Why Startups Prefer to Have an India-US Setup?

Startups increasingly opt for an India-US setup to leverage global markets, talent, and investors. However, founders face challenges like complex regulations, dual taxation, and operational hurdles. Discover how a cross-border startup setup can drive growth. 

Our latest blog is here to guide your India-US startup journey!

Introduction: Understanding the India-US Startup Setup

In today’s rapidly evolving business landscape, the India-US startup setup has emerged as a strategic choice for entrepreneurs seeking to tap into global markets. 

This setup involves establishing a business presence in both India and the United States, enabling startups to leverage the strengths of each country. 

By combining India’s vast pool of tech talent and cost-effective operational advantages with the US’s access to capital and innovative ecosystems, startups can position themselves for significant growth and success.

The India-US setup typically entails registering a company in one or both countries, complying with local regulations, and navigating tax implications and adhering to the Foreign Exchange Management Act (FEMA) in India, which governs foreign investments and currency exchange.

In summary, establishing an India-US startup setup is not just about geographical presence; it’s about leveraging the unique advantages of both markets to drive growth, attract investment, and foster innovation.

The Rise of Cross-Border Startups

The rise of the India-US startup setup is significant, with Indian founders establishing a prominent presence in the U.S. market. 

Over 55% of billion-dollar startups in the U.S. have immigrant founders, with Indians at the forefront, founding 66 such companies according to a recent National Foundation for American Policy (NFAP) report.

Moreover, the COVID-19 pandemic accelerated digital transformation, enabling startups to operate effectively across borders. A report from McKinsey & Company indicates that 75% of businesses have adopted digital tools, making cross-border collaboration more feasible than ever.

Why Are India-US Setups Becoming Popular Among Startups?

The rising trend of India-US setups among startups can be attributed to several key factors:

• Access to Funding: Startups can tap into extensive U.S. venture capital, with Indian startups raising over $42 billion in 2022.
• Skilled Workforce: India offers a large pool of tech talent, enabling startups to innovate while benefiting from U.S. market resources.
• Cost Efficiency for U.S. Companies: Indian subsidiaries provide lower operational costs while maintaining high productivity.
• Regulatory Navigation: Dual operations help startups optimize compliance and leverage different regulatory environments​.
• Cultural Exchange: Cross-border operations promote collaboration and knowledge sharing, driving innovation and competitiveness.

What is a Holding-Subsidiary Structure?

In an India-US setup, the holding subsidiary structure can be established in either direction, allowing for flexibility in international business operations.

1. US Holding Company with Indian Subsidiary: In this scenario, the U.S.-based holding company owns a significant stake in an Indian subsidiary. This allows the Indian entity to tap into local resources and markets while complying with the Foreign Exchange Management Act (FEMA) to ensure legal adherence to foreign investment norms in India​.
2. Indian Holding Company with US Subsidiary: Conversely, an Indian holding company can establish a U.S. subsidiary. This allows Indian firms to leverage the robust U.S. market while complying with Indian laws on foreign direct investment (FDI) and the Companies Act.

How Does an India-US Holding-Subsidiary Model Work?

The India-US holding-subsidiary model involves a parent company in either the U.S. or India owning a significant stake in a subsidiary located in the other country. It involves:

1. Entity Formation: The parent company is established under local laws (Companies Act in India or relevant U.S. laws).
2. Operational Control: The holding company exercises strategic control, while the subsidiary manages daily operations, leveraging local resources and market insights​.
3. Regulatory Compliance: The Indian subsidiary must comply with FEMA regulations for foreign investments, while the U.S. entity adheres to SEC and state laws​.
4. Financial Management: This structure allows for efficient fund transfers, such as profit repatriation and inter-company loans, optimizing tax strategies in both jurisdictions​.
5. Risk Mitigation: It isolates liabilities, protecting the parent company's assets from the subsidiary's risks​.

Common Legal Structures for Indian Startups in the US

When Indian startups consider establishing a presence in the US, they often choose from several common legal structures, each offering unique benefits and regulatory implications. 

Below table summarizes the popular structures along with their advantages and disadvantages:

Legal Structure	Advantages	Disadvantages
Limited Liability Company (LLC)	- Combines partnership flexibility with corporation liability protection. - Pass-through taxation.	- May face challenges attracting venture capital. - More complex to manage than a sole proprietorship.
C-Corporation (C-Corp)	- Preferred by investors; can issue multiple classes of stock. - Limited liability protection.	- Subject to double taxation. - Higher regulatory compliance costs.
S-Corporation (S-Corp)	- Pass-through taxation, avoiding double taxation. - Limited liability protection.	- Limited to 100 shareholders, all must be U.S. citizens or residents.
Partnership	- Easy to form; offers pass-through taxation.	- General partners share liability for business debts. - Limited liability partnerships may have ownership restrictions.
Non-Profit Organisation	- Can qualify for tax-exempt status; able to attract donations.	- Must adhere to strict regulations regarding profit distribution and transparency.
Single Person Business	- Simple to establish and manage; full control of business decisions. - Pass-through taxation.	- Personal liability for business debts; harder to raise funds compared to other structures.

