Business entities registered outside India (Foreign Company) can establish business operations in India without creating and registering a subsidiary company.
Subject to the RBI guidelines, a foreign company can open a Branch Office or Liaison Office in India. The scope of operations of such offices is typically limited to activities and functions such as country representative office, sourcing, technical and/or marketing support, import and export, etc.
Approvals for Branch Offices and Liaison Offices are granted based on the sectors in which the foreign company's principal business is conducted.
Establishing a Branch/Liaison Office in India involves:
Business entities incorporated outside India are allowed to set up Branch Offices in India with specific approval of the RBI. Such branch offices are permitted to represent the parent/group companies and undertake the following activities:
Generally, branch offices should engage in the same activities as the parent company. Important Notes:
Business entities incorporated outside India are allowed to set up Liaison Office in India with specific approval of the RBI.
A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between the Head Office abroad and parties in India. LOs are not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange by the Head Office of the company. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
A liaison office can undertake the following activities in India:
RBI approvals are not required to establish a branch/unit in Special Economic Zones (SEZ) to carry out manufacturing and service activities, subject to the following conditions:
The RBI grants general permission to foreign companies for setting up Project Offices in India, in instances where these companies secure contracts for executing projects in India from an Indian company. The following conditions should also be satisfied:
Exceptions: If the above mentioned criteria are not satisfied, or the foreign company's parent entity is incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China; applications for setting up a project office should be forwarded to the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai, for prior approval.
Branch offices and liaison offices should file an Annual Activity Certificate (AAC) at the end of each financial year, i.e. March 31. The AAC should be obtained from a qualified Chartered Accountant. A copy of the AAC along with the audited Balance Sheet should also be filed with the designated Category I Bank's AD on or before September 30 of that year. A copy of the same should also be sent to the Directorate General of Income Tax (International Taxation), New Delhi.
In case the annual accounts of the LO/BO are finalized on a date other than March 31, the AAC and audited Balance Sheet should be submitted within six months from the date of preparation of the balance sheet to the designated AD from a Category I Bank.
Compliance under Company Law
The tax treatment of a branch office is different from that of a company registered in India. The present tax rate applicable to a foreign company branch is 42%. Apart from direct tax, a branch of a foreign company should also comply with all prescribed regulatory requirements under Indian Income Tax laws.
On the other hand, a liaison office cannot generate any income in India and is hence not required to pay any taxes. A liaison office should fulfill compliance requirements, including filing Annual Activity Certificate form at the end of each year and any other compliance requirements as applicable from time to time.