Everything about Foreign Companies in India
Master Circular on Establishment of Liaison / Branch / Project Offices in India by Foreign Entities (RBI/2015-16/54 Master Circular No.7/2015-16)
Establishment of Branch/Liaison/Project Offices in India by Foreign Entities
(A) GENERAL CRITERIA – LIAISON OFFICE / BRANCH OFFICE
A body corporate incorporated outside India (including a firm or other association of individuals), desirous of opening a Liaison Office (LO) / Branch Office (BO) in India have to obtain permission from the Reserve Bank under provisions of FEMA 1999.
The applications from such entities in Form FNC (Annex-1) will be considered by Reserve Bank under two routes:
Reserve Bank Route — Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
Government Route — Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non – Government Organisations / Non – Profit Organisations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.
The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison/Branch Offices of foreign entities:
Track Record For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.
Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].
For Branch Office — not less than USD 100,000 or its equivalent.
For Liaison Office — not less than USD 50,000 or its equivalent.
The application for establishing BO / LO in India should be forwarded by the foreign entity through a designated AD Category – I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, along with the prescribed documents including
Applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company, subject to the condition that the parent company satisfies the eligibility criteria as prescribed above. The designated AD Category – I bank should exercise due diligence in respect of the applicant’s background, antecedents of the promoter, nature and location of activity, sources of funds, etc. and also ensure compliance with the KYC norms before forwarding the application together with their comments/ recommendations to the Reserve Bank. The Branch / Liaison offices established with the Reserve Bank’s approval will be allotted a Unique Identification Number (UIN).
The BOs / LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.
(B) LIAISON OFFICE
b.1 Permissible Activities for a Liaison Office:-
A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an AD Category I bank.
A Liaison Office can undertake the following activities in India:
i. Representing in India the parent company / group companies.
ii. Promoting export / import from / to India.
iii. Promoting technical/financial collaborations between parent/group companies and companies in India.
iv. Acting as a communication channel between the parent company and Indian companies.
b.2. Liaison Office of Foreign Insurance Companies / Banks Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Regulation (DBR), RBI.
b.3 Extension of Validity of the Approval of Liaison Offices The designated AD Category – I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted by the Reserve Bank, if the applicant has complied with the following conditions and the application is otherwise in order.
The LO should have submitted the Annual Activity Certificates for the previous years and
Such extension has to be granted, as expeditiously as possible, within a period of one month from the receipt of the request under intimation to the Regional Office concerned of the Reserve Bank and to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, quoting the reference number of the original approval letter and the UIN.
The application for extension of the validity period of the LOs of banks and entities engaged in insurance business has to be directly submitted to the Department of Banking Regulations, Reserve Bank and Insurance Regulatory and Development Authority (IRDA), respectively as stipulated by them, as hitherto. Further, no extension would be considered for LOs of entities which are NBFCs and those engaged in construction and development sectors (excluding infrastructure development companies). Upon expiry of the validity period, these entities have to either close down or be converted into a Joint Venture (JV) / Wholly Owned Subsidiary (WOS), in conformity with the extant Foreign Direct Investment policy. The Hon’ble Supreme Court vide its interim orders dated July 4, 2012 and September 14, 2015, passed in the case of the Bar Council of India vs A.K. Balaji & Ors., has directed RBI not to grant any permission to any foreign law firm, on or after the date of the said interim order, for opening of LO in India. Hence, no foreign law firm shall be permitted to open any LO in India till further orders/notification in this regard. However, foreign law firms which have been granted permission prior to the date of interim order for opening LOs in India may be allowed to continue provided such permission is still in force. No fresh permissions/ renewal of permission shall be granted by RBI/AD banks respectively till the policy is reviewed based on, among others, final disposal of the matter by the Hon’ble Supreme Court.
(C) BRANCH OFFICES
c.1 Permissible Activities
a). Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India:
i. Export / Import of goods:- Procurement of goods for export and sale of goods after import are allowed only on wholesale basis
ii. Rendering professional or consultancy services.
iii. Carrying out research work, in areas in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v. Representing the parent company in India and acting as buying / selling agent in India.
vi. Rendering services in information technology and development of software in India.
vii. Rendering technical support to the products supplied by parent/group companies.
viii. Foreign airline / shipping company.
Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.
b) Retail trading activities of any nature is not allowed for a Branch Office in India.
c) A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
d) Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
c.2 Branch Office in Special Economic Zones (SEZs)
(i) Reserve Bank has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:
a. such units are functioning in those sectors where 100 per cent FDI is permitted;
b. such units comply with part XI of the Companies Act,1956 (Section 592 to 602);
c. such units function on a stand-alone basis.
(ii) In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the documents as mentioned under “Closure of Liaison / Branch Office” except the copy of the letter granting approval by the Reserve Bank.
8 c.3 Branches of Foreign Banks Foreign banks do not require separate approval under FEMA, for opening branch office in India. Such banks are, however, required to obtain necessary approval under the provisions of the Banking Regulation Act, 1949, from Department of Banking Regulation, Reserve Bank.
(D)Application for Undertaking Additional Activities or Additional Branch / Liaison Offices Requests for undertaking activities in addition to what has been permitted initially by the Reserve Bank may be submitted through the designated AD Category -I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, justifying the need with comments of the designated AD Category – I bank.
Requests for establishing additional BO / LOs may be submitted through fresh FNC form (Annex 1), duly signed by the authorized signatory of the foreign entity in the home country to the Reserve Bank of India as explained above.
However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier.
(E) Reporting by Branch/Liaison Offices
e.1. All new entities setting up LO/BO shall submit a report containing information, as per format provided in Annex 3 within five working days of the LO/BO becoming functional to the Director General of Police (DGP) of the state concerned in which LO/BO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India;
e.2. Branch Offices / Liaison Offices have to file Annual Activity Certificates (AAC) (Annex 4) from Chartered Accountants, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year. In case the annual accounts of the LO/ BO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet 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. The certificates are to be filed by the following offices as applicable:
The designated AD Category – I bank shall scrutinize the Annual Activity Certificate and ensure that the activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given by the Reserve Bank.
In the event of any adverse findings being reported by the Auditor or noticed by the designated AD Category -I bank, the same should be reported immediately by the designated AD Category–I bank to the respective Regional Office of the Reserve Bank in respect of LOs and to the Central Office of the Reserve Bank in the case of BOs, along with the copy of the Annual Activity Certificate and their comments thereon.
e.3. A copy of the report in Annex 3 shall be filed with the DGP concerned on annual basis along with a copy of the Annual Activity Certificate, and also with the AD concerned.
F) Closure of Branch/Liaison Offices
At the time of winding up of Branch/Liaison offices the company has to approach the designated AD Category – I bank with the following documents:
(a) Copy of the Reserve Bank’s permission/ approval from the sectoral regulator(s) for establishing the BO / LO.
(b) Auditor’s certificate-
i) indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets;
ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and
iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
(c) Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.
(d) A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the Office in India.
(e) Any other document/s, specified by the Reserve Bank while granting approval. The designated AD Category – I banks has to ensure that the BO / LOs had filed their respective Annual Activity Certificates with the Reserve Bank for the previous years, in respect of the existing Branch/Liaison Offices. Confirmation about the same can be obtained from the Central Office of the Reserve Bank in the case of BOs and from the Regional Office concerned in the case of LOs. W.r.t the application made by a BO/LO for making remittance of its winding up proceeds, the designated AD Category – I bank may permit the remittance subject to the directions issued by the Reserve Bank in this regard from time to time and payment of applicable taxes in India, if any. Closure of such BO / LO has to be reported by the designated AD Category – I bank to the Reserve Bank (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO / LO have been scrutinized and found to be in order. If the documents are not found in order or cases are not covered under delegated powers, the AD Category – I bank may forward the application to the Reserve Bank, with their observations, for necessary action. All the documents relating to the BO / LO operations may be retained by the AD Category – I bank for verification by the internal auditors of the AD / inspecting officers of the Reserve Bank.
