The first transfer to a new India entity usually happens under time pressure. Salaries are due, the entity has no revenue, and someone wires funds from the parent. It works. The question of what that money legally was gets answered months later, by an accountant reading a bank statement.
Money sent from a foreign parent to an India subsidiary is not one thing. It can be share capital, a loan, or payment for services — and each carries different reporting, different tax treatment and different consequences for getting it back. The characterisation should be decided before the transfer, not reconstructed afterwards.
Planning transfers into a new India entity? WhatsApp us and we will walk you through what each route means for your situation.
Quick Summary — Three Routes, Three Treatments
| Route | What it is | Key consequence |
| Share capital | Parent subscribes to shares | Reported to the RBI through your bank; returns come out as dividend or on exit |
| Loan | Parent lends to the subsidiary | Falls under external commercial borrowing rules; repayment and interest are regulated |
| Service fee | Subsidiary invoices the parent for work done | Must be priced at arm’s length; transfer pricing applies |
💡 TaxKitab Tip The characterisation that causes the most trouble later is the one that was never made. Funds arrive, get recorded as “received from parent,” and sit in the books as an unexplained credit. At audit the question becomes unavoidable, and by then the reporting window for whichever route it actually was may have closed. Before any transfer, write down in one line what it is and why. It costs nothing at the time and saves a great deal afterwards. — From our GST Filing Mistakes Guide (Book 1). Available at taxkitab.com/books (Rs 179)
Share Capital
The most common route for funding a new subsidiary. The parent subscribes to shares and the money becomes the entity’s equity.
Foreign investment into India is reported to the Reserve Bank of India through your authorised dealer bank, and the reporting is time-bound after shares are allotted. The window is short — considerably shorter than most parents assume — and late reporting has a compounding process attached rather than a simple penalty.
The practical sequence matters. Funds come in, shares are allotted, and reporting follows allotment. Sending money without a clear plan for allotment is what creates the awkward cases, because the funds sit as neither capital nor loan while the clock runs.
Money that goes in as equity comes back out as dividend, or on eventual sale or winding up. It is not casually withdrawn.
Loan From the Parent
A parent can lend to its India subsidiary, but this falls under India’s external commercial borrowing framework rather than being a simple intercompany transfer. Eligibility, permitted end-use, minimum maturity and interest ceilings are all regulated, and the borrowing is reported.
Groups often prefer a loan because repayment feels more flexible than dividends. In the Indian context that flexibility is narrower than expected, and the compliance is heavier. Take advice on whether the loan route genuinely fits before choosing it for that reason.
Payment for Services
Where the India entity does work for the parent — engineering, back office, research, support — the subsidiary invoices the parent for that work. This is not funding. It is revenue.
This is the route most foreign groups with India teams end up using, and it is where the largest exposure sits. The price charged must be at arm’s length: what an unrelated party would charge for the same work. Charging at cost, with no profit element, is a common arrangement in captive back-office structures and it is one of the things Indian tax authorities look at closely.
Transfer pricing documentation applies once international transactions with related parties cross the prescribed threshold, along with an accountant’s report. Adjustments carry penalties that are severe by international standards.
Two further points foreign parents miss. Written intercompany agreements matter — an arrangement operating without documentation is difficult to defend. And the recovery must be genuinely priced, not simply invoiced at whatever balances the books at year end.
Getting Money Back Out
Worth understanding before money goes in. Dividends can be declared from profits and are subject to withholding, at a rate that depends on the double tax treaty between India and the parent’s country. Service fees flow back as ordinary commercial payments, subject to withholding where applicable. Loan repayment follows the terms permitted under the borrowing framework. Capital comes back on sale or winding up.
The route you choose on the way in shapes what is available on the way out.
What to Settle Before the First Transfer
Decide what the money is and record that decision. Confirm with your bank what reporting the route requires and when. Have the intercompany agreement in place before the arrangement starts, not after. If the India entity will do work for the parent, agree the pricing basis at the outset. And keep the routes distinct in the books rather than netting them off — a single “due to parent” balance mixing capital, loans and service recoveries is difficult to unpick later.
Frequently Asked Questions
Can we just wire money and sort it out later?
You can, and many groups do. The risk is that the reporting window for the correct route closes while the question is open. Deciding first is considerably cheaper than reconstructing later.
Is a loan simpler than share capital?
Usually not. Loans from a parent fall under a regulated borrowing framework with conditions on maturity, end-use and interest. Share capital has its own reporting but is often the more straightforward route for initial funding.
Our India team works only for us. Do we still need transfer pricing?
Yes, and captive arrangements are precisely where scrutiny is highest. Pricing at cost with no margin is one of the patterns that attracts attention.
What is the withholding rate on dividends to our parent?
It depends on the treaty between India and your country and on the specifics of the holding. Check your position rather than assuming a standard rate.
Who handles the RBI reporting?
Usually your authorised dealer bank in coordination with your Indian advisor. Confirm who is doing it and by when, rather than assuming the bank handles it automatically.
References
- Foreign Exchange Management Act, 1999 and rules made thereunder
- RBI Master Directions on foreign investment and external commercial borrowings
- Income Tax Act, 1961 — transfer pricing provisions and accountant’s report requirements
- Applicable Double Taxation Avoidance Agreement between India and the parent’s jurisdiction
⚠️ Foreign exchange reporting timelines, borrowing conditions and transfer pricing thresholds change through RBI and CBDT notification, and treaty rates vary by country. This is general guidance only. Confirm your specific position with your authorised dealer bank and a qualified advisor before transferring funds.
For what happens after the entity is funded and running, see Who Actually Does What: A Vendor Map for Your India Subsidiary. Repatriation and treaty relief in a UK context are covered in A UK Company With an India Subsidiary, and if you are paying a team before the entity exists, see Paying an India Team Before the Entity Existed.
Related Reading
- Payroll in India for a Foreign Company: PF, ESIC, PT, TDS
- Should Your India Books and Taxation Sit With the Same Firm?
- Who Actually Does What: A Vendor Map for Your India Subsidiary
Need help with this? TaxKitab handles Global Payroll for businesses across India and overseas. Talk to us.
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