owned subsidiary is a legal entity entirely owned by a foreign parent company. For businesses looking to create a tech capability center, setting up a WOS allows full control over operations, local compliances, and strategic decisions. This structure ensures a high level of autonomy, transparency, and alignment with the parent company’s objectives.

2. Advantages of Setting Up a Tech Capability Centre in India

• • 1. Access to Skilled Talent: India is renowned for its large pool of IT professionals skilled in cutting-edge technologies such as artificial intelligence (AI), machine learning (ML), blockchain, and data analytics. With over 4.5 million tech professionals and continuous growth in STEM graduates, companies can readily find the talent required to fuel innovation and maintain a competitive edge.
    2. Cost-Efficiency: India offers a significant cost advantage due to lower salary structures and operational expenses compared to Western economies. This cost efficiency enables substantial savings, which can be reinvested into research and development (R&D) or strategic expansions.

• • 3. Favorable Government Policies: The Indian government’s policies encourage foreign investment, particularly in the IT sector. Incentives such as tax holidays under the Special Economic Zones (SEZs) Act and initiatives promoting R&D contribute to a favorable environment for tech investments.

• • 4. Innovation and Scalability: India’s tech ecosystem is characterized by its scalability and adaptability. With a well-established startup culture and numerous tech hubs in cities like Bangalore, Hyderabad, and Pune, companies have access to an environment that fosters rapid development and expansion.

3. Legal Framework for Setting Up a WOS in India

Setting up a wholly owned subsidiary involves adhering to various regulatory frameworks and obtaining necessary registrations. Below are the key steps:

3.1. Company Registration under the Companies Act, 2013

To set up a WOS, the parent company must comply with the requirements under the Companies Act, 2013. The process includes:

1. Business Structure: The most common choice for foreign entities is a Private Limited Company due to its operational flexibility.
2. Name Reservation: The proposed company name must be checked for availability on the Ministry of Corporate Affairs (MCA) portal.
3. Charter Documents: Drafting the Memorandum of Association (MoA) and Articles of Association (AoA) is mandatory, outlining the company’s objectives and operational framework.
4. Minimum Directors: A minimum of two directors is required, with at least one being an Indian resident.

3.2. Foreign Direct Investment (FDI) Compliances

India permits 100% FDI under the automatic route for the IT and ITeS sector. The foreign parent company must ensure that all investments comply with FEMA regulations and must report such investments through the RBI’s Single Master Form.

3.3. Taxation and Transfer Pricing Regulations

A WOS is subject to corporate taxes under the Income Tax Act, 1961. Additionally, transfer pricing regulations under Section 92A to 92F mandate that transactions between the parent company and its WOS must adhere to arm’s length principles. Proper documentation and periodic assessments are crucial to comply with transfer pricing guidelines.

4. Operational Considerations for Tech Capability Centers
Once the legal framework is in place, the next step is to focus on the operational aspects of the tech capability center:

4.1. Office Space and Infrastructure Setup

India offers flexible office space options, ranging from coworking spaces to large tech parks. Major cities like Bangalore, Hyderabad, Pune, and Chennai are popular choices due to their robust tech ecosystem and availability of skilled talent. Setting up infrastructure involves establishing IT systems, securing data networks, and complying with local labor laws for workplace safety.

4.2. Talent Acquisition and HR Policies

• Recruitment Strategies: Leveraging job portals, recruitment agencies, and campus placements can help secure top talent.
• Compliance with Employment Laws: The center must adhere to key employment laws, including the Industrial Employment (Standing Orders) Act, 1946, and the Payment of Wages Act, 1936.
• Employee Benefits: Comply with the Employees’ Provident Fund (EPF) Scheme, Professional Tax (PT), and Gratuity Act to ensure comprehensive employee welfare.

4.3. Data Protection and IT Compliance

Tech centers must comply with the IT Act, 2000, along with the new Digital Personal Data Protection Act, 2023, to ensure comprehensive data security and regulatory adherence. Establishing strong data encryption protocols, multi-factor authentication, secure access controls, and conducting regular IT audits are essential steps for maintaining robust cybersecurity and data integrity. Furthermore, employee training on data protection practices and incident response plans can reinforce compliance efforts and safeguard sensitive information effectively.

5. Financial and Compliance Management

5.1. Accounting and Bookkeeping

A WOS must follow Accounting Standards (AS). Maintaining books of accounts, preparing annual financial statements, and undergoing statutory audits as per the Companies Act, 2013 is mandatory.

5.2. Tax Filing and Annual Compliance

Tech capability centers must file periodic returns under various statutes such as the Goods and Services Tax (GST), Income Tax Act, and EPF regulations. Additionally, annual compliance includes filing Forms AOC-4 (financial statements), Form MGT-7 (annual return), and other event-based forms with the RoC.

5.3. Transfer Pricing and Cross-Border Transactions

For companies engaged in cross-border transactions, Transfer Pricing Regulations apply. Periodic audits, Income Tax Act Section 92E reporting, and adherence to OECD Transfer Pricing Guidelines are essential to avoid scrutiny.

6. Strategic Operations and Scaling

To ensure sustainable growth and scalability, the tech capability center must focus on key strategies:

1. Adoption of Emerging Technologies: Staying ahead of the curve by investing in AI, machine learning, and other emerging technologies.
2. Continuous Skill Development: Regular training and development programs to upskill employees and align with global standards.
3. R&D and Innovation: Establishing in-house R&D capabilities to foster innovation and streamline processes.

7. Challenges and Mitigation Strategies

While the benefits are significant, setting up and running a WOS as a tech capability center can present challenges, such as:

1. Regulatory Changes: The Indian regulatory landscape is dynamic. Having an in-house legal team or collaborating with local experts can mitigate risks.
2. Talent Retention: The competition for skilled tech professionals is intense. Offering flexible work arrangements, upskilling programs, and employee-centric policies can improve retention.
3. Cultural Integration: Bridging cultural differences between the parent company and the Indian team is crucial. Regular training on cross-cultural collaboration can be effective.

8. Exit Strategy and Repatriation of Profits

In the long term, companies may seek to repatriate profits back to the parent entity. The Companies Act, 2013 and FEMA Regulations provide guidelines for the declaration of dividends and remittance of profits. The subsidiary must also adhere to the provisions under Section 115-O of the Income Tax Act regarding the Dividend Distribution Tax (DDT) and the new changes post-DDT abolition.