(G) PROJECT OFFICE
g.1 General Permission
Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and
i. the project is funded directly by inward remittance from abroad;
ii. the project is funded by a bilateral or multilateral International Financing Agency;
iii. the project has been cleared by an appropriate authority;
iv. a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project. However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval. Setting up of Project Offices by foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, by whatever name called, are under the Government Route. Accordingly, such entities are required to apply to the Reserve Bank for prior permission to establish an office in India, whether Project Office or otherwise.
g.2 Opening of Foreign Currency Account
AD Category – I banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:
i. The Project Office has been established in India, with the general / specific permission of Reserve Bank, having the requisite approval from the concerned Project Sanctioning Authority concerned.
ii. The contract, under which the project has been sanctioned, specifically provides for payment in foreign currency.
iii. Each Project Office can open two Foreign Currency Accounts, usually one denominated in USD and other in home currency, provided both are maintained with the same AD category–I bank.
iv. The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority, and remittances from parent/group company abroad or bilateral / multilateral international financing agency.
v. The responsibility of ensuring that only the approved debits and credits are allowed in the Foreign Currency Account shall rest solely with the branch concerned of the AD. Further, the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD banks.
vi. The Foreign Currency accounts have to be closed at the completion of the Project.
g.3 Intermittent Remittances by Project Offices in India
(i) AD Category – I bank can permit intermittent remittances by Project Offices pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction, subject to the following:
a. The Project Office submits an Auditors’ / Chartered Accountants’ Certificate to the effect that sufficient provisions have been made to meet the liabilities in India including Income Tax, etc.
b. An undertaking from the Project Office that the remittance will not, in any way, affect the completion of the Project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.
(ii) Inter-Project transfer of funds requires prior permission of the Regional Office concerned of the Reserve Bank under whose jurisdiction the Project Office is situated.
g.4 Reporting requirements
(i) All new entities setting up Project Offices shall submit a report containing information, as per format provided in Annex 3 within five working days of the PO becoming functional to the Director General of Police (DGP) of the state concerned in which PO has established its office; if there is more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India;
(ii) The foreign company establishing a Project Office in India is to furnish report through the concerned AD branch, to the concerned Regional Office of Reserve Bank of India under whose jurisdiction the Project Office is set up, incorporating the following details.
a. Name and address of the Foreign Company,
b. Reference Number and date of letter awarding the contract referred to in clause (ii) of Regulation 5 of Notification No. FEMA 22/2000-RB dated May 3, 2000,
c. Particulars of the authority awarding the projects / contract,
d. The total amount of contract,
e. Address / e-mail address / telephone number / fax number of the Project Office,
f. Tenure of Project Office,
g. Brief details of the Project undertaken,
h. AD branch with whom the account has been opened and the foreign currency in which the account is opened,
(i) An undertaking to the effect that the Project Office is eligible to avail of the General Permission under Regulation 5(ii) to RBI Notification No.22/2000 – RB dated May 3, 2000 read with Notification No. FEMA 95 dated July 2, 2003 showing the reason thereof. This Report shall be forwarded through the AD branch to the Regional Office concerned of the Reserve Bank of India within 2 months of establishment of the Project Office.
(iii) The Project Office shall also submit to the AD branch on an annual basis, a Certificate from a Chartered Accountant showing the Project Status and certifying that the accounts of the Project Office has been audited and the activities undertaken are in conformity with the General / Specific permission given by the Reserve Bank.
Additional Reporting Requirements:
A copy of the report in Annex 3 shall be filed with the DGP concerned on annual basis along with a copy of the annual certificate, and also with the AD concerned.
(H) Other General Conditions Applicable to Branch / Liaison / Project Offices of Foreign Entities in India
(i) Without prior permission of the Reserve Bank, no person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.
(ii) Entities from Nepal are allowed to establish only Liaison Offices in India.
(iii)Branch/Project Offices of a foreign entity are permitted to acquire immovable property by way of purchase for their own use and to carry out permitted/incidental activities. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Hong Kong, Macau, Nepal, Bhutan or China are not allowed to acquire immovable property in India for a Branch / Project Office without prior RBI approval. All Branch / Project Offices including Liaison Offices, have general permission to carry out permitted / incidental activities from lease property subject to lease period not exceeding five years.