LLCs and C-Corps enable rapid scaling and access to extensive fundraising opportunities while facilitating entry into new markets. In contrast, S-Corps, partnerships, and single-person businesses offer limited scalability and fundraising options, with varying potential for market expansion. 

Refer to the table and graph below for further insights and comparisons.

The graph depicts the varying degrees of importance that different legal structures hold for startups, highlighting that C-Corps and LLCs are the most advantageous for scaling and fundraising, while also facilitating entry into new markets.

Advantages of an India-US Setup for Startups

Benefits for Indian Subsidiaries to US Companies:

• Cost Efficiency: Indian subsidiaries enjoy lower operational costs, enabling U.S. companies to save on labour and resources while maintaining productivity.
   
• Market Insight: Subsidiaries offer insights into the Indian market, enabling U.S. firms to tailor products and services to local preferences.
   
• R&D Opportunities: Indian subsidiaries often serve as hubs for research and development, leveraging local talent to innovate and develop new technologies​

Benefits for U.S. Subsidiaries to Indian Companies:

• Access to Capital: U.S. subsidiaries can secure diverse funding from venture capital and private equity.
   
• Market Expansion: A U.S. presence enables entry into one of the largest consumer markets, boosting sales and brand recognition.
   
• Regulatory Advantage: Operating in the U.S. allows for navigation of favourable regulations and access to robust support systems.

Challenges Faced by Startups Setting Up an India-US Business

Challenges can be particularly daunting for startups due to the differing legal frameworks, procedures, and requirements in each country. Here are some specific legal and regulatory challenges that founders may encounter:

Complex Legal and Regulatory Compliance

• Foreign Investment Regulations: Compliance with FEMA for Foreign Direct Investment (FDI) in India and scrutiny by the Committee on Foreign Investment in the United States (CFIUS) in the U.S. is critical, especially in sensitive sectors.
• Licensing and Permits: Various licences are needed, such as FSSAI for food businesses in India and local health permits in the U.S., varying by state.
• Employment Laws: Compliance with Industrial Disputes Act in India and state-specific labour laws in the U.S. regarding minimum wage and employee rights is essential.
• Data Protection Laws: Compliance with the IT Act in India and state laws like the California Consumer Privacy Act (CCPA) in the U.S. is crucial for data privacy.

Managing Dual Tax Compliance

• Double Taxation: Startups risk being taxed on the same income in both countries. Without proper planning, profits earned in the U.S. may face IRS taxes and again when repatriated to India, resulting in financial strain.
• Transfer Pricing Regulations: Startups in both countries must comply with transfer pricing regulations. India's Income Tax Act and the U.S. Internal Revenue Code requires arm's length pricing for intercompany transactions, with non-compliance leading to hefty penalties.
• Tax Treaty Benefits: Navigating the double taxation avoidance agreement (DTAA) between India and the U.S. is a challenge for startups. Misunderstanding treaty provisions can lead to loss of benefits like reduced withholding tax rates on dividends, interest, and royalties.
• Foreign Tax Credits: To mitigate double taxation, startups can claim foreign tax credits to reduce their home country tax by the amount paid abroad, but understanding the complexities and documentation requirements can be challenging.

Administrative and Operational Hurdles

Startups expanding into both India and the U.S. face various administrative and operational hurdles that can complicate their growth. Key challenges include:

• Time Zone and Response Delays: The 9.5 to 13.5 hour time difference between India and the U.S. limits overlapping working hours, causing delays in communication, decision-making, and overall project progress.
• Cultural and Communication Barriers: Differences in communication styles, language nuances, and time zones between India and the U.S. can lead to misunderstandings, misinterpretations, and coordination challenges. 

Financial Reporting Requirements in Two Countries

Startups operating in both India and the U.S. face the challenge of complying with differing financial reporting standards. 

In India, companies must adhere to Indian Accounting Standards (Ind AS), while in the U.S., they must follow Generally Accepted Accounting Principles (GAAP). 

This dual compliance requires careful coordination, as reporting timelines, formats, and audit requirements vary, making financial management complex and resource-intensive.

Understanding Transfer Pricing for an India-US Subsidiary

What is Transfer Pricing?

Transfer pricing regulations in both India and the U.S. require that cross-border transactions between related entities be conducted at arm's length.

In India, startups must comply with the Income Tax Act, 1961, which mandates detailed documentation for all intercompany transactions and periodic audits. In the U.S., the Internal Revenue Code requires similar arm's length pricing, with strict penalties for non-compliance. 

Startups must ensure accurate pricing of goods, services, and intellectual property to avoid hefty fines and adjustments in both countries. 

