Subsidiary co.
This query is : Resolved
08 December 2011
Whats the treatment of profit /loss of a subsidiary company as per companies act and income tax? will it change if the subsidiary company is located outside India? Will there be any difference if the % holding differs like 25%, 50%, 100%?
Can anyone please do help me in this regard?
Its very urgent...................please
Can anyone please do help me in this regard?
Its very urgent...................please
08 December 2011
Subsidiary Company is a separate legal entity from the holding Company.
.
Its profit are not affected by the share holding pattern adopted by the holding company.
.
Like other investors, holding Co. also gets dividend and not any share in the profits.
.
At the time of consolidation, a change due to the Exchange Rate may have certain impact on profits where subsidiary company is having its business in another country.
.
Its profit are not affected by the share holding pattern adopted by the holding company.
.
Like other investors, holding Co. also gets dividend and not any share in the profits.
.
At the time of consolidation, a change due to the Exchange Rate may have certain impact on profits where subsidiary company is having its business in another country.
Message likes :
1 times
08 December 2011
Sir, so there will be no other issues in Income Tax & Accounts point of view? Profit of Sub will sub's only. point comes only at the time of consolidation time or any other case still? Ans will be the same for Sub in abroad also?
What about the treatment of foreign exchange difference at the time consolidation?
Kindly clarify me SIR! (Paras Bafna)
What about the treatment of foreign exchange difference at the time consolidation?
Kindly clarify me SIR! (Paras Bafna)
08 December 2011
can u please still explain me sir about foreign sub treatment in consolidation?
26 July 2025
Certainly! Let's break down the **accounting and income tax treatment of profit/loss of a subsidiary company** under the **Companies Act, 2013 (India)** and **Income Tax Act, 1961**, and also address how things change if the subsidiary is **foreign** and if **ownership %** varies (e.g., 25%, 50%, 100%).
---
### 📘 **1. Companies Act, 2013 – Accounting Treatment**
Under the Companies Act, 2013 and relevant accounting standards (notably **Ind AS 110 – Consolidated Financial Statements** and **Ind AS 21 – The Effects of Changes in Foreign Exchange Rates**), the treatment depends on the nature and degree of control:
#### ✅ **A. Subsidiary (more than 50% holding or control)**
* The **holding company must consolidate** the financial statements of its subsidiary.
* In consolidation, **100% of the subsidiary’s revenue and expenses** are added to those of the parent, and then **minority interest** (Non-Controlling Interest or NCI) is shown separately.
* If the subsidiary is **wholly owned (100%)**, there's **no NCI**.
* If ownership is partial (e.g., 75%), then **25% is shown as NCI** in the consolidated statements.
#### ✅ **B. Associate (20%–50% holding)**
* If the company owns **20–50%**, it’s considered an **associate**, and **equity method** is used (Ind AS 28).
* Profits are not consolidated line by line. Instead, **share of profit/loss** is shown as a single line item in the investor company’s P\&L.
---
### 🌍 **2. Foreign Subsidiary – Additional Considerations**
#### 🪙 **A. Foreign Exchange Translation (Ind AS 21)**
* Assets, liabilities, income, and expenses of the foreign subsidiary (whose functional currency ≠ INR) are **translated to INR** during consolidation.
* Translation involves:
* **Income/expenses** at **average exchange rate**.
* **Assets/liabilities** at **closing exchange rate**.
* The **foreign exchange differences** from translation are **not taken to profit/loss**, but to a **Foreign Currency Translation Reserve (FCTR)** under **Other Comprehensive Income (OCI)**.
#### 🔁 Example:
* If the subsidiary made \$1,000 profit, and exchange rate changes from ₹70/\$ to ₹75/\$, there will be a **translation difference** that will go to **OCI**, **not P\&L**.
---
### 🧾 **3. Income Tax Act, 1961 – Tax Treatment**
#### ✅ **A. Domestic Subsidiary**
* The **subsidiary is taxed independently** on its income at applicable corporate tax rates.
* The **holding company is not taxed** on the subsidiary’s profits.
* If the holding receives **dividends**, tax treatment will depend on whether the dividend is exempt or taxable (as per current rules).
#### ✅ **B. Foreign Subsidiary**
* **No tax in India** on the profits made abroad unless:
* The profits are **repatriated as dividends** (subject to dividend taxation, possibly under DTAA).
* Or Indian company exercises **control or management** in a way that makes foreign income taxable under Indian law.
* Transfer pricing and **CFC (Controlled Foreign Corporation)** provisions may be relevant in aggressive tax planning scenarios.
