Ways to Set Up a Company in India

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Feb. 19 – Foreign companies looking at a presence in India can set up five different kinds of entities depending on how they want to be represented in India. Companies wishing to maintain their foreign company status can set up a Liaison Office, Project Office or a Branch Office. Those companies that wish to operate as an Indian Company can set up a Wholly-owned Subsidiary or a Joint Venture Company. Due to ease and scope of work allowed most foreign companies decide to open a wholly owned subsidiary. The following enumerates shareholding and scope of work under the specific entities:

a. Wholly Owned Subsidiary (WoS):

Under a wholly owned subsidiary, the foreign company could own and control up to 100 percent of the shares of the Indian company. A WoS is set up under the Companies Act of 1956 and needs the approval of the Registrar of Companies. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.

It takes approximately three weeks to incorporate a wholly owned subsidiary. The minimum capital requirements are not substantial (US$2000 in case of private companies and US$10,000 in case of public companies). In order to form a WoS the identification of two promoter shareholders is needed.

b. Joint Venture Company (JV):

A joint venture company is not treated different to a local company in India. Foreign companies may establish joint venture companies by forming strategic alliances with Indian partners and agreeing to a shareholding pattern.
A JV may be set up in any one of the following ways:

(i) Two parties, who/which may be individuals or companies, one of them non-resident or both residents, incorporate a company in India.
Business of the Indian resident party is transferred to the JV company and as consideration for such transfer, shares are issued by the JV company and subscribed by the Indian resident party. The other non-Indian subscribes for the shares in cash.

(ii) Alternately, the above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.

c. Branch Offices:

Foreign investors planning to open a branch in India need to obtain prior approval of the Reserve Bank of India. A branch office of a foreign company attracts a higher tax than a WoS or a JV company.

Foreign companies engaged in manufacturing and trading activities outside India are allowed to set up branch offices in India for the Export/import of goods and services, research work on behalf of the parent company, promoting technical or financial collaborations between Indian companies and parent or overseas group company, representing the parent company in India and acting as buying/selling agents in India etc.

A branch office is mostly not permitted to carry out manufacturing activities on its own, but is permitted to subcontract the activities to an Indian sub-contractor. A branch office is required to file an annual compliance letter from their auditors with the RBI. Remittance of profits of the branch office is permissible by furnishing requisite documents with an authorized dealer (i.e. bank).

d. Liaison Office:

A liaison office or a representative office is set up primarily to explore and understand the business environment and represent the parent company in India. A liaison office is not allowed to undertake any business activity in India or earn any income. The role of liaison offices is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. A liaison office can promote export/import from/to India and also facilitate technical/financial collaboration between its parent company and companies in India. A liaison office cannot engage in any commercial activity directly or indirectly and therefore cannot earn any income in India.

The Foreign Exchange Management Act (“FEMA”) regulates the opening and operation of such offices. Also, approval of RBI is required for opening of a liaison office. Permission for a liaison office is initially granted for a period of three years and may be extended from time to time.

At the time of closure of the Liaison Office, RBI grants permission to repatriate the balance in the Indian bank account to the parent company.

Since the Liaison Office is not permitted to earn any income, it should not constitute a taxable entity in India. However, the Liaison Office would be required to withhold tax from certain payments and hence is expected to comply with the requisite “tax withholding” obligations under the domestic tax law.

e. Project Office:

Foreign companies planning to execute specific projects in India can set up temporary project/site offices in India. The RBI has now granted general permission to foreign entities to establish project offices subject to specified conditions. A project office cannot undertake or carry out any activity other than the activity relating and incidental to execution of the project. Project offices may remit money and surplus funds outside India completion of the project without any additional approvals from the RBI.

In order to know more on legally setting up a company in your chosen industry please do contact Aaron Solomon at Solomon & Co.