Inter-company agreements are the legal backbone of every relationship between a foreign parent and its Indian subsidiary. Without them, service fees, royalties, loans and cost allocations can be challenged by the tax department, questioned by auditors or blocked by banks. This guide is for foreign companies, global startups, MNCs, NRIs and overseas investors who have completed Company Formation In India or are planning a Company Setup in India and want money and intellectual property to move across borders cleanly.
India reviews related-party dealings closely under transfer pricing, FEMA, the Companies Act, 2013 and GST law. A well-drafted agreement, supported by real evidence of services delivered, is your first line of defence. Advisers such as Startup Solicitors LLP regularly see disputes that began with a missing or backdated contract. The sections below explain what to sign, which laws apply, and how to build a structure that withstands scrutiny.
Understanding Inter-Company Agreements in the Indian Context
Inter-company agreements are written contracts between related entities, here a foreign parent and its Indian subsidiary, that record the commercial terms of intra-group transactions. They cover who provides what, at what price, under which law and with what proof of delivery.
For the Indian entity, these contracts establish that an expense was incurred for business purposes and priced at arm’s length. For the foreign parent, they make cross-border payments traceable and defensible. Common types include:
| Agreement | Typical Purpose | Key Compliance Focus |
|---|---|---|
| Intra-group services agreement | IT, HR, finance, management support | Transfer pricing, GST, withholding tax |
| IP or technology licence | Software, brand, know-how | Royalty rates, FEMA, DTAA relief |
| Inter-corporate loan / ECB agreement | Funding the subsidiary | RBI rules, interest limits |
| Cost-sharing agreement | Shared R&D or platform costs | Benefit test, allocation keys |
| Secondment agreement | Employees deputed from parent | Payroll, GST, permanent establishment |
| Distribution or marketing agreement | Sale of group products | Pricing, customs, margins |
Foreign owners often forget that a subsidiary registered through private limited company registration or subsidiary company registration is a separate legal and taxable person. Informal “head office instructions” are not enough.
Legal Framework and Regulations in India
Several overlapping laws shape these contracts:
- Transfer pricing: Sections 92 to 92F of the Income-tax Act, 1961, carried into the Income-tax Act, 2025 effective 1 April 2026, require international related-party transactions to meet the arm’s length standard, supported by documentation and Form 3CEB certification. Details are on the Income Tax Department portal. Our transfer pricing compliance service covers this area.
- FEMA and RBI: Foreign Exchange Management Act, 1999 rules govern equity, loans, royalties and remittances. See FEMA and RBI compliance and FDI approval.
- Companies Act, 2013: Sections 177 and 188 and the related-party rules require disclosure and, in many cases, board or audit committee approval. Filings are made through the Ministry of Corporate Affairs. Transactions between a holding company and its wholly owned subsidiary are treated differently, so confirm your position. Our corporate governance compliance team handles this.
- Withholding tax and treaties: Section 195 applies to payments to non-residents, and Double Taxation Avoidance Agreements may reduce rates. Our international tax advisory page explains the options.
- GST: Imported services are usually taxed under reverse charge. Related-party supplies can attract GST even where no consideration is charged. See GST advisory.
- Stamp duty: Rates and requirements vary by state.
Step-by-Step Process to Structure Inter-Company Agreements
- Map every transaction. List services, IP use, loans, shared costs and seconded staff between the parent and the Indian entity.
- Choose the legal form. Use one master agreement with schedules, or separate contracts per transaction type.
- Define scope and deliverables. State the services, service levels, location of delivery and reporting lines precisely.
- Set the price using a benchmark. Select a transfer pricing method (TNMM, CUP, cost-plus) and document comparables.
- Add payment and tax clauses. Cover currency, invoicing, GST, withholding tax and gross-up language.
- Protect IP and data. Define ownership, licence scope and confidentiality. Review IP due diligence and licensing and DPDP Act compliance.
- Fix governing law and disputes. Choose a seat and rules, and consider domestic and international arbitration.
- Approve, sign and stamp before performance begins.
- Maintain evidence. Keep invoices, timesheets, emails and deliverables, because Indian officers ask for proof of benefit.
- Review annually against actual margins and regulatory changes.
Audience-specific considerations:
- Indian residents (promoters or co-founders): Ensure related-party approvals and disclosures are properly recorded, especially where you also hold shares in the parent.
- NRIs: Use FEMA-compliant routes for capital and loans, and note that personal guarantees and loans from NRIs have their own conditions.
- Foreign companies: Align the parent’s local accounting with Indian pricing, and avoid arrangements that create a permanent establishment.
- Global startups: Keep a lean master services agreement but document IP assignment from Indian developers early, and align it with any shareholder agreements.
- Overseas investors: Check that intra-group flows do not breach the pricing and sectoral conditions attached to their investment.
Key Challenges and Practical Issues
- Backdated or missing contracts. Agreements signed after the services began weaken the claim for deduction.
- No proof of service. Management fees without evidence of actual benefit are the most common reason for disallowance.
- Wrong pricing. A flat 10 percent markup used across all services rarely matches a benchmarking study.
- Royalty and technical fee leakage. Paying high royalties for brand use may be challenged as not being at arm’s length.
- Loan structuring errors. Intra-group loans must follow RBI’s external commercial borrowing norms and the interest limitation rule under Section 94B.
- Secondment gaps. Treating seconded staff as free of local tax or GST is risky, particularly after court rulings on secondment arrangements.
- Missed filings. Form 3CEB, related-party disclosures and FEMA reporting are separate deadlines.
Strategic Insights and Expert Recommendations
- Contract first, invoice second. Execute the agreement before the first charge, and set effective dates deliberately.
- Build a pricing file, not just a contract. A benchmarking report and a one-page rationale for each charge strengthen your position in assessments.
- Prefer a master agreement with schedules. New services can be added by a short schedule, which supports scalability.
- Test the benefit. Ask whether an independent Indian company would pay for this service, and keep that answer on file.
- Coordinate tax, FEMA and corporate teams. One approval workflow prevents conflicts between the three regimes.
- Plan for disputes. Include escalation steps and arbitration, and align with corporate law and legal advisory so board minutes support the contract.
For sector-specific structures, such as fintech and banking or IT and software, additional licensing conditions may apply.
Conclusion
Strong inter-company agreements turn a foreign parent and Indian subsidiary relationship into a documented, defensible and scalable structure. Map transactions, price them at arm’s length, follow FEMA and Companies Act requirements, and keep evidence of delivery. Whether you are at the Company Formation In India stage or reviewing an established Company Setup in India, early structuring avoids costly corrections later.
If you want a professional review of your current group contracts, you can contact Startup Solicitors LLP for guidance tailored to your structure. Explore more at startupsolicitors.com.
5️⃣ FAQs
1. What are inter-company agreements in India?
They are written contracts between related entities, such as a foreign parent and its Indian subsidiary, recording the terms of services, loans, licences or cost sharing. They support tax deductions, transfer pricing compliance and cross-border payments, and they help demonstrate that each transaction has a genuine commercial purpose.
2. Is an agreement mandatory between a foreign parent and an Indian subsidiary?
No single law mandates one, but in practice it is essential. Tax authorities, auditors and banks expect documented terms. Without a signed agreement, deductions for management fees or royalties and remittances to the parent can be disallowed or questioned during assessments or FEMA reviews.
3. Does transfer pricing apply to these agreements?
Yes. International transactions between associated enterprises must follow the arm’s length principle. The Indian subsidiary must maintain documentation and obtain an accountant’s report in Form 3CEB where applicable thresholds are crossed. Benchmarking studies should support the price in each agreement.
4. Can an Indian subsidiary pay royalty or management fees to its foreign parent?
Yes, generally under the automatic route, subject to FEMA rules, withholding tax under Section 195, GST on imported services, and arm’s length pricing. Treaty benefits may reduce withholding rates. Proper contracts and evidence of services received are essential for deduction.
5. Who approves related-party agreements in an Indian company?
The board, and in some cases the audit committee and shareholders, depending on transaction type and value under the Companies Act, 2013. Exemptions can apply for transactions between a holding company and its wholly owned subsidiary, so verify your facts before relying on them.