---
### 📊 **4. Impact of Shareholding %**
| % Holding | Relationship | Consolidation Method | Profit Treatment |
| --------- | ---------------- | ------------------------------- | --------------------------------------------------- |
| 50% | Subsidiary | Full Consolidation (Ind AS 110) | 100% line-by-line + show NCI if less than 100% held |
| 100% | Wholly-owned Sub | Full Consolidation | No NCI; entire profit consolidated |
---
### ✅ **Conclusion / Summary**
* **Profits of the subsidiary are not taxed or accounted for in the holding company books directly** — only through **consolidation**.
* For **foreign subsidiaries**, **exchange rate differences** affect only the **OCI**, not the P\&L.
* **No direct tax impact in India** for foreign subsidiary profits unless they are **remitted** or fall under special provisions.
* Accounting **treatment depends on % holding** (subsidiary vs associate vs investment).
---
If you need this answer tailored to a specific case (like a company name or country), feel free to ask!
---
### 📘 **1. Companies Act, 2013 – Accounting Treatment**
Under the Companies Act, 2013 and relevant accounting standards (notably **Ind AS 110 – Consolidated Financial Statements** and **Ind AS 21 – The Effects of Changes in Foreign Exchange Rates**), the treatment depends on the nature and degree of control:
#### ✅ **A. Subsidiary (more than 50% holding or control)**
* The **holding company must consolidate** the financial statements of its subsidiary.
* In consolidation, **100% of the subsidiary’s revenue and expenses** are added to those of the parent, and then **minority interest** (Non-Controlling Interest or NCI) is shown separately.
* If the subsidiary is **wholly owned (100%)**, there's **no NCI**.
* If ownership is partial (e.g., 75%), then **25% is shown as NCI** in the consolidated statements.
#### ✅ **B. Associate (20%–50% holding)**
* If the company owns **20–50%**, it’s considered an **associate**, and **equity method** is used (Ind AS 28).
* Profits are not consolidated line by line. Instead, **share of profit/loss** is shown as a single line item in the investor company’s P\&L.
---
### 🌍 **2. Foreign Subsidiary – Additional Considerations**
#### 🪙 **A. Foreign Exchange Translation (Ind AS 21)**
* Assets, liabilities, income, and expenses of the foreign subsidiary (whose functional currency ≠ INR) are **translated to INR** during consolidation.
* Translation involves:
* **Income/expenses** at **average exchange rate**.
* **Assets/liabilities** at **closing exchange rate**.
* The **foreign exchange differences** from translation are **not taken to profit/loss**, but to a **Foreign Currency Translation Reserve (FCTR)** under **Other Comprehensive Income (OCI)**.
#### 🔁 Example:
* If the subsidiary made \$1,000 profit, and exchange rate changes from ₹70/\$ to ₹75/\$, there will be a **translation difference** that will go to **OCI**, **not P\&L**.
---
### 🧾 **3. Income Tax Act, 1961 – Tax Treatment**
#### ✅ **A. Domestic Subsidiary**
* The **subsidiary is taxed independently** on its income at applicable corporate tax rates.
* The **holding company is not taxed** on the subsidiary’s profits.
* If the holding receives **dividends**, tax treatment will depend on whether the dividend is exempt or taxable (as per current rules).
#### ✅ **B. Foreign Subsidiary**
* **No tax in India** on the profits made abroad unless:
* The profits are **repatriated as dividends** (subject to dividend taxation, possibly under DTAA).
* Or Indian company exercises **control or management** in a way that makes foreign income taxable under Indian law.
* Transfer pricing and **CFC (Controlled Foreign Corporation)** provisions may be relevant in aggressive tax planning scenarios.
---
### 📊 **4. Impact of Shareholding %**
| % Holding | Relationship | Consolidation Method | Profit Treatment |
| --------- | ---------------- | ------------------------------- | --------------------------------------------------- |
| 50% | Subsidiary | Full Consolidation (Ind AS 110) | 100% line-by-line + show NCI if less than 100% held |
| 100% | Wholly-owned Sub | Full Consolidation | No NCI; entire profit consolidated |
---
### ✅ **Conclusion / Summary**
* **Profits of the subsidiary are not taxed or accounted for in the holding company books directly** — only through **consolidation**.
* For **foreign subsidiaries**, **exchange rate differences** affect only the **OCI**, not the P\&L.
* **No direct tax impact in India** for foreign subsidiary profits unless they are **remitted** or fall under special provisions.
* Accounting **treatment depends on % holding** (subsidiary vs associate vs investment).
---
If you need this answer tailored to a specific case (like a company name or country), feel free to ask!
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Spice form, ? mark comes in address
- E bike purchase can get input in GST
- Interest on borrowed capital rental income
- TDS APPLICABILITIY
- Issue with PTEC Registration – PAN Already Used
- Tds on GST in connection with sale to public company
- B2B Amendment
- Restoration of certificate of practice
- Regarding change in correspondence address in SSP portal
- Regarding Advance Tax not claimed in the Return of Income for A.Y. 2025-26
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
CAclubindia
