Article explains What is a Branch Office, What are the benefits of opening the Branch Office, Why Branch Office is not used as a preferred mode by foreign entities for setting up in India, What are the compliances of the Branch Office and Can a Branch Office can be converted into wholly owned subsidiary company?

Q 1. What is a Branch Office?

Branch office (BO) is a representative office setup by a foreign company in India to carry out business activities as enumerated below. BO is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.

a. Export/Import of goods;

b. Rendering professional or consultancy services;

c. Carrying out research work in which the parent company is engaged;

d. Promoting technical or financial collaborations between Indian companies and parent or overseas group company;

e. Representing the parent company in India and acting as buying/selling agents in India;

f. Rendering services in Information Technology and development of software in India;

g. Rendering technical support to the products supplied by the parent/ group companies;

h. Foreign airline/shipping company.

As per Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, a non-resident entity having a profit making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent can establish a BO in India.

A BO may approach any AD Category-I Bank in India to open an account for its operations in India. Credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office and any legitimate receivables arising in the process of its business operations. Debits to this account shall be for the expenses incurred by the BO and towards remittance of profit/winding up proceeds.

Q 2. What are the benefits of opening the Branch Office?

Following are the benefits of opening a BO in India:

a. Parent company has direct control over the operations of the BO as its not a separate legal entity

b. No requirement of infusion of equity, only the funds for operation requirements is required.

c. Low cost of compliance

d. Easy repatriation of funds

e. No tax on repatriation of funds

f. Easy to wind-up

g. Once the markets are tested and the parent entity is sure of carrying on business, a wholly owned subsidiary (WOS) can be incorporated, wherein the assets of the BO can be sold to such WOS

Q 3. Why Branch Office is not used as a preferred mode by foreign entities for setting up in India?

A Branch Office is not preferred by foreign entities for setting up in India for the following reasons:

a. The tax rate for a BO is 40% vis a vis 22 % for a domestic company i.e. WOS.

b. A BO is not a separate legal entity from its parent company and should be engaged in the activities of the parent company and comply with the regulations of FEMA for operations which are restrictive in nature vis a vis to a WOS which may engage in activities as stipulated in its Memorandum of Association, subject to Indian Law and allied regulations.

c. The criteria for track record needs to be complied with by the parent company for registering a BO, however the same is not required for incorporating a WOS.

d. The funds for operating a BO are required to be sent by the parent company however there is no requirement of minimum share capital and revenue from operations of a WOS can be used for funding.

e. A BO can be operational only for 3 years however a WOS can continue till such time the parent company so requires depending upon the business plans.

f. The liability of a parent company in case of a BO is unlimited. However, the liability of a parent company in case of a WOS is limited to the extent of its shareholding.

g. BO is not allowed to borrow locally without prior approval of RBI which is allowed only in exceptional cases.

h. BO cannot purchase property in India.

i. No revenue expenses such as lease hold improvements incurred by the BO can be capitalised and transferred to WOS.

j. Duplication of work is there in closing a BO and incorporating a WOS including time and cost, if the parent entity is sure of carrying on business in India, considering that the back-end expenses would remain the same in both the BO and WOS.

Q 4. What are the compliances of the Branch Office?

Authority

Forms

Frequency

RBI

Annual Activity Certificate (AAC)
Filing AAC with RBI, as at the end of March 31 each year, along with the audited financial statements including receipt and payment account on or before September 30 of that ear.In case the annual accounts of the Branch Office are finalized with reference to a date other than March 31, the AAC along with the audited financial statements may be submitted within six months from the due date of the Balance Sheet to the designated AD Category I bank, and a copy to the Directorate General of Income Tax (International Taxation), New Delhi along with the audited financial statements including receipt and payment account.

Approval for change in name

Compliances for change in name of the BO need to be reported to FED, CO Cell, New Delhi.

Annually
Registrar
of
Companies
Form FC1 for intimation of approval from RBI

Filing form FC‐ 1 within 30 days of receipt of approval from the RBI of registration in India

One Time
Form FC for intimating any changes in the Branch office (constitution, name, directors change etc.)
Filing form FC‐ within thirty days from the date on which the alteration was made or occurred.
Event Basis
Form FC for filing of accounts along with the list of all principal places of business in India established by foreign company
Filing form FC‐ within six months of the close of the financial year of the foreign company
Annually
Form FC4 for filing of Annual return

Filing FC‐4 within 60 days from the close of financial year

Annually
Income
Tax
Obtaining Permanent Account Number (PAN)

BOs shall obtain PAN from the Income Tax Authorities on setting up of their office in India and report the same in the AACs.

One time

Income Tax Return
Income tax return is to be filed by 30th of September unless there are international transactions for which transfer pricing is required, wherein the date of filing the return would be 30th November

Annually

Annual Activity Certificate (AAC)

Filing AAC with Director General of Income Tax (International Taxation), New Delhi, as at the end of March 31 each year, along with the audited financial statements including receipt and payment account on or before September 30 of that year.

Annually

Q 5. Can a Branch Office can be converted into wholly owned subsidiary company?

As per the Master Circular of Foreign Exchange Management Act, 1999 on Establishment of Liaison/Branch/Project Offices in India by Foreign Entities, Branch Office cannot be converted into wholly owned subsidiary (WOS) of the company. However, a wholly owned subsidiary can be incorporated separately.

It may be noted that the assets of a BO can be transferred by way of sale to the WOS in the following circumstances:

1. BOs who are adhering to the operational guidelines such as submission of AACs (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation).

2. BOs have obtained PAN from IT Authorities.

3. BOs can be allowed by AD Category-I bank to make such a sale, only when the non-resident entity intends to close its BO operations in India.

4. A certificate is to be submitted from the Statutory Auditor furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or written down value (WDV) value and sale consideration to be obtained. Statutory Auditor should also confirm that the assets were not re-valued after their initial acquisition. The sale consideration should not be more than the book value in each case.

5. The assets should have been acquired by the BO from inward remittances and no intangible assets such as good will, pre-operative expenses should be included. No revenue expenses such as lease hold improvements incurred by the BO can be capitalised and transferred to WOS.

6. AD Category-I bank must ensure payment of all applicable taxes while permitting transfer of assets.

7. Credits to the bank accounts of BO on account of such transfer of assets will be treated as permissible credits.

8. Donation by BO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organisations may be permitted by the AD category-I banks after satisfying itself about the bonafides of the transaction.

Author Bio

Qualification: CS
Company: N/A
Location: New Delhi, New Delhi, IN
Member Since: 30 Jan 2020 | Total Posts: 1

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One Comment

  1. CA VINOD BUKALSARIA says:

    We have gone through the your topic on discussion regarding Branch Office , which is quite knowledgeable and explanatory. You should write such topics on liaison office, Project Office and wholly owned subsidiary by foreign company for the knowledge of professional fraternity. Really commendable and wish you all the best.

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