Branch Office/ Liaison Office

Establishment of Branch / Liaison Office in India by Foreign Entities

A body corporate incorporated outside India that intends to start their operation in India can commence it either through establishing their Liaison Office (LO)/Branch Office (BO) or incorporating a Wholly Owned Subsidiary (WOS) company in India.

Why incorporate a WOS company or establish a LO/BO in India?

To choose any of the options, first one should understand the salient feature of both establishments. We have addressed this in brief as follows:

Incorporation of a WOS Company

This is one of the most common ways to enter into Indian market from a Non-Resident Indian perspective. Once the WOS company gets incorporated it is considered atpar to the Indian Company and all the compliance including, but not limited to taxation applicability remains the same as applicable to an Indian Company. For more details, you may refer to our article on Incorporating a Private Limited Company in India – Non-Resident perspective.

Establishment of LO/BO

This is one of the options available for commencing business operation without incorporating any new entity in India where the foreign company itself retains its name. The foreign company that intends to commence its operation in India needs to take prior permission from the Reserve Bank of India under provisions of FEMA 1999. Once the entities get the approval of RBI, they need to get registered themselves as a Foreign Company in compliance with the provision of the Companies Act, 2013. The taxability would be liable to pay tax @40%, it is pertinent to note that LO is not subject to pay income tax (as they are not allowed to earn income), however, the BO shall be liable to pay income tax.

How to seek approval from RBI for the establishment of LO/BO in India

The foreign entity who intends to establish a LO/BO in India is required to file an application in Form FNC with an AD Bank for seeking approval from Reserve Bankof India , the RBI grants approval under two routes i.e.,

  • Automatic Route —Where principal business of the foreign entity falls under sectors where 100 percent Foreign Direct Investment (FDI) is permissible under the automatic route.Application for establishment of BO/LO is to be forwarded through AD Category-I Bank. To know about sectors in which 100 percent FDI is allowed, see Fundamentals of FDI in India and Sectoral Caps.
  • Government Route —Where principal business of the foreign entity falls under the sectors where FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non – Government Organisations/ Non – Profit Organisations/ Government Bodies/ Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

Permitted Activities for Liaison Office

The liaison office can act as the representative of parent/group companies in India, promote export-import and technical/financial collaboration between parent/group companies and companies in India, act as a communication channel between the parent and Indian suppliers/ buyers.

Permitted Activities for Branch Office

Permitted activities include Import/Export of Goods, providing professional/ consultancy services(excluding the practice of the legal profession in any manner), research work, representing and acting as buying/selling agent for the parent company, rendering tech support for the products of the parent company. GST Laws ,as applicable for such Sales and Purchase transactions are done by the Branch Office and accordingly, it is required to obtain GST Registration. Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.Retail trading activities of any nature are not allowed for a Branch Office in India.The branch office cannot undertake to manufacture; however, it can outsource it to Indian manufacturers.

Criteria to be fulfilled by Foreign Entities for the establishment of Branch / Liaison Offices:

For Branch Office — a profit-making track record during the immediately preceding five financial years in the home country and net worth not less than USD 100,000 or its equivalent

For Liaison Office — a profit-making track record during the immediately preceding three financial years in the home country and net worth not less than USD 50,000 or its equivalent.

What if the applicant entity does not qualify the pre-requirement criteria?

Applicants who do not satisfy the eligibility criteria can still apply if these are subsidiaries/associates of other companies bysubmitting a Letter of Comfort from their parent company/group company provided such parent/group company satisfies the eligibility criteria as prescribed above.

Compliances to be done by a LO/BO

Branch Offices / Liaison Offices need to submit Annual Activity Certificates (AAC) for each Financial Year ending March 31, along with the audited Balance Sheet on or before September 30 of that year. In case the annual accounts of the LO/ BO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the date for which the Balance Sheet (together with AAC) is prepared.It is to be filed with AD Category – I Bank as well as Director-General of Income Tax (International Taxation), New Delhi.

The Branch / Liaison offices established as described above will be allotted a Unique Identification Number (UIN)by RBI. The Branch Office / Liaison Office shall also require to obtain Permanent Account Number (PAN) from the Income Tax Authorities upon setting up of these offices in India. To know more about eligibility, application procedure, an extension of tenure, and reporting requirements, please see FAQs on Branch Office / Liaison Office / Project Office.

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