Procedures for US Businesses to Establish a Liaison Office in India
By Rohit Kapur, Dezan Shira & Associates, New Delhi
US-India bilateral trade is growing, and reached US$142 billion in 2018. This, coupled with a commitment by US President Donald Trump and Indian Prime Minister Narendra Modi to improve US-India bilateral trade, makes the Indian market attractive for American businesses. Both New Delhi and Washington are working on a ‘Phase One’ trade deal following President Trump’s visit to India in February.
Items imported and exported between the two countries can be examined in this article here, and we also wrote about the trade and services the US currently supplies to India in our article What Goods & Services Is India Buying from the US.
Meanwhile, US insists on unconditional access to the Indian market for its dairy products, manufacturing products, and medical devices. As President Trump had complained about India’s high tariffs and expressed concerns about US trade interests, it is expected that India will work towards lowering tariffs to increase exports from the US. A trade deal is expected by the end of this year, after US general elections in November.
Prospective US companies and investors looking to enter the Indian market must carefully consider their options for investment and available avenues for establishing a business presence in the country. There are advantages in doing so, and not just from the increasing trade perspective.
The US and India have a Double Tax Treaty which can be used to mitigate against Indian profits tax. US parent companies for example may bill their Indian subsidiary for royalties and technical expertise at lower taxable rates than India otherwise permits. Such issues need to be planned in advance with your India advisers, who will also discuss establishment options with you.
Of these, Liaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time, as they are inexpensive and relatively simple to set up. 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.
Here, we outline the functions and requirements for liaison offices operating in India.
Setting up a liaison office in India
American companies can open a liaison office in India to facilitate and promote the parent company’s business activities, and act as a communications channel between the foreign parent company and Indian companies.
Unable to engage in commercial, trading, or industrial activities, liaison offices must be sustained by private, inward remittances received from the US parent company.
A liaison office is permitted to engage in the following activities:
- Facilitate communication between the US head office and parties in India to establish market opportunities;
- Promote imports/exports between India and other countries; such as US and the NAFTA region;
- Establish financial and technical cooperation between American and other overseas and Indian companies; and
- Represent the US parent company in India.
The Foreign Exchange Management Act (FEMA) governs the application and approval process for the establishment of a liaison or branch office in India.
Under the Act, US and other foreign enterprises must receive specific approval from the Reserve Bank of India’s (RBI) Foreign Exchange Department to operate a liaison office in the country.
There are additional qualifying aspects in certain industries as follows:
- American and Foreign insurance companies can establish LOs in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).
- American and Foreign banks can establish LOs only after obtaining approval from the Department of Banking Regulation (DBR), RBI.
- Applications are to be submitted through Form FNC Annex-1 (Application for Establishment of Branch/Liaison Office in India).
Identifying if the target sector is restrictive
Applications from these entities will be considered by the RBI under two approval routes:
- RBI route – Where principal business of the foreign entity falls under sectors where 100 percent FDI is permissible under the automatic route.
- Government route – Where principal business of the foreign entity falls under the sectors where 100 percent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from non-government organizations are considered by the RBI in consultation with the Ministry of Finance, Government of India.
To clarify further – if the US entity is conducting business in the following sectors – defense, telecom, private security, and information and broadcasting – then no prior approval of the RBI is required if the government or concerned ministry has already granted clearance.
If the LO applicant is a non-governmental/non-profit organization engaged in any of the activities under Foreign Contribution (Regulation) Act 2010 (FCRA), they will have to obtain a certificate of registration under the FCRA instead of seeking permission through FEMA.
The approval process generally takes 40 days and permission to operate a liaison office is granted for a three-year period, which can be extended at a later date (maximum three year extension).
However, in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, the validity period is only two years, and no extension for these sectors (excluding infrastructure development companies) will be considered.
Once the validity period expires, the liaison office has to either close down or be converted into a joint venture/wholly owned subsidiary in conformity with the FDI policy.
An enterprise must also meet the following conditions before qualifying for the establishment of a liaison office:
- Must have a three-year record of profitable operations in the home country; and,
- Must have a minimum net worth of US$50,000 verified by the most recent audited balance sheet or account statement.
To begin the process of setting up a liaison office, the US parent company must submit a certificate of incorporation, Memorandum and Articles of Association (MOA and AOA), and a copy of the parent company’s latest audited balance sheet.
The liaison office must also obtain a Permanent Account Number (PAN) from the income tax department and a Unique Identification Number (UIN) from the RBI. The application for registration should be forwarded to the RBI by a designated AD Category – I Bank.
The following documents must also be provided:
- A notarized and attested copy of the liaison office charter or Memorandum and Articles of Association;
- Full address of the enterprise’s principal place of operation outside of India;
- Name and address of the liaison office in India;
- List of directors; and,
- Name and address of the company’s official representative based in India (the person authorized to accept delivery of notices and documents served to the company).
An AAC along with Form 49C should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year.
If an LO wants to open more than one bank account in India, it has to obtain prior permission of the RBI through its AD Category – I bank justifying the reason for the additional account.
An LO can also be upgraded into a branch office (BO) structure once its bank account is re-designated as a BO account. The entity will not require a new PAN.
Special approvals and registration with police authorities
Prior approval of the RBI will be required only if applicants or US subsidiary companies from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau want to open a liaison office in Jammu and Kashmir, the North East region, and Andaman and Nicobar Islands.
Further, only applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong, Kong, Macau, and Pakistan have to register with the state police authorities, there is no need for American nationals to do this.
A copy of the approval letter for persons from these countries shall be marked by the AD Category – I bank to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New Delhi for necessary action and record.
All other countries, including US businesses are exempted from registering with the state police authorities.
Establishing a Liaison Office in India is a proven, low capital investment route for establishing connections, promoting American products, or facilitating import-export between the US parent and domestic Indian enterprises.
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