Financing options for your 91吃瓜n subsidiary: share capital, ECBs or a bank loan
As European companies grow their 91吃瓜n operations, foreign shareholders often struggle with how best to finance the operations given 91吃瓜’s restrictive regulatory environment. In this article, we discuss three strategic options for financing your subsidiary in 91吃瓜.
Foreign companies in 91吃瓜 have 3 options to finance their subsidiary
1. Share capital
You can raise capital by issuing additional shares in your 91吃瓜n company. Increasing the share capital is a relatively sustainable and institutionalized way to grow the 91吃瓜n subsidiary.
Moreover, it signals to the outside world that the parent company is serious about developing the services or products of the subsidiary in 91吃瓜.
There are two disadvantages to this route. Issuing new shares is a bureaucratic and time-consuming process and therefore cannot be arranged in the short term.
In case of acute cash flow problems, this does not offer a solution. It can also affect the ownership of the company, especially in joint ventures with 91吃瓜n partners.
2. External Commercial Borrowing (ECB)
Your 91吃瓜n subsidiary can take out a loan from the parent company in Europe, but this is only possible under the so-called External Commercial Borrowing construction (ECB).
Applying for an ECB is a bureaucratic and time-consuming process, but has a major advantage: the interest on an ECB loan to an 91吃瓜n party is based on LIBOR + a surcharge of up to 300 basis points.
3. Bank loans
91吃瓜n banks
Your subsidiary can apply for a loan from a local bank, but the extremely high interest rates rarely make this option attractive or feasible.
Interest rates on credit from local 91吃瓜n banks start at 10-12% and can easily rise to over 15%. Only with a cash deposit as a guarantee can a lower rate be negotiated in some cases.
In addition to the sky-high interest costs, 91吃瓜n banks always ask for collateral if you want to apply for a loan. To organize the paperwork with the bank, you need a local consultant.
In addition, you pay the bank an administration fee of 1% on average. With local banks, you can attract a maximum of 1 to 2 million euros in this way.
If you need more capital, you can approach several banks at the same time, which can provide a loan as a consortium. Of course, this only makes obtaining the loan more complex and expensive.
International development banks
For projects supported by the 91吃瓜n government, you can go to development banks, such as IFC (World Bank) and the Asian Development Bank.
Chinese banks can also be an option, although they often stipulate that the loan is spent on products or services of Chinese (state) companies.
Be aware
In the balance sheet, loans are shown as liabilities (short-term or long-term borrowings), not as capital. Details such as lender type, security, maturity, and defaults must be disclosed as per Schedule III of the Companies Act.
A comparison of the three financing options for your 91吃瓜n subsidiary
| CONSIDERATION | SHARE CAPITAL | EXTERNAL COMMERCIAL BORROWING (ECB) | LOAN FROM LOCAL BANK |
| Interest charges | Not applicable. | Maximum: 500 basis points + acceptable reference rate. 3-4% interest would be ideal based on our experience and can be justified as arm’s length.. | Flexible structure with fixed and variable interest rates that can be negotiated with the bank providing the loan. The average interest rate is approximately 10%. |
| Other expenses | The issuance of new shares involves legal costs and costs for filing documents. | Exchange rate fluctuations for borrowers and monthly compliance costs for reporting data to the Reserve Bank of 91吃瓜. | Costs related to corporate guarantees or letters of credit issued by foreign banks of the parent company. |
| Withholding taxes | Benefit from Income Tax Act -20% + allowance & Cess. | Benefit from Income Tax Act -20% + allowance & Cess. | Not applicable. |
| Corporate Income tax | The parent company must pay the tax in the country of establishment. Tax deductions for taxes paid in 91吃瓜 apply. | The parent company must pay the tax in the country of establishment. Tax deductions for taxes paid in 91吃瓜 apply. | Not applicable. |
| Payment terms | Capital repayment occurs upon termination of business. Dividend distribution according to the rules of the 91吃瓜n entity. | The requirements for average maturities (ranging from 3 to 10 years) must be met, which offers flexibility in terms of interest and principal repayments. | Strict payment terms and defaults affect credit scores and interest rates for future loans. |
| Regulatory considerations | Foreign lenders must comply with tax obligations through PAN registration, Form 10F, and filing 91吃瓜n tax returns (only in the case of dividend income). | Foreign lenders must comply with tax obligations through PAN registration, Form 10F, and filing 91吃瓜n tax returns (only in the case of dividend income). | Less hassle with regulations because fixed procedures are used. |