(iv)Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.
(v) Powers relating to transfer of assets of Liaison / Branch Office/Project Office have been delegated to AD Category-1 Banks subject to compliance with the following stipulations:
a. Such proposals will be considered only from LO/BOs who are adhering to the operational guidelines stipulated in AP DIR Circular No.23 & 24 of December 30, 2009 such as (i) submission of AACs (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation) and (ii) obtained PAN from IT Authorities and have got registered with ROC under Companies Act 1956, if necessary. Similarly, proposals from POs should conform to the guidelines issued in AP DIR Cir.No.44 dated May 17, 2005 with regard to initial reporting requirements (para.2.3) and submission of CA certified annual report indicating project status (para.2.4).
b. 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 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.
c. The assets should have been acquired by the LO/BO/PO 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 LO/BOs can be capitalised and transferred to JV/WOS.
d.AD bank to ensure payment of all applicable taxes while permitting transfer of assets.
e. Transfer of assets to be allowed by AD banks only when the foreign entity intends to close their LO/BO/PO operations in India.
f. Credits to the bank accounts of LO/BO/PO on account of such transfer of assets will be treated as permissible credits.
(vi) Branch Offices are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the Authorised Dealer through whom the remittance is effected
a. A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year
b. A Chartered Accountant’s certificate certifying
i. the manner of arriving at the remittable profit
ii. that the entire remittable profit has been earned by undertaking the permitted activities
iii. that the profit does not include any profit on revaluation of the assets of the branch.
(vii) Authorised Dealers can allow term deposit account for a period not exceeding 6 months in favor of a branch/office of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.
(viii) Regularisation of LO / BO established during pre-FEMA period Under the provisions of FEMA 1999 foreign entities are permitted to establish a branch or liaison office in India with permission of the Reserve Bank of India. Liaison / Branch Offices established in pre FEMA period without approval of Reserve Bank of India and those that have not been allotted a Unique Identification Number by the Reserve Bank of India may approach the Reserve Bank through their ADs to regularise the offices under FEMA 1999.
RoC Compliance ( Ministry of Corporate Affairs)
In General, a foreign company is a company which is incorporated outside India but having its place of business in India.
To understand more about Foreign Company, let’s discuss some important definitions:
Definition of Company under Companies Act, 2013
Section 2(20): Company means a company incorporated under this Act or under any previous company law.
Definition of Body Corporate under Companies Act, 2013
Section 2(11): Body Corporate or Corporation includes a Company incorporated outside India, but does not include-
Definition of Foreign Company under Companies Act, 2013 vs. Companies Act, 1956:
|Foreign Company under Companies Act 1956 – Section 591||Foreign Company as per Companies Act, 2013 – Section 2(42)|
|Company incorporated outside India and having a place of business in India||Company or Body Corporate incorporated outside India having a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.|
The Companies Act, 2013 has the potential to impact a large number of Foreign Companies that may be doing business in India through electronic mode. The registration requirement of companies doing business in India through ‘electronic mode’ has been the subject matter of discussions and debates. Rule 2 (c) of the Companies (Registration of Foreign Companies) Rules, 2014 defines ‘electronic mode’ as carrying out electronically based, whether main server is installed in India or not, including but not limited to-
These transactions may be conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.
Impact of change in definition of Foreign Companies
The New Act has drastically expanded the definition of Foreign Companies to include those foreign companies as well that are doing business in India through electronic mode. As discussed earlier, Rule 2 (c) defines ‘electronic mode’, which definition is wide enough to cover virtually every transaction carried through electronic mode including through e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise. Such a wide coverage on transactions done through electronic modes is, therefore, likely to have a great impact on various foreign companies involved in transactions such as consultancy services, financial services, e-commerce etc. with their customers in India that would be required to establish a permanent place of work in India through registration, in order to continue to operate in the country.
