How to Establish the Branch office (BO), Liaison office (LO) or Project office (PO) in India
Eligible foreign Companies are permitted to the establishment of Liaison Office and Branch Office (Commonly known as Representative Office) and Project Office in India under the specific or general ‘approval’ route by the RBI and Government of India. Eligible Foreign Companies includes the following companies:
- Foreign companies
- Foreign non-governmental organizations (NGOs)
- Foreign non-profit organizations (c) (NPOs)
- Foreign Govt. Bodies
- Departments of Foreign Govt.
Establishment of Liaison office and Branch office in Indian:
Permission for established a Liaison Office and Branch Office in India
(i) RBI General Approval (commonly referred to as the ‘RBI’ Route)
Eligible foreign companies are required to submit an application with the RBI to establish Liaison Office and Branch Office in India in the form FNC under the RBI general approval route through the authorized AD Category-I bank if foreign companies are involved in the sector where 100% FDIs are permitted in India
(ii) Specific approval by the Govt of India (commonly referred to as the ‘Government’ Route)
Eligible foreign companies are required to submit an application with the RBI through the designated AD Category-I bank for the establishment of the Liaison Office and Branch Office in India in the form FNC under the specific approval procedure, where the RBI requires specific approval from the concerned Ministry or Department of Government of India in the following circumstance.
(a)Establishment of Liaison office and Branch office by foreign NGOs, NPOs, Governing Bodies or Governing department.
(b) Applicant is registered or incorporated in Pakistan for establishment in ‘any’ location in India.
(c) The applicant is a registered/unregistered entity for the establishment of a Liaison Office or Branch Office in Jammu and Kashmir/ North East States /Andaman and Nicobar Island in the following 7 countries as follows;
- Sri Lanka
- Hong Kong
(d) The Parents companies’ of the applicant are not permitted in 5 of the following sectors:
- Private Security
- Info and Broadcasting
- Foreign companies are involved in the sector where 100% of FDIs in India.
(iii) The other Foreign Companies that are “Not permitted” to establish in India are as follows:
- Partnership firm
- Association of Individuals
- Proprietary Concern
(iv) Mandatory approval requirements under the RBI Route:
The RBI is required to consider 2 criteria:
- Track record
- Net value
For Liaison Office:
- Foreign Company must have a record of profit-making in their home country during the immediately preceding 3 financial years
- The minimum net worth in the home country should be USD 50 thousand.
For Branch office:
- In case For Branch office: Foreign companies should have a record of profit-making in their home country during the immediately preceding 5 financial years
- For Branch office: The minimum net worth in the home country should be USD 1 Lakh.
Net worth includes total paid-up capital + Free Reserves – Intangible assets as per the latest audited balance sheet or account statement as certified by Certified Public Account (CPA) or any Registered Account Practitioner
Application for the establishment of a Liaison office and Branch office in India
(i) Submission of an application for establishment Liaison office and Branch office in India
(a) The application for the establishment of a Liaison office or Branch office should be forwarded to the RBI by a foreign company through the designated AD Category-I bank for approval.
Designated AD Category-I bank is needed to obtain the Unique Identification Number (UIN) along with specified documents from the concerned general manager in charge, Foreign Exchange Department, Central Office Cell, RBI, New Delhi, Regional Office, 6 Parliament Street, New Delhi-110001
(b) Following are the List of Documents and it should be in the English version
- Certificate of incorporation
- Registration and Memorandum and Article of Association (M&A)
- Audited Balance Sheet that must be attested by an Indian embassy or notary public in the country of registration outside of India
(c) Letter of Comfort: Letter of Comfort (LOC) from the parent company must be submitted if applicants do not satisfy the eligibility criteria i.e. track record and/or net worth
(d) Due Diligence: Designated AD category-I bank is required to carry out due diligence on the following matters.
- Background of the applicant
- Background of the promoter
- The nature & location of the activity
- Fund Sources
- Compliance with KYC requirements before submitting an application along with feedback or recommendations to the RBI to obtain the UIN number and approval.
(ii) Allotment of the UIN number: The RBI is required to assign the Liaison office or Branch office a unique Identification Number (UIN).
(iii) The allocation of PAN card: The liaison office or Branch office is required to obtain a PAN card for the Income Tax Authorities in India.
