Liaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time. In contrast to other business structures, LOs allow foreign companies to establish a light footprint in India while keeping their financial, legal and administrative commitments low.
Like representative offices (ROs) in China, foreign companies that establish LOs in India can build business-to-business relationships, work with local providers and assess the consumer market. LOs can also facilitate trade with India without incurring tax penalties: products sold to Indian consumers are invoiced to the foreign parent company.
All together, the Reserve Bank of India (RBI) allows LOs to engage in the following activities:
- Represent a parent company or group of companies in India;
- Promote imports and exports to and from India;
- Promote technical and financial collaboration between the parent company or group of companies and Indian companies;
- Communicate between the parent company or group of companies and Indian companies.
How to Establish a LO
Foreign companies have to submit a Form FNC (Application for Establishment of Branch/Liaison Office in India) to the Foreign Investment Division, Foreign Exchange Department of the Reserve Bank of India (RBI) at its central office in Mumbai. Along with the Form FNC, the applicant must submit the following documents:
- English versions of a Certificate of Incorporation, Registration or Memorandum of Association (MoA) and Articles of Association (AoA) certified by an Indian Embassy or notary public in the country of registration;
- The latest audited balance sheet of the applicant.
The RBI will assess the application on the following criteria:
- In industries where 100 percent foreign direct investment (FDI) is allowed, foreign businesses can invest through the Automatic Route.
- In industries where FDI is capped below 100 percent, or the foreign investor is a non-governmental organization, non-profit organization or government body, applications are assessed through the Government Route.
- Organizations that would like to establish an LO must have made a profit during the three years immediately preceding the application.
- Organizations that would like to establish an LO must have a net worth of US $50,000.
If a company does not meet this RBI criteria, but a subsidiary of the company does, the parent company may submit a ‘Letter of Comfort’ on the subsidiary’s behalf to qualify for the LO.
The application review process may only take several weeks. However, applicants should allow as much time as possible between the submission of the application and an RBI decision – the review process can take up to three months.
When a company meets the investment route, profitability and net worth criteria, the RBI will grant permission for the establishment of a LO for approximately three years; this three year period may be extended.
Next Steps for Your New LO
The RBI assigns companies that have received LO approval a Unique Identification Number (UIN) that is used during the LO establishment process. Companies with LO approvals should plan to obtain a Permanent Account Number (PAN) from the Income Tax Department at this time.
The LO must file a Form 44 at the Registrar of Companies (RoC) within 30 days of establishment. LOs can file the Form 44 online through the Ministry of Corporate Affair (MCA) online portal. The Form 44 requires the following support documentation:
- A MoA and AoA in English;
- The full address of the parent company’s primary foreign place of business;
- Name and address of the LO in India;
- A list of the LO’s directors;
- Name and address of the LO’s India-based representative.
Beyond these immediate requirements, LOs must file an Annual Activity Certificate (AAC) prepared by a chartered accountant and an audited balance sheet to the RBI on or before September 30. This AAC must verify that the LO’s activities are compliant with the RBI guidelines for LOs.
LOs must also file a copy of the AAC with the Income Tax Department; the Income Tax Department requires the AAC copy within 60 days of the end of the financial year. The Income Tax Department requires LOs to submit audited financial statements, including receipt and payment accounts, along with the AAC copy.
This AAC copy should be addressed to the Director General of Income Tax, International Taxation in New Delhi. LOs must also notify the Director General of Income Tax, International Taxation if and when authorities grant an extension on the initial three years of permission for an LO.
The Long Game
Many companies in Asia have used the equivalent of a LO as a foothold before becoming a wholly foreign owned enterprise (WFOE). This is particularly the case in China, where Dezan Shira & Associates founder and Chairman Chris Devonshire-Ellis has noted that “the process of allowing foreign investors to use the equivalent of an LO – a representative office – worked well over many years, with thousands of ROs over time converting to capitalized wholly foreign owned enterprises committed to paying profits tax”. Although LOs endure some tighter regulations in India, LOs remain a low risk opportunity for foreign business interests to test their viability in the Indian market.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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