Currently, there are a number of foreign based websites that operate directly or indirectly in India and may be said to have a place of business in India through electronic mode such as Amazon.com, Rakuten.com etc., where customers located in India can purchase products and get the shipment in India. Moreover, ebooks, software, or subscription to e-magazines, dailies or subscription of other members only websites could be purchased online at many websites that need no physical shipment to India. The New Act specifically provides that in order to ascertain the place of business in India through electronic mode, the main server is not required to be installed in India.
The bare perusal of the provisions of the New Act (esp. section 380 and section 2 (42) along with prescribed Rules) suggests that even a single transaction conducted in India by a foreign company would be sufficient to infer that such foreign company has established a place of business in India. Such an interpretation would lead to undesirable consequences as any foreign company e.g. a consultancy company based outside India would require registration in India even if it undertakes only one single transaction in a whole year. Imagine a situation where a customer in India buys an application or software worth $1 on a foreign based marketplace websites like google play store that may not be registered in India. The marketplace websites could have sellers that are also not registered in India as per the requirement of section 380. In such a case, it would be absurd to expect that for the sale of a $1 product/service both the seller company as well as the marketplace owner company be required to get registered under the New Act. However, as absurd as it may appear, the bare interpretation of the New Act leads to this conclusion
So from above, it is clear that foreign companies must comply with the provisions of the Companies Act, 2013 in respect to the business as if it were a company incorporated in India.
The Companies Act, 2013 aims to:
Compliances for Foreign Companies under Companies Act, 2013 and rules made thereunder:
Section 380: Documents etc., to be delivered to Registrar by Foreign Companies:
Every Foreign company is required to submit these documents to the Registrar for registration, within 30 days of the establishment of its place of business in India:
Rule 3(3) of the Companies (Registration of Foreign Companies) Rules, 2014 requires application in Form FC-1 to be supported with an attested copy of approval from the Reserve Bank of India under Foreign Exchange Management Act and the rules and regulations thereunder or a declaration from the authorised representative of such Foreign Company that no such approval is required.
And Rule 3(4) provides that in case of any alteration in the aforesaid documents the Foreign Company is require to submit a return in Form FC-2 containing the particulars of alteration as per the prescribed format with the Registrar of Companies, within 30 days of any such alteration.
Section 381: Accounts of Foreign Companies:
The Foreign Companies in each calendar year are required to prepare a balance sheet and profit & loss account in such form, containing such particulars and shall also annex the documents as prescribed under Rule 4 along with the balance sheet and profit & loss account. All these documents shall be filed with Registrar of Companies along with a copy of list of all the places where business has been established in India as on the date of the balance Sheet in Form FC-3.
If any of such documents is not in English Language, a certified translation of these documents in English Language shall be attached.
And Rule 5 provides that every foreign company shall get its accounts, pertaining to the Indian business operations prepared in accordance with the requirements of section 381 and rule 4, audited by a practicing Chartered Accountant in India or a firm or limited liability partnership of practicing chartered accountants.
The provisions of Chapter X i.e. Audit and Auditors and rules made there under, as far as applicable, shall apply, mutatis mutandis, to the foreign company.
Section 382: Display of Name of Foreign Companies:
Every Foreign Company is required to exhibit outside its every office or place of business in India, and in all business letters, bill heads and letter paper, and in all notices, and other official publications, the name of the company and the country where it is incorporated. The name shall be in legible letters of English language and also in the local language of the state where such office is situated.
Besides the name and the country of Incorporation, the company is also required to mention the fact that the liability of the company is limited if it is so.
Section 383: Service on Foreign Company:
Any process, notice, or other document required to be served on a foreign company shall be addressed to the person whose name and address have been delivered to the Registrar and sent by post or by electronic mode. The documents on Foreign Company as per the New Act may now also be served by Electronic Mode.
Section 384: Debentures, Annual Return, Registration of Charges, Books of Accounts and their Inspection
The provisions of Section 71 shall apply mutatis mutandis to a foreign company.
The provisions of Section 92 shall subject to such exceptions, modification and adaptations as may be made therein by rules made under this act, apply to a foreign company as they apply to a foreign company as they apply to a company incorporated in India.
