Bird’s Eye View of Liaison Office, Branch Office and Project Office
A company incorporated outside India have an option to have an office in India by way of a liaison office, a branch office, and a project office. These offices can be set up in India subject to fulfillment of certain conditions and within the framework of the Reserve Bank of India. An overview of these entity structures is as under:
1. Liaison Office
A Liaison office (‘LO’) also known as a representative office can be established in India to promote or facilitate the business of the parent company in India. An LO acts as a communication channel between the foreign headquarters and an Indian company. An LO cannot engage in revenue generating activities in India and therefore operating expenses of an LO are met by the Head Office from outside India through foreign inward remittances.
An LO is primarily set up by the foreign company to create brand awareness about it’-s head office, promote business activities and explore market opportunities for it’s head office in India. An LO collects information about the possible market opportunities, and provides information about the foreign company – it’-s products and services to prospects in India.
- Represent the foreign company/parent company in India.
- Promote trade with India.
- Identify and establish financial/technical collaborations between the Indian company and the parent company.
- Facilitate the communication channel between the parent company and the Indian company.
Prior permission from the Reserve Bank of India (‘RBI’) is required to set up an LO in India. Initially, the permission to set up an LO is granted for a period of three years which can be further extended from time to time. Once the validity of an LO expires, it has to either be shut down or converted into a Wholly Owned Subsidiary (WOS) / Joint Venture (JV) following accordance with the Foreign Direct Investment (‘FDI’) policy.
To establish an LO in India, the following additional requirements to be satisfied:
- The company should be profitable in the home country for a period of three preceding financial years;
- The minimum net worth of the company should be USD 50,000 as per the latest audited balance sheet.
2. Branch Office
A Branch Office (‘BO’) is an extended arm of the foreign company and can conduct the same business activities as that of the parent company. The name of the Indian branch shall be the same as the parent company. A BO is not permitted to engage in retail trading activities or to carry out any direct or indirect manufacturing or processing activities in India on their own. However, a BO may subcontract these to an Indian manufacturer. In the case of a BO operating from a Special Economic Zone (SEZ), it is permitted to undertake manufacturing and service activities in sectors with 100 percent FDI approval.
All operating expenses of a BO can be met from remittances received from the foreign head office or the income generated by the BO in India from activities permitted by the RBI. Profits earned by the BO are freely repatriable subject to payment of taxes.
- Import/Export of goods;
- Render professional/consultancy services;
- Undertake research work in connection with activities of the parent company;
- Promote financial/technical collaboration between an Indian company and parent company or group companies
- Represent parent company in India and act as a buying/selling agent in India
- Render service in information technology and software development in India
- Render technical support to the products supplied by parent/group companies
- Represent foreign airline/shipping company.
Prior permission from the RBI is required to set up a BO in India. RBI shall consider the applications under the following routes:
Reserve Bank Route: Where the parent company’s business falls under the category where 100% FDI is permissible under the automatic route.
Government Route: Where parent company’s business falls under a sector where 100% FDI is not permissible.
To establish a BO in India, the following additional requirements are to be satisfied:
- The company should be profitable in the home country for a period of five preceding financial years;
- The minimum net worth of the company should be USD 1,00,000 as per the latest audited balance sheet.
3. Project Office
A Project Office (‘PO’) can be established when a foreign company has been awarded a contract to execute a project in India from an Indian company. A PO is valid till the conclusion of the project.
To establish a PO in India, the following additional conditions are required to be met in addition to the contract being awarded to the foreign company:
- The project is funded by remittances from the parent company/overseas entity
- The project is funded by a multilateral or bilateral international agency
- The project has been cleared by the appropriate authority in India
- The Indian company awarding the contract has been granted a term loan from a public financial institution for the project.
In case, the aforesaid conditions are not satisfied, RBI approval is required to be obtained. It takes approximately ten days to receive the approval of the PO. In case, the PO is not opened within six months from the approval letter, an extension of six months may be granted by the RBI.
A PO is permitted to carry on commercial activities concerning the execution of the project. In this regard, a PO is permitted to open non–interest bearing foreign currency account. Permissible debits and credits to this account are payments and receipts from the project sanctioning authority, parent company, and multilateral/bilateral international financing agency. The foreign currency account should be closed after project.
Conclusion: For taxation, LO, BO and PO are treated at par with foreign companies and the tax rates that apply to a foreign company also apply to a liaison office, branch office and project office.