Setting up of Brand 0ffice

A body corporate incorporated outside India (including a firm or other association of individuals), desirous of opening a Liaison Office (LO) / Branch Office (BO) in India have to obtain permission from the Reserve Bank under provisions of FEMA 1999. The applications from such entities in Form FNC (Annex-1) will be considered by Reserve Bank under two routes:

  • Reserve Bank Route — Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
  • Government Route — Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non - Government Organizations / Non - Profit Organizations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison/Branch Offices of foreign entities:

  • Track Record

    For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.

    For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.
  • Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].
    • For Branch Office — not less than USD 100,000 or its equivalent.
    • For Liaison Office — not less than USD 50,000 or its equivalent.

LIAISON OFFICE

A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is 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 from the Head Office outside India. 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. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an AD Category I bank.

A Liaison Office can undertake the following activities in India:
  • Representing in India the parent company / group companies.
  • Promoting export / import from / to India.
  • Pomoting technical/financial collaborations between parent/group companies and companies in India.
  • Acting as a communication channel between the parent company and Indian companies.
However there are certain restrictions on Liaison Offices, which are as follows :
  • The Liaison Office cannot undertake any business activity in India nor can it generate any income in India without the approval of RBI.
  • All expenses of the office must be met through inward remittances to the office from abroad through normal banking channels. However, at the time of closure of the Liaison Office, RBI grants permission to repatriate the balance in the Indian bank account to the parent company.
  • It is not subject to taxation in India. However, liaison office would be required to withhold taxes from certain payments.
  • It cannot borrow, lend money, or accepts deposits.
  • It cannot acquire, hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India, without prior approval of RBI.
  • However, the office must file regular returns to the RBI. Such returns must include Audited Annual Accounts and an Annual Activity Certificate by a Chartered Accountant.
Advantages
  • Easy operations
  • Less formalities
  • Simple closure process
  • Normally, the transactions between the liaison office and the parent entity are not subject to Transfer Pricing (TP) regulations
BRANCH OFFICES

1 Permissible Activities
  • Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India:
    • i. Export / Import of goods.1
    • Export / Import of goods.1
    • Rendering professional or consultancy services.
    • Carrying out research work, in areas in which the parent company is engaged.
    • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
    • Representing the parent company in India and acting as buying / selling agent in India.
    • Rendering services in information technology and development of software in India.
    • Rendering technical support to the products supplied by parent/group companies.
    • Foreign airline / shipping company.
  • Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.
  • Retail trading activities of any nature is not allowed for a Branch Office in India.
  • A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
  • Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
Advantages
  • Unlike a liaison office, branch offices can generate revenue from the sales in the local market and repatriate the profits to the foreign parent company.
  • Funding is possible through the receipts from the parent company and from business operations in India.
  • Branch offices set up with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines.
Restrictions
  • A branch office cannot carry on any manufacturing activities. Manufacturing activities can be carried on only through the means of a company incorporated in India.
  • A branch office of a foreign company in india is taxed at higher rates of corporate income tax than a domestic company.
Normally, the transactions between the project office and the parent entity are subject to Transfer Pricing (TP) regulations.
Remittance of profit or surplus

A person resident outside India permitted by the Reserve Bank to open a branch or a project office in India may remit outside India the profit of the branch or surplus of the project on its completion, net of the applicable Indian taxes, on production of the following documents, and establishing the net profit or surplus, as the case may be, to the satisfaction of the authorised dealer through whom the remittance is remitted.

  • For remittance of profit of a branch
  • certified copy of the audited balance sheet and profit and loss account for the relevant year
  • a Chartered Accountant’s certificate certifying
    • the manner of arriving at the remittable profit,
    • that the entire remittable profit has been earned by undertaking the permitted activities, and
    • that the profit does not include any profit on revaluation of the assets of the branch
  • For remittance of surplus on completion of the Project:
  • certified copy of the final audited project accounts
  • a Chartered Accountant’s certificate showing the manner of arriving at the remittable surplus income-tax assessment order or either documentary evidence showing payment of income-tax and other applicable taxes, or a Chartered Accountant’s certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities; and
  • auditor’s certificate stating that no statutory liabilities in respect of the Project are outstanding.

PROJECT OFFICE

Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and

  • the project is funded by a bilateral or multilateral International Financing Agency; or
  • the project has been cleared by an appropriate authority; or
  • a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
  • As a director, you are treated as an employee and must pay tax
  • The advantages of limited liability status are increasingly being undermined by banks, finance house, landlords and suppliers who require personal guarantees from the directors before they will do business.

However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval.

Remittance of profit or surplus

A person resident outside India permitted by the Reserve Bank to open a branch or a project office in India may remit outside India the profit of the branch or surplus of the project on its completion, net of the applicable Indian taxes, on production of the following documents, and establishing the net profit or surplus, as the case may be, to the satisfaction of the authorised dealer through whom the remittance is remitted.

  • For remittance of profit of a branch
  • certified copy of the audited balance sheet and profit and loss account for the relevant year
  • a Chartered Accountant’s certificate certifying
    • the manner of arriving at the remittable profit,
    • that the entire remittable profit has been earned by undertaking the permitted activities, and
    • that the profit does not include any profit on revaluation of the assets of the branch
  • For remittance of surplus on completion of the Project:
  • certified copy of the final audited project accounts
  • a Chartered Accountant’s certificate showing the manner of arriving at the remittable surplus income-tax assessment order or either documentary evidence showing payment of income-tax and other applicable taxes, or a Chartered Accountant’s certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities; and
  • auditor’s certificate stating that no statutory liabilities in respect of the Project are outstanding.
Advantages
  • Easy operations
  • Less formalities
  • Simple closure process

Normally, the transactions between the project office and the parent entity are subject to Transfer Pricing (TP) regulations

e Bank through their ADs to regularise the offices under FEMA 1999.