Also, Rule 7 provides that every foreign company shall prepare and file, within a period of sixty days from the last day of its financial year, to the Registrar annual return in Form FC.4 along with such fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 containing the particulars as they stood on the close of the financial year.
Books of Accounts:
The provisions of Section 128 shall apply to a foreign company to the extent of requiring it to keep at its principal place of business in India, the books of account referred to in that section, with respect to monies received and spent, sales and purchases made, and assets and liabilities, in the course of or in relation to its business in India.
Registration of Charges:
Companies Act 1956: As per Section 600 read with Section 125 of the Companies Act 1956 charges on properties in India which are created by a Foreign Companies and charges on properties in India which is acquired by any Foreign Company shall be registered with Registrar.
Companies Act 2013: The provisions of Chapter VI shall apply mutatis mutandis to charges on properties which are created or acquired by any foreign company. As per Section 384 read with Section 77 of the Companies Act 2013 charges on properties which are created or acquired by any Foreign Companies whether situated in or outside India shall be registered with Registrar. Under Companies Act 2013 properties need not be situated in India. Foreign Companies shall register charges on properties which are created or acquired by Foreign Companies whether situated in or outside India with Registrar.
The provisions of Chapter XIV shall apply mutatis mutandis to the Indian business of a foreign company as they apply to a company incorporated in India.
Section 391: Application of sections 34 to 36 and Chapter XX
The provisions of sections 34 to 36 (both inclusive) shall apply to—
(i) the issue of a prospectus by a company incorporated outside India under section 389 as they apply to prospectus issued by an Indian company;
(ii) the issue of Indian Depository Receipts by a foreign company.
The provisions of Chapter XX (Winding Up) shall apply mutatis mutandis for closure of the place of business of a foreign company in India as if it were a company incorporated in India.
Section 392: Punishment for Contravention
Without prejudice to the provisions of section 391, if a foreign company contravenes the provisions of this Chapter, the foreign company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees and in the case of a continuing offence, with an additional fine which may extend to fifty thousand rupees for every day after the first during which the contravention continues and every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty five thousand rupees but which may extend to five lakh rupees, or with both.
Provisions for raising capital
Typically, foreign companies operating in India do not access Indian capital markets. They can raise capital privately from Indian investors or banks and financial institutions in India.
In case they want to access capital publicly, they need to issue a prospectus. There are certain documents specified under Rule 11 of Companies (Registration of Foreign Companies) Rules, 2014 that shall be annexed to the prospects such as
Typically, securities issued are Indian Depository Receipts (IDRs) and not shares, because the company is incorporated offshore. Foreign company can make an issue of Indian Depository Receipts (IDRs) only when such company complies with the conditions mentioned under Rule 13 of Companies (Registration of Foreign Companies) Rules, 2014, in addition to the Chapter X of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and any directions issued by the Reserve Bank of India. IDRs have not been popular with only Standard Chartered Bank issuing them since the route has been made available to foreign companies.
A foreign company may be wound up as an unregistered company if it ceases to carry on business in India, whether the body corporate has been dissolved or otherwise ceased to exist as per the law under which it was incorporated. (Refer to section 376 of Companies Act, 2013)
Compliances under Foreign Exchange Management Act (FEMA) 1999
Income Tax Compliance
Taxation of foreign income
Taxation of foreign income entails the taxation by one country of income that its residents earn in another country. In the early stages of development every country has to depend to some extent on foreign capital and foreign technicians for the industrial development of the country. The government of India also has been extremely anxious to attract foreign capital and technical know-how. To attract these, certain tax concessions have been granted to foreign investors and technicians and the government has plans to offer still more concessions in the near future. The foreign investors may be Indian National who resides outside India and other foreign investors including corporation. A person who resides outsides India is technically known as “non-resident”. The residential status of an individual does not depend upon the nationality or domicile of that person but it depends upon the stay in India during the previous year. The case of an assessee, other than an individual, the residence depends upon the place from which its affairs are controlled and managed. If the control and management of the affairs of a foreign is, during the previous year, situated wholly in India, it shall be treated as resident in India. Where part of the control and management of the affairs of a foreign company is situated outside India, it shall be treated as non resident company.
Company defined under section 2(17) of Income Tax Act 1961
(i) any Indian company, or
(ii) anybody corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company:
Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration
Income defined under section 2(24)
Dictionary meaning of income is periodical product of one’s work, business, lands or investments (commonly expressed in terms of money); or annual or periodical receipts accruing to a person or a corporation.
Rate of Tax for Foreign Corporations:-
Income [email protected]% ( 40% + 2% EC + 1% SHEC )
Surcharge on Income Tax @ 2% in case income is in range of Rs. 1 Crore – Rs. 10 Crore.
Surcharge on Income Tax @ 5% in case income exceeds Rs. 10 Crore
Marginal Relief is available.
Foreign income means any income which is neither received or deemed to be received in India nor accrues or arises or deemed to accrue or arise in India i.e. income which accrues or arises or deemed to accrue or arise outside India and also received or deemed to be received outside India. However it includes the following:
(a) Business income where business is wholly and partly controlled in India.
(b) Profession Income where profession was setup in India.
(c) Business income where business was wholly controlled from outside India.
(d) Profession Income where profession was set up outside India.
(e) Any other income (Salary, rent and dividend).
Regarding foreign income it is always taxable in case of R/ROR but never taxable in case of NR but taxable in case of RNOR in exceptional cases i.e. when it is business income and the business is controlled in India or when it is Profession Income where profession was set up in India.
|(i) Business income where business is wholly and partly controlled in India||Included and taxable||Included and taxable||Not Included and Not taxable|
|(ii) Profession Income where profession was setup in India||Included and taxable||Included and taxable||Not Included and Not taxable|
|(iii) Business income where business was wholly controlled from outside India||Included and taxable||Not Included and Not taxable||Not Included and Not taxable|
|(iv) Profession Income where profession was set up outside India||Included and taxable||Not Included and Not taxable||Not Included and Not taxable|
|(v) Any other income (Salary, rent and dividend)||Included and taxable||Not Included and Not taxable||Not Included and Not taxable|
Residential Status of A Company
According to section 6(3) of income tax act 1961 a company is said to be resident in India in any previous year, if:
(i) It is an Indian company; or
(ii) During that year, the control and management of its affairs is situated wholly in India.
For deciding the residential a status of a company, a company is of two types
(i) Indian Company- always resident in India irrespective of control and management of its business affairs
(ii) Foreign Company – resident in India if its place of effective management (POEM) is in India. For this purpose, POEM means where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are in substance mode.
Basic Concepts of Taxing Foreign Source Income.
Foreign source income refers to income that is deemed to be generated from activities conducted in a foreign jurisdiction.
Worldwide Versus Territorial Taxation Systems
Since foreign income is generally taxed under local laws in the foreign country in which the income arises, the home country of a multinational corporation generally seeks to avoid double taxation of the foreign income by either providing a tax credit for foreign income taxes paid or exempting such income from home country taxation.
Countries frequently are described as having either a worldwide or territorial system with respect to foreign income of their resident companies. Under a worldwide approach, a country taxes resident corporations on all their income whether generated from domestic sources or from overseas activities. Under a territorial system, a country taxes its resident corporations only on income generated from activities within the country, and income generated by foreign subsidiaries generally is not taxed in the parent company’s jurisdiction of residence whether or not repatriated.
Generally, worldwide taxing jurisdictions provide tax credits for foreign income taxes, while territorial countries providing an exemption for foreign source dividends will not provide a foreign tax credit on such income.
Most countries do not follow “pure” worldwide or territorial approaches to taxing foreign income. The United States, for example, is considered to follow a worldwide approach, but generally does not tax income of foreign subsidiaries until repatriated. This is referred to as a “deferral” regime, under which tax is deferred until the income is repatriated to the parent company’s jurisdiction.
Overview Of Foreign Source Income
Corporations generate income from a range of activities and sources. Broadly, income can be classified as active or passive.
Active income normally arises from the primary business activity of the company and involves more than investing in an asset that generates a return. It often involves a continuous process of designing, producing and selling a good or service to ultimate customers, whether related or unrelated to the company.
Passive income normally is generated by the corporation through acquiring and holding the asset with no additional activity, again regardless of whether the income is received from a related or unrelated party. While the precise definition of passive income differs between countries, interest income, royalty payments from owning intellectual property, dividends from holding shares, and rental income often are classified as passive income. Capital gains realized from the sale of assets that generate passive income (e.g., shares, loans, intellectual property, or buildings) may be considered passive income.
Taxation Of Foreign Income In India
Companies resident in India are subject to Indian tax on their income, generally on an accrual basis, from all sources inside or outside India and whether or not remitted to India.
The income of all foreign branches is taxed in India as part of the Indian company’s worldwide taxable income. Similarly, the losses of all foreign branches are deductible in computing the worldwide taxable income. In computing the income or loss of a foreign branch, a deduction is generally allowed for all expenses incurred wholly and exclusively for the purpose of the business that are not of a capital or personal nature. Income is taxed whether or not repatriated. If the branch income incurs tax in the foreign country, credit is given in India to the extent of the lesser of the foreign tax paid or the Indian tax on the foreign income, either unilaterally or under treaty.
Foreign subsidiary income
Dividends of foreign subsidiaries when declared (and interim dividends when they are made unconditionally available) are included in the worldwide taxable income of the Indian company. Profits not distributed by the foreign subsidiary are not taxed in the hands of the Indian company. Treaties often provide for lower foreign withholding tax. No credit is given for underlying tax paid by the foreign subsidiary.
A distribution to an Indian company by a foreign subsidiary upon its liquidation is treated as dividends to the extent it is attributable to accumulated profits up to the date of liquidation. The balance is treated as a return of capital and taken into account in determining the capital gain or loss on the shares held.
Interest from foreign subsidiaries is fully taxable in the hands of the Indian company, with credit allowed for foreign tax withheld or paid, up to the Indian tax on the interest.
Royalties and fees for technical or professional services
Indian companies and other residents are allowed a deduction equal to 50 percent of the royalties and fees for technical and professional services received in convertible foreign exchange from foreign governments or any foreign enterprise for granting the use of patents, providing technical or professional services abroad, etc. The excess and any other royalties and fees for technical services are taxable in full, subject to credit for the foreign tax withheld or paid up to a maximum of the Indian tax on the royalty or fees.
Foreign exchange gains and losses
Profits and losses of foreign branches, royalties and fees for technical services, and interest (other than interest on securities) arising in foreign currency are translated for inclusion in the worldwide taxable income of the Indian company at the relevant telegraphic transfer buying rate. Dividends from foreign subsidiaries, capital gains and interest on securities are also translated the relevant telegraphic transfer buying rate. Revenue gains or losses in exchange are included or deducted in computing the worldwide taxable income.
Effects Of Taxing Foreign Income – International Scenario
The taxation of foreign income and the tax laws of other countries have the potential to influence a wide range of corporate and individual behavior, including, most directly, the location and scope of international business activity. Studies of behavioral responses to international tax rules find that multinational firms invest less in high-tax countries than they do in otherwise-similar low-tax countries.
There is extensive evidence that firms arrange financial flows and intra firm sales to reallocate taxable income from high-tax countries to low-tax countries. This reallocation is commonly accomplished by concentrating corporate borrowing, and therefore interest deductions, in high-tax countries (Desai, Foley and Hines, 2003) and by adjusting prices paid for intra firm financial transactions and sales of goods and services to minimize income reported in high-tax countries. As a consequence, multinational firms report significantly higher profit rates in low-tax countries than in high-tax countries, and the ability to reallocate taxable income only increases the attractiveness of investing in low-tax countries.
Taxation of foreign income, together with provision of foreign tax credits, dampens incentives to earn income in low-tax countries, since lower foreign tax payments reduce available foreign tax credits and thereby create greