Setting Up a Foreign-Invested Enterprise in India
Apr. 10 – Foreign investment into India can come through a variety of legal entities, with your choice of entity depending on the kind of work you plan to do in the country. In this article we discuss the establishment requirements and the advantages and disadvantages of each type of entity that can be established as a business enters India.
A foreign company can open a liaison office in India to engage in the following activities:
- Representing the parent company/group companies in India
- Promoting export/import from/to India
- Promoting technical or financial collaboration between parent/group companies and Indian companies
- Acting as a communications 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, and a license to operate is generally given for a period of 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 will make the liaison office subject to treatment as a foreign entity for tax purposes. 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 may represent a more appropriate choice.
Foreign companies engaged in manufacturing and trading activities outside of 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
- Promoting technical and financial collaborations between Indian and parent or overseas group companies
- Rendering professional or consultancy services
- Rendering services in information technology and development of software
- Rendering technical support for products supplied by parent/group companies
A branch office’s allowable scope of activities is broader than that of 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 are permitted to undertake manufacturing and service activities. Moreover, special governmental approval is not required to open a branch office in a special economic zone, and the setup process is carried out as normal.
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 of no less than US$100,000 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 Reserve Bank of India, and a license to operate is generally given for a period of three years (after which it needs to be renewed).
A project office, which is essentially a branch office set up with the limited purpose of executing a specific project, allows companies to establish a presence for a limited period of time. Project offices are particularly common among foreign companies engaged in turnkey operations. 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 remittances from abroad;
- Funded by an international 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 term loan from 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 Reserve Bank of India. Project offices are permitted only for activities to execute the approved project; all unrelated activities are forbidden.
Wholly-Owned Subsidiaries and Joint Ventures
For a foreign enterprise to engage in activities not listed within the limits of liaison, branch and project offices, wholly-owned subsidiaries or joint venture companies can be established.
Both wholly-owned subsidiaries and joint venture companies have independent legal status as Indian companies distinct from the foreign parent company.
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.
Portions of this article came from the March/April issue of Asia Briefing Magazine, titled “Expanding Your China Business to India and Vietnam.” This issue discusses why China is no longer the only solution for export driven businesses, and how the evolution of trade in Asia is determining that locations such as Vietnam and India represent competitive alternatives. With that in mind, we examine the common purposes as well as the pros and cons of the various market entry vehicles available for foreign investors interested in Vietnam and India.
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.
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