1. Operational Funding: Service Invoicing & The 15.5% Safe Harbour
This is the standard “Revenue Route” used to cover Operating Expenses (OPEX) like payroll, rent, and utilities. The subsidiary invoices the parent for services rendered.
The 15.5% Rule (Updated April 2026): To minimize tax litigation, the government has unified the Safe Harbour margin to 15.5% for IT and ITeS services. If the subsidiary bills its total costs plus this 15.5% markup, the Indian tax department grants “tax certainty,” meaning they will not audit the price of these transactions.
Implications: While this ensures steady cash flow, the 15.5% profit is taxable income in India. Effectively, you are paying corporate tax on the markup to keep the operations running legally.
Compliance: Requires a formal Inter-company Services Agreement and an annual Transfer Pricing Study Report to justify the arm’s length nature of the transactions.
2. Capital Infusion: Equity & ROC Compliance
When you need to fund Fixed Asset Requirements (CAPEX)—such as purchasing servers, office fit-outs, or high-end hardware—Equity is the most stable route.
The Process:
Increase Authorized Capital: File Form SH-7 with the Registrar of Companies (ROC) and pay the applicable Stamp Duty (which varies by state).
Allotment: Once funds arrive via FIRC (Foreign Inward Remittance Certificate), file Form PAS-3 with the ROC.
RBI Filing (FC-GPR): Within 30 days of allotment, you must report the investment on the RBI’s FIRMS portal using Form FC-GPR.
The May 31st SFT Deadline: A critical “niche” compliance. Under the Income Tax Act, if the subsidiary receives ₹10 lakh or more in a year for issuing shares, it must file a Statement of Financial Transaction (SFT) in Form 61A by 31st May. Failure to do so leads to heavy daily penalties.
Implications: High upfront costs (Stamp Duty and ROC fees) but no recurring tax or interest burden.
3. Debt Financing: External Commercial Borrowing (ECB)
If the parent prefers to lend money rather than invest permanent capital, the ECB route is utilized.
Interest & LIBOR Transition: All inter-company loans are now pegged to Alternative Reference Rates (ARR), such as SOFR (for USD), replacing the retired LIBOR system.
Strict Reporting: You must obtain a Loan Registration Number (LRN) from the RBI before the money is received. Additionally, the subsidiary must file Form ECB-2 every month to report loan utilization.
Implications: Interest paid to the parent is a tax-deductible expense for the Indian unit but is subject to Withholding Tax (TDS) (usually 5%–20%) before it leaves India.
Best For: Temporary or project-specific funding where the parent expects the principal to be repaid.
| Feature | Service Invoicing | Equity | Parent Loan (ECB) |
|---|---|---|---|
| Primary Use | Daily expenses | Assets & infrastructure | Temporary funding |
| Main Cost | Tax on markup | Stamp duty & ROC fees | Interest + TDS |
| Filing Frequency | Annual | Event-based | Monthly |
| Repayment | Not required | Dividend/Buyback | Mandatory |
How Ebizfiling Simplifies the Process?
Managing a captive subsidiary requires a deep understanding of the “fine print” in Indian law. Ebizfiling acts as your specialized compliance partner to:
- Handle SFT Filings: We ensure your Form 61A is filed before the 31st May deadline so you avoid the ₹500+ daily penalty.
- Manage RBI Portals: From generating FC-GPR reports for new shares to managing Monthly ECB-2 filings for loans.
- Optimize Tax: We help you decide the most cost-effective balance between Invoicing, Equity, and Debt based on the latest April 2026 Safe Harbour rules.
- Liaison with Banks: Assisting in the issuance of FIRCs and LRNs to keep your foreign remittances seamless.
Ensure your Indian subsidiary remains compliant and cost-efficient. Contact Ebizfiling for a specialized consultation today.