- Permitted and not permitted (Prohibited) activities in India for the Liaison office and Project Office:
- Liaison Office
Permitted activities in India for the Liaison Office are as follows:
- Representing on behalf of the parent company or Group of Company in India.
- Encouraging import/export from/to India
- Supporting technical/financial alliances between parent/group companies and companies in India.
- Functioning as a channel of communication between the parent company and Indian companies.
Practices for the Liaison offices that are not permitted (prohibited) in India
- It is prohibited to participate in any commercial/trading practice in India; (b) It is prohibited to earn any income in India.
- It is prohibited to incur expenses other than direct inward remittances in foreign exchange from the head office outside India
Role of Foreign insurance company, a foreign bank, or a foreign law firm in establishing a Liaison Office.
(i) Liaison office of the Foreign Insurance Company in India
After obtaining approval from the Insurance Regulatory and Development Authority (IRDA) as according to the RBI in India then only the foreign insurance company is permitted to establish a Liaison office.
(ii) Liaison office of the Foreign Bank in India
After obtaining approval from the Department of Banking Operations and Development (DBOD) as accordance to RBI in India then only the foreign bank is permitted to establish a Liaison office.
(iii) Liaison office of the Foreign Law Firm in India
Fresh permission or renewal is not permitted for the Liaison office of a foreign law firm. However already approved are allowed to continue until the day of its expiry.
1.2 Extension of the approval of a LO Permitted in India
(i) Designated AD category – I bank is approved to extend the Liaison office’s validity for a period of 3 years from the date of expiry of the original or extension if the applicant has satisfied the following terms and conditions.
- LO should have to submit the Annual Activity Certificates (AACs) for the all previous year
- LO should have to maintain an account with the designated AD Category -I bank in compliance with the terms and conditions as stipulated in approval.
(ii) The extension shall be granted by Designated AD Category-I bank within 1 month from date of the request under intimation to the RBI, along with the reference number of the original letter of approval and UIN number.
(iii) Extending the Validity of an Insurance Company’s and a Bank’s Liaison office in India.
Insurance companies and banks must submit the application to the Insurance Regulatory and Development Authority (IRDA) and Department of Banking Operations and Development (DBOD) to extend the validity of the Liaison office’s period
- 2. Branch office
Permitted activities for the Branch office are as follows:
- Conduct research work in which the parent company must engage.
- Export/Import activities of Goods
- Developing technological or financial alliances between Indian companies and parent companies or groups of foreign companies.
- Providing Professional or Consultancy services.
- Operating in India as the buying/selling agent to representing the parent company in India.
- Providing facilities in Information Technology (IT) and software development in India.
- The Providing Facilities in technical support for goods supplied by parent/group companies.
- International airline operations or shipping activities in India.
Practices for the Branch office that are not permitted (prohibited) in India are as follows:
- Retail Trading Activities are not permitted by a BO in India
- Manufacturing or processing activities are not permitted for BO in India.
However, incorporating a subsidiary business in India is permitted.
2.1 Remittances against Profits by the BO are permitted.
Branch offices are allowed to remit Outside India against profits ‘after’ the payment of taxes. Following documents shall be submitted for remittances
- Certified copy of the Indian BO’s audited balance sheet and profit and loss account
- Certificate of Chartered Accountant certifying the manner arrives remittable profit and also the entire remittable profit is earned by BO from ‘permitted’ activities but also profit does not include a profit on revaluation of BO’s assets in India
Establishment in India of the Project Office (PO) Permitted
1.1 Establishment of Project Office (PO) by the Foreign Companies in India.
The RBI has granted foreign companies a general or specific ‘approval’ route for establishing a Project Office in India.
However, Project Office should obtain a contact from an Indian company in order to execute the project in India.
- Project should be funded by inward remittance from Outside India ‘or’
- A bilateral or multilateral Foreign Financial Agency can finance the project ‘and’ also,
- Project must be authorized by a relevant Indian authority ‘and’
- The Indian Company should obtain a term loan from the Public Financial Institution or bank for the project in India for the award of the contract.
In the absence of the above mentioned, a foreign company is required to obtain a specific permission from the RBI through the designated AD Category- I bank in India.S
- Bank account for the PO: After satisfying the following terms and conditions the designated AD category-I bank can open a ‘non-interest bearing’ foreign currency account for the PO in India.
- PO should be established with the general or specific ‘approval’ route from the RBI ‘and from the relevant project sanctioning authority.
- Project should specifically provide for payment in foreign currency only
- PO is permitted to open 2 foreign currency accounts with the same designated AD Category-I bank, one in USD and one in non-USD, respectively.
- Project-related expenses are permissible debits to the account and permissible credits to the account are only foreign currency receipts from a foreign company.
- A designated AD Category-I bank must ensure that permissible debits and credits are permitted in the foreign currency account, as well as that the account is duly inspected by the bank’s concurrent auditor.
- The foreign currency account must be closed at the time the project is completed.
Remittances by the PO: Designated AD Category-I bank is permitted to remit by the PO as pending completion or winding up completion of the project after the following terms and conditions have to be satisfied.
- The PO should submit an auditor’s certificate confirming that all liabilities, including income taxes have been paid.
- PO should submit an undertaking since remittance will not hinder the completion of the project in India, and any funding shortfall will be obtained by inward remittance from outside India.
- Inter Project Transfer of Funds in India: Prior RBI permission is needed for inter project fund transfers in India.
Reporting to the RBI by Project office in India
The foreign entity shall, within 2 months from the date of establishment of the PO, provide the following information to the RBI through the Designated AD Category-I bank in the form of FNC.
- Name and address of Foreign Company
- Reference number and date of letter against contract granted in In accordance with Regulation No. 5(ii) of Notification No. FEMA 22/2000-RB, dated May 03, 2000,
- particulars of authority as granting of the project or contract to the PO
- The total amount of the Project
- address, e-mail and telephone number of PO in India
- Tenure of PO in India
- A brief description of the project
- Name of the designated AD category – I bank for opening a foreign currency account in USD and ‘non’ USD
- The undertaking that the PO is entitled to obtain General Permission in accordance with Regulation No. 5(ii) of Notification No. 22 of 03 May 2000 read with Notification No. 95 of 02 July 2003.
The Project office must submit a certificate from a Chartered Accountant specifying the project’s status and ensuring that the PO’s accounts have been audited and that the activities carried out are in accordance with general or specific approval by the RBI.
Special provisions for the Liaison office/Branch office/Project office in India.
Acquisition of Immovable Property in India by BO/LO/PO
- BO or PO in India is permitted to purchase the immovable property if necessary or incidental to carry on the activities of the BO/PO as the case may be.
- Payments for the purchase of the immovable property are to be made through the normal banking channel out of the foreign inward remittance only.
- The declaration is to be submitted to the RBI in Form IPI within 90 days of the date of purchase of the immovable property.
- Sale proceeds of the property on winding-up shall be repatriated with the approval of the RBI.
- However, RBI approval also required to acquire immovable property by a company incorporated in 10 countries.
- Hong Kong
- Sri Lanka
- LO is not permitted to acquire immovable property in India from any country. However, LO is permitted to acquire immovable property on lease ‘not’ for more than 5 years from ‘any’ country.
General Conditions BO/LO
- Companies from Nepal are permitted to establish a LO but are not permitted to establish a BO in India.
- BO/LO is required to open a non-interest-bearing INR current account in India.
- RBI approval is required in order to transfer of assets to subsidiaries or other BOs.
- Term deposits of more than 6 months shall not be permitted against temporary surplus funds of the BO/LO
- However, term deposits shall not be permitted for shipping or airline companies operating in India.
- BO/LO regularization is required if it was established before FEMA, i.e. before 1999,
Additional Reporting to Police for establishing New or fresh LO/PO
Following ‘Additional’ Reporting required for establishing new Liaison office / Project office
- Submit a report containing certain information to the Director General of Police (DGP) of the State/Union Territory within 5 working days of BO/LO become functional
- The same report shall be submitted on annual basis to DGP along with AAC in India.
Miscellaneous Provisions for BO/LO in India
- Establishment of a BO in Special economic zones (SEZs).
RBI has given general permission to foreign companies to establish a BO or unit in the SEZ region to carry out manufacturing and service activities (b) General permission to carry out manufacturing and service activities is available after fulfillment of the following terms and conditions:
- The orgination must work in a sector that makes 100 % foreign direct investment.
- Branch Office must comply with the provisions of Sections 380 to 386 of the Companies Act, 2013.
- The unit must operate on a stand-alone basis only.
Winding up of a Branch office in India.
The BO must require to approach the designated AD Category-I bank with documents mentioning the BO’s closure for remittance of winding-up proceeds outside Away from India
Application for additional establishment of BO/LO in India
- An application for additional BO/LO must be required to submitted to the RBI through a specified AD Category -I Bank where specific approval is required for the establishment of a BO/LO,
- Fresh FNC form required to be submitted for an additional BO/LO
- However, documents should not be re-submitted because there is no change in the documents which are ‘already’ submitted.
- A justification for the additional BO/LO must be submitted if the number of BOs/LOs are exceeding by 4 in India,
- In order to organize the activities of all offices in India, the applicant is required to identify one office as a nodal office.
Submission of Annual Activity Certificate (AAC) for BO/LO in India
- BO/LO is required to submit an Annual Activity Certificate (AAC) as on 31 March to 30 September of each year to the following.
- Designated AD Category-I bank in India
- The DGIT (International Taxation) New Delhi
- DGP State/Union Territory
- The Annual Activity Certificate (AAC) should also be submitted by the BO/LO or By the Nodal Office if there are multiple BO/LOs in India
- Designated AD Category -I banks are expected to scrutinize the Annual Activity Certificate (AAC) to ensure that the activities carried out by BO/LO are in accordance with the RBI terms and conditions.
- The Designated AD Category -I banks are required to report to the RBI if negative comments/reports have been made by statutory auditors
Documents must be submitted at the time of closure of the BO/LO are mention below:
- Copy of the approval for the establishment of the BO/LO in India
- A certificate from the statutory auditors is required for the computation of the remittable amount.
- NOC from the Income Tax authority for remittance
- Undertaking from the applicant that no legal proceedings are pending in any court in India
- The ROC report in accordance with the provisions of the Companies Act, 2013
- Any other document as specified at the time of approval.
Role of Designated AD Category – I Bank at the Time of BO/LO Closure
- Designated AD Category – I Bank is required to ensure that the BO/LO have submitted all Annual Activity Certificate’s (AACs)
- Also to report to the RBI along with a declaration stating that all required documents submitted by the BO/LO have been scrutinized and found to be in order.
RBI approval for the establishment of a LO
- In general, the RBI takes about 40 days to grant permission for the establishment of a LO in India.
- RBI generally grants a permit for a maximum period of 3 years
- The RBI generally allows an extension for a maximum period of 3 years ‘each time’
- Once the original or extended approval has expired, LO is required to close the establishment in India. However, LO is permitted to convert the company into a joint venture or wholly owned subsidiary in India.
Registration and annual filings with the MCA for the BO/LO
- Within 30 days of its establishment, a BO/LO must register with the ROC by filing an e-form FC-1 with the ROC.
- For the financial statement and annual return, BO/LO required to file e-forms FC-3 and FC-4.
Conclusion on BO/LO/establishment PO’s in India
- The establishment of a BO/LO is permitted under the head
- General permission (‘RBI’ approval route) and
- Specific permission (‘Government’ approval route).
- There are some restrictions where specific permission is required, such as
- The parent entity is located in eight countries, including Pakistan and China, and so on.
- 4 sensitive sectors, i.e. defense, etc.
- NGOs and NPOs
- a sector in which 100% of FDIs are ‘not’ permitted in India
- BOs/LOs are ‘not’ permitted to carry out ‘multiple’ activities in India. The establishment of a domestic (subsidiary) company in India is therefore a solution to the ‘not’ activities in India
- The establishment of a PO is permitted “after” the fulfillment of certain terms and conditions in India
- BOs/POs are only permitted to buy immovable assets for critical purposes. Therefore, LOs are ‘not’ allowed to buy India’s immovable assets. LO is, however, allowed to take on leases for a maximum duration of 5 years.
- Branch office’s /LOs/POs are required to close their establishment ‘after’ meeting the certain terms and conditions’
- BOs/LOs must submit Annual Activity Certificate (AAC) to the following offices on an annual basis.
- Designated AD Category- I Bank
However, the Project office is not required to submit an Annual Activity Certificate (AAC).
You may also have a option of company formation or LLP formation in case you are looking for setting up business in India. Details about the comparative details about the both the option.