FREQUENTLY ASKED QUESTIONS (FAQS)
Q1.How can foreign companies open liaison/Project/Branch office in India?
A.1 Foreign companies can set up Liaison/ Branch Office in India after obtaining approval from Reserve Bank of India. Reserve Bank of India has given general permission to foreign companies to establish Project Offices in India subject to certain conditions.
Q2.What is the Procedure to be followed for obtaining Reserve Bank’s approval for opening Liaison Officer/ Representative Office ?
A.2 A Liaison office can carry on only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is 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 from the Head Office abroad. The role of such office is therefor, limited to collecting information about possible market opportunities and providing information about the company and its product to the prospective Indian customers.

The companies desirous of opening a liaison office in India may make an application in form FNC-1 along with the documents mentions therein to foreign exchange department, Reserve Bank Of India, Central office Mumbai. This form is available at www.rbi.org.in permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional office in whose jurisdiction the office is set up. Liaison /Representative offices have to flee an Activity certification on an annual basis from Chartered Accountant to the concerned Regional office of the Reserve Bank of India, starting that the Liaison office has undertaken only those activities permitted by Reserve Bank of India.
Q3. What is the procedure for setting up Project Office?
A.3 Foreign companies are granted projects in India by Indian entities. General Permission has been granted by Reserve Bank of India Vide Notification no. FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open Project Office/s in India provided they have secured from an Indian Company, a contract to execute a project in India and

The project is funded directly by inward remittance from abroad;
The project is funded by a bilateral or multilateral International financing Agency; or
The project has been cleared by an appropriate authority; or
A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or bank in India for the project.

However, if the above criteria are not met, or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such application have to be forwarded to Central Office of the Foreign Exchange Department of the Reserve Bank at Mumbai for approval.
Q4. What is the procedure for setting up Branch office?
A.4 Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch office in India for the following purposes:
    To represent the parent company/ other foreign companies in various matters in India E.g. acting as buying/ selling agents in India.
  • To conduct research work in the area in which the parent company is engaged.
  • To undertake export and import activities and trading on wholesale basis.
  • To promote possible technical and financial collaborations between the Indian companies and overseas companies
  • Rendering professional or consultancy services
  • Rendering services in Information technology and development of software in India
  • Rendering technical support to the products supplied by the parent/ Group companies.
  • A branch office is not allowed to carry out manufacturing, processing activities directly/ indirectly. A Branch Office is also not allowed to undertake Retail Trading activities of any nature in India. Branch Offices have to submit Activity Certificate from a Chartered Accountant on an annual basis to the Central Office of FED. For annual remittance of profit Branch office may submit required documents to an authorized dealer. Permission for setting up branch offices is granted by the Reserve Bank of India. Reserve Bank of India considers the track record of the Applicant Company, existing trade relations with India, the activity of the company proposing to set up office in India as well as financial position of the company while scrutinizingthe application.
Opening of Foreign Currency Account

AD Category – I banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

  • The Project Office has been established in India, with the general / specific permission of Reserve Bank, having the requisite approval from the concerned Project Sanctioning Authority concerned.
  • The contract, under which the project has been sanctioned, specifically provides for payment in foreign currency.
  • Each Project Office can open two Foreign Currency Accounts, usually one denominated in USD and other in home currency, provided both are maintained with the same AD category–I bank.
  • The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority, and remittances from parent/group company abroad or bilateral / multilateral international financing agency.
  • The responsibility of ensuring that only the approved debits and credits are allowed in the Foreign Currency Account shall rest solely with the branch concerned of the AD. Further, the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD banks.
  • The Foreign Currency accounts have to be closed at the completion of the Project.
Other General Conditions Applicable to Branch / Liaison / Project Offices of Foreign Entities in India
  • Without prior permission of the Reserve Bank, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.
  • Entities from Nepal are allowed to establish only Liaison Offices in India.
  • Branch/Project Offices of a foreign entity are permitted to acquire immovable property by way of purchase for their own use and to carry out permitted/incidental activities. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India for a Branch / Project Office without prior RBI approval.

    All Branch / Project Offices including Liaison Offices, have general permission to carry out permitted / incidental activities from lease property subject to lease period not exceeding five years.
  • Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.
  • Transfer of assets of Liaison / Branch Office to subsidiaries or other Liaison/Branch Offices or any other entity is allowed with specific approval of the Central Office of the Reserve Bank.
  • Branch Offices are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the Authorised Dealer through whom the remittance is effected
    • A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year
    • A Chartered Accountant’s certificate certifying
      • the manner of arriving at the remittable profit
      • that the entire remittable profit has been earned by undertaking the permitted activities
      • that the profit does not include any profit on revaluation of the assets of the branch.
  • Authorised Dealers can allow term deposit account for a period not exceeding 6 months in favor of a branch/office of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.
  • Regularisation of LO / BO established during pre-FEMA period

Under the provisions of FEMA 1999 foreign entities are permitted to establish a branch or liaison office in India with permission of the Reserve Bank of India. Liaison / Branch Offices established in pre FEMA period without approval of Reserve Bank of India and those that have not been allotted a Unique Identification Number by the Reserve Bank of India may approach the Reserve Bank Of India

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