Here's a comparison table outlining the key Transfer Pricing (TP) requirements for India and the US:

Requirement	India	United States
Applicable Law	Income Tax Act, 1961 (IITA)	Internal Revenue Code (IRC)
Key Authority	Indian Tax Authorities	Internal Revenue Service (IRS)
Arm’s Length Principle	Required for cross-border transactions	Required for intercompany transactions
Documentation Requirements	- Master File - Country-by-Country Report (CbCR) for groups with revenue > ₹6,400 crore	- Contemporaneous documentation for all major transactions
Audits & Enforcement	Tax authorities conduct audits and adjustments	IRS enforces with potential audits and adjustments
Advanced Compliance Mechanism	N/A	Advance Pricing Agreements (APAs) available
Non-Compliance Penalties	Significant penalties for failure to comply	Strict penalties for non-compliance and potential adjustments

Transfer Pricing Methods and Compliances

Transfer pricing methods: Includes Comparable Uncontrolled Price (CUP), Cost Plus, Resale Price, Profit Split, and Transactional Net Margin Method (TNMM), ensure arm's length pricing for intercompany transactions by comparing controlled transactions to market benchmarks or allocating profits based on the relative contributions of each party involved.

Non-Compliance Risks: Non-compliance can lead to significant penalties, tax adjustments, and reputational damage, often due to inadequate documentation or improper method application.

Choosing the right transfer pricing method is essential. Companies should consider factors like the nature of transactions, availability of comparables, and market conditions to mitigate compliance risks and optimize their tax positions.

Legal and Compliance Considerations for an India-US Startup Setup

Foreign Direct Investment (FDI) 

Foreign Direct Investment (FDI) refers to an investment made by an individual or entity in one country in business interests in another country, typically in the form of establishing business operations, acquiring assets, or investing in joint ventures. 

Overseas Direct Investment (ODI) 

Overseas Direct Investment (ODI) refers to investments made by Indian companies in foreign countries, enabling them to establish or expand business operations beyond India. This can include acquiring assets, setting up subsidiaries, or forming joint ventures abroad.

Navigating Foreign Direct Investment (FDI) and Overseas Direct Investment (ODI) in an India-U.S. setup poses significant challenges for startups. 

They must contend with complex regulatory frameworks, sector-specific restrictions, and rigorous compliance requirements while addressing tax implications under the Double Taxation Avoidance Agreement (DTAA), necessitating a proactive and informed approach.

Visa and Immigration challenges

Establishing a business presence in the U.S. from India presents startups with a complex array of visa and immigration challenges.

Startups must choose the appropriate visa, such as H-1B for skilled workers, L-1 for intra-company transfers, and O-1 for individuals with extraordinary abilities. The L-1 visa necessitates proof of a qualifying relationship between companies, demanding careful documentation.

Best Practices for Managing an India-US Startup Setup

To navigate an India-U.S. startup setup, founders should conduct market research, choose the right business structure, and maintain clear communication. Emphasizing legal compliance and strong HR practices while leveraging technology and local networks will enhance collaboration and drive growth.

Leveraging cross-border tax experts

Expert knowledge of complex tax regulations and strategies for minimizing liabilities helps navigate challenges like double taxation and transfer pricing, allowing you to concentrate on growing your business.

Building a solid Transfer Pricing strategy

It guarantees fair pricing of intercompany transactions, ensures compliance, and reduces audit risks. By prioritizing this, you enhance operational efficiency and foster trust with tax authorities, paving the way for long-term success.

Efficiently managing operational challenges

It involves strong communication, efficient processes, and understanding cultural differences. By leveraging local knowledge and technology, startups can streamline operations and navigate regulatory complexities.

Building a solid Transfer Pricing strategy

Their expertise ensures compliance with local regulations, protects intellectual property, and streamlines contract negotiations. This partnership helps mitigate legal risks, enabling startups to focus on growth and innovation.

Final Thoughts

Establishing a startup across the India-U.S. landscape is a thrilling opportunity to create a bridge between two vibrant markets. By mastering the legalities, tax structures, and cultural differences, you're not just building a business—you're driving innovation and collaboration.

Turn challenges into opportunities for growth and see your vision succeed. Ready to start your journey? Get connected with us for your India-U.S. startup today!"

FAQs

Q. Can an Indian start a startup in the USA?

Yes, an Indian can start a startup in the USA by choosing a suitable business structure, registering the business, securing the necessary visa, and ensuring compliance with local regulations. This venture offers access to a larger market and growth opportunities.

Q. What is a holding-subsidiary structure in the context of an India-US startup setup?

A holding-subsidiary structure in an India-US startup setup consists of a parent company (holding company) that owns and controls one or more subsidiaries in each country, enabling centralized management, risk mitigation, and potential tax benefits while facilitating market access in both regions.

Q. How does the Double Taxation Avoidance Agreement (DTAA) benefit India-US startups?

The Double Taxation Avoidance Agreement (DTAA) allows India-US startups to avoid being taxed on the same income in both countries, facilitating easier profit repatriation and reducing their overall tax liability.