A S BANKA ADVISORS

Every week, at least one founder asks me: “I want to set up a US entity. How do I do it?”

The answer is not “just incorporate in Delaware.” The answer starts with understanding which FEMA route applies to your situation, because getting this wrong creates compliance problems that take months and lakhs of rupees to fix.

This guide covers the end-to-end process of setting up a US subsidiary as an Indian company, including the FEMA ODI framework, Delaware incorporation mechanics, banking, transfer pricing, and the 5 compliance steps most founders skip.

Step 1: Understand Which FEMA Route Applies

When an Indian company sets up a foreign entity, it falls under FEMA’s Overseas Direct Investment (ODI) regulations. The rules changed significantly with the new ODI Rules (August 2022), and most online guides are outdated.

The two primary routes:

Automatic Route: No prior RBI approval needed. Your Authorized Dealer (AD) bank processes the application. This applies to most startup scenarios where the Indian entity is investing equity in a foreign subsidiary.

Approval Route: Requires prior RBI approval. This applies in specific cases: if the Indian entity has been referred to NCLT, if there’s an ongoing investigation by a regulatory body, or if the investment is in certain restricted sectors.

Key requirements under Automatic Route:

• The Indian entity must be incorporated for at least 1 year (exceptions exist for IT/ITES companies)
• The investment amount must not exceed the financial commitment limits (currently 400% of net worth for listed companies, or specific limits for unlisted)
• The Indian entity must not be on the RBI’s caution list or defaulter list
• All previous ODI filings must be up to date

Step 2: Delaware Incorporation (The Mechanics)

Delaware is the standard choice for US subsidiaries of Indian startups. Not because of tax benefits (Delaware has no sales tax, but your subsidiary will still pay federal tax and tax in the state where it operates), but because of legal infrastructure.

Why Delaware:

• The Court of Chancery has 200+ years of corporate law precedent. Disputes resolve faster.
• US VCs are familiar with Delaware C-Corp structures. If you ever raise US capital, this matters.
• Delaware LLC or C-Corp can be set up in 24-48 hours with a registered agent.

The incorporation steps:

1. Choose entity type: C-Corp (if raising US VC) or LLC (if subsidiary for client billing/market access)
2. Register with Delaware Division of Corporations (franchise tax: ~$400/year for small companies)
3. Appoint a registered agent in Delaware (annual fee: $100-300)
4. Get an EIN (Employer Identification Number) from the IRS
5. Open a US bank account (Mercury, Relay, or traditional banks like Chase/SVB)

Timeline: Incorporation itself takes 2-3 business days. The EIN takes 4-6 weeks by mail (or can be obtained faster via phone/fax with an ITIN/SSN holder). Banking takes 1-2 weeks.

Step 3: FEMA Compliance (The Part Everyone Skips)

This is where most founders get in trouble. Incorporating in Delaware is easy. The FEMA compliance that follows is where things break.

Mandatory filings:

Form ODI Part I: Must be filed with your AD bank before or at the time of making the first remittance. This is not optional. The form includes details of the foreign entity, investment amount, source of funds, and business justification.

Unique Identification Number (UIN): After filing Form ODI Part I, RBI generates a UIN for the foreign entity. This UIN is required for all subsequent filings. If your UIN was never generated, every filing after it is technically invalid.

Form ODI Part II (Annual Performance Report): Due by December 31 every year. Reports the financial performance of the foreign entity. Miss this, and RBI flags your account.

FLA Return (Foreign Liabilities and Assets): Due by July 15 every year. Filed directly with RBI (not through the AD bank). Mandatory even if the foreign entity has zero revenue.

Form FC (for each remittance): Every time you send money to the foreign entity, Form FC must be filed within 30 days. Penalty for non-filing: up to 3x the transaction amount, compounding monthly.

Step 4: Transfer Pricing from Day 1

The moment you have an Indian parent and a US subsidiary, you have related party transactions. Transfer pricing applies from Day 1, not from the day you start generating significant revenue.

Common transactions that trigger transfer pricing:

• Indian team providing development services to the US entity (most common for SaaS startups)
• US entity billing clients, with work done by the Indian team
• IP licensing from Indian entity to US entity (or vice versa)
• Management fees or shared service charges
• Intercompany loans or guarantees

The safe approach:

• Document an intercompany agreement before the first transaction
• Use arm’s length pricing (TNMM or CUP method, depending on transaction type)
• Maintain a transfer pricing study from Year 1 (even if revenue is minimal)
• File Form 3CEB with your Indian tax return (due by October 31 if transfer pricing applies)

The cost of getting transfer pricing wrong is not just penalties. It’s double taxation, where both India and the US tax the same income because neither country accepts your pricing.

Step 5: US Tax Obligations (The Ongoing Cost)

Your US subsidiary has US tax filing obligations from the day it’s incorporated. These do not go away, even if the entity has zero revenue.

Annual filings:

• Federal: Form 1120 (C-Corp) or Form 1065 (LLC taxed as partnership). Due by April 15 (or March 15 for some entities).
• State: Delaware franchise tax (due March 1). Plus state income tax in every state where you have “nexus” (physical presence, employees, or significant sales).
• FBAR and FATCA: If the US entity has financial accounts, the Indian parent may have additional US reporting obligations.

Estimated annual US compliance cost: $3,000-8,000 for a small subsidiary (CPA fees + franchise tax + registered agent). This scales with complexity.

The 5 Mistakes Most Founders Make

1. Sending money via LRS instead of ODI route. LRS (Liberalised Remittance Scheme) is for personal remittances. If you use LRS to fund a company, RBI can reclassify it as an unauthorized ODI transaction. Penalty: up to 3x the amount.
2. Not filing Form ODI Part I before the first remittance. This is the foundational filing. Without it, your UIN is never generated, and all subsequent compliance is in limbo.
3. Ignoring transfer pricing in Year 1. “We’ll deal with it when we have revenue” is how founders end up with unrecoverable double taxation.
4. Forgetting the Annual Performance Report. Due by December 31. Missed by 70%+ of startups I audit. RBI actively tracks non-filers.
5. Not maintaining a US bank account properly. A dormant US bank account with no activity for 12+ months can be frozen by the bank. Re-activating it takes weeks.

What to Do Next

If you’re planning to set up a US entity, or if you already have one and aren’t sure about your FEMA compliance status, get it checked before you run into problems.

I run a free FEMA Diagnostic Call where I review your current structure, filing history, and flag the top risks.

Book your FEMA Diagnostic: Schedule a quick call here

Also check out our free tools:

• Cap Table Health Check
• ESOP Calculator

CA Adityavikram Banka is the founder of A S Banka Advisors Private Limited, a cross-border structuring and startup finance advisory firm.

Disclaimer: This article is for educational purposes and does not constitute legal or tax advice. Consult a qualified professional for advice specific to your situation.