Oct. 18 – Foreign investment into India can come in a variety of different legal entities. Your choice of entity depends on the kind of work you plan to do during your time in the country.
Below we discuss the functions and establishment requirements of each of the five entities that can be established as a business enters India. Specifically, the five entities are as follows:
- Liaison Offices
- Branch Offices
- Project Offices
- Wholly Owned Subsidiaries and Joint Ventures
A foreign company can open a liaison office in India to engage in the following activities:
- Representing in India the parent company/group companies;
- Promoting export/import from/to India;
- Promoting technical/financial collaborations between parent/group companies and companies in India; and
- Acting as a communication channel between the parent company and Indian companies.
A liaison office is not allowed to commence any commercial, trading or industrial activities, directly or indirectly, and is required to sustain itself out of private remittances received from its foreign parent company through usual banking channels.
To establish a liaison office, a foreign parent company should have a net worth of no less than US$50,000 and have a three-year profit-making track record in its home country. Applications to establish a liaison office are sent to the Reserve Bank of India (RBI) and a license to operate is generally given for three years (after which it needs to be renewed).
When operating a liaison office in India, care should be taken not to trigger Permanent Establishment (PE) status, as this status subjects the liaison office to treatment as a foreign entity. PE status is triggered when a direct business connection is established between the liaison office and its foreign parent company.
If a parent company’s plans for the liaison office are likely to trigger PE status, a branch office, project office or limited liability company could prove to be a more appropriate choice.
Foreign companies engaged in manufacturing and trading activities outside India may open branch offices for the purposes of:
- Representing the foreign parent company or other foreign companies in various matters in India, such as acting as buying and selling agents;
- Conducting research in which the foreign parent company is engaged, provided the results of this research are made available to Indian companies;
- Undertaking export and import trading activities;
- Promoting technical and financial collaborations between Indian and parent or overseas group companies;
- Rendering professional and consultancy services;
- Rendering services in information technology and development of software;
- Rendering technical support to the products supplied by parent/group companies; or
- In the case of foreign airline/shipping companies.
A branch office’s allowable scope of activities is broader than for a liaison office, however branch offices are still generally forbidden from engaging in retail trading, manufacturing or processing activities within India. The major exception to this rule is in special economic zones, where branch offices can be established to undertake manufacturing and service activities without RBI approval if conditions are met.
Only companies engaged in manufacturing or trading activities abroad are permitted to open a branch office in India. To qualify to open a branch office, the foreign parent company should have a net worth not less than US$1,000,000 and a profit-making track record for the preceding five years. Similar to a liaison office, applications to establish a branch office are sent to the RBI and a license to operate is generally given for three years (after which it needs to be renewed).
The project office, essentially a branch office set up with the limited purpose of executing a specific project, allows companies to establish a business presence for a limited period of time. Project offices are particularly common among foreign companies engaged in turnkey construction or installation.
A business must secure a contract from an Indian company in order to execute a project in India and thus establish a project office. This project must be:
- Funded with remittance from abroad directly;
- Funded by a joint or multilateral financing agency;
- Cleared by an appropriate authority; or
- Based on a contract awarded by a company or entity in India which in turn is funded by a public financial institution or bank in India.
If the project does not meet the above criteria, the entity must obtain special
approval from the RBI. Project offices are permitted only for activities to execute
the project under approval; all unrelated activities are forbidden.
Wholly Owned Subsidiaries and Joint Ventures
For a foreign enterprise to engage in activities that fall outside the limits of liaison, branch and project offices, wholly owned subsidiaries or joint venture companies can be established.
Wholly owned subsidiaries and joint ventures are set up as private limited companies. Private limited companies are the most suitable and widely used form of business enterprise for foreign investors in India because they allow total control over business operations, provide limited liability, and have fewer restrictions on business activities than liaison offices and project offices.
Both wholly owned subsidiaries and joint venture companies have independent legal status as Indian companies distinct from the foreign parent company.
This article was extracted from our complimentary new guide, titled “An Introduction to Doing Business in India.” In this guide, we introduce the basics of setting up and running a company in the country and some of the key issues investors should pay attention to. This issue is currently available as a complimentary download on the Asia Briefing Bookstore.
Dezan Shira & Associates 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 emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
You can stay up to date with the latest business and investment trends across India by subscribing to The India Advantage, our complimentary update service featuring news, commentary, guides, and multimedia resources.