Foreign investors are permitted to set up business operations in India in the following two ways (i) Incorporated Route (As an Indian Company or LLP) and (ii) Unincorporated Route (As an entity which is not incorporated here in India and continue to represented as an extended branch/office of parent organization). Under the above incorporated route further the foreign investor can set up a wholly owned subsidiary subject to FDI Policy and sectoral limits and alternatively go for joint venture as well. Under the unincorporated route, the foreign investor can set up operations in India in the following ways (i) Liaison office/Representative office (ii) Branch office (iii) Project office.
Liaison office as the name suggests works only as a channel of communication between the parent company situated abroad and the prospective customers/vendors in India. As a general rule, the liaison office is not permitted to engage in any industrial or commercial activity and hence cannot generate any income in India without the approval of Reserve Bank of India. As there is no income, liaison office are dependent upon the funds received from parent company to meet all expenses relating to their operation in India. The reason of establishing liaison office in India may be exploring market opportunities, promoting tourism, promote imports/exports, establish technical cooperation between parties and so on. As there is no income therefore there is no tax liability on liaison office. As a general rule, Liaison office cannot borrow money or accept deposit.
Liaison office/representative office can be set up in India with the approval of the Reserve Bank of India by making an application in form FNC-1 through an Authorized Dealer (AD). The approval process generally takes 2-4 weeks and the permission is granted usually for a period of 3 years which can be extended at a later date.
Foreign Company has to get itself registered with the Registrar of Companies within 30 days of the establishment of Liaison office in India. Foreign Insurance companies can establish Liaison offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Foreign banks can establish Liaison offices in India only after obtaining approval from the Department of Banking Regulations (DBR), Reserve Bank of India.
Routes Available: There are two routes for setting liaison office in India
1. RBI 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 then the liaison office shall be approved by the Reserve Bank of India.
2. Government Route: Where principal business of the foreign entity falls under the sectors where 100% FDI is not permissible under the automatic route. Applications from such entities and those from Non–Government Organisations/Government Bodies/Non-Profit Organisations are considered by the Reserve Bank of India in consultation with the Ministry of Finance, Government of India.
Eligibility Criteria: Reserve Bank of India has prescribed certain limits for setting liaison office in India:
1. Parent Company must have a profit making track record in the immediate preceding three financial years in the home Country.
2. Parent Company must have a minimum net worth of USD 50,000 as per latest audited balance sheet and account statement certified by a Public Accountant or any Registered Accounts Practitioner.
[Net worth means total of paid-up capital and free reserves, less intangible assets.]
In case applicant that does not meet the aforesaid criteria and if it is a subsidiary of other company, then the applicant can submit a letter of comfort from the parent company and in that case the parent company must satisfy the above mentioned criteria.
Documents Requirement: Following are the list of the documents which are basically required to be submitted to the RBI for making an application for opening Liaison Office
1. Form FNC-1
2. Copies of the English version of the Memorandum and Articles of Association of the Parent Company attested by Indian Embassy/ Notary public in the Country of Registration.
3. The latest audited Balance sheet of the Parent Company.
4. Bankers' Report from the applicant’s banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank.
Please note that the aforesaid list is only indicative in nature and not exhaustive. RBI may demand additional documents as it may deem fit.
1. It can carry out permitted / incidental activities from lease property subject to lease period not exceeding five years.
2. It is not liable to tax in India as there is no income.
1. All new entities setting up Liaison office shall submit a report within five working days of the LO becoming functional to the Director General of Police (DGP) of the state concerned in which LO has established its office, if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India;
2. Liaison Offices have to file Annual Activity Certificates (AAC) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year. In case the annual accounts of the LO 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 due date of the Balance Sheet to the designated AD Category I bank, and a copy to the Directorate General of Income Tax (International Taxation), New Delhi along with the audited financial statements including receipt and payment account.
3. Liaison office has to file Report with the DGP concerned on annual basis along with a copy of the Annual Activity Certificate, and also with the AD concerned.
The Permission to set up Liaison office is generally granted for a period of 3 years. The designated AD Category - I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted by the Reserve Bank, if the applicant has complied with the following conditions and the application is otherwise in order.
1. The LO should have submitted the Annual Activity Certificates for the previous years and
2. The account of the LO maintained with the designated AD Category – I bank is being operated in accordance with the terms and conditions stipulated in the approval.
At the time of closure/winding up of the office, Liaison Office has to approach to the concerned AD and the AD has to ensure that the Liaison Office had filed Annual Activity Certificate with the RBI for previous years. The AD shall report the same to the Reserve bank (the regional office concerned for liaison office) along with a declaration that all the necessary documents submitted by the Liaison office have been scrutinized and found to be in order. If the documents are not found in order the AD shall forward the same to the RBI with his comments for necessary action.
Documents Requirement: Following documents are required for closure/winding of Liaison office:
1. Copy of the Reserve Bank's permission and/or approval from the sectoral regulator(s) for establishing the Liaison Office.
2. Auditor’s certificate
a. Indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities and indicating the manner of disposal of assets;
b. Confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the office have been either fully met or adequately provided for;
c. Confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India.
3. No objection / Tax Clearance Certificate from Income Tax authority
4. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.
5. A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013 in case of winding up of the office in India.
6. Any other document/s, specified by the Reserve Bank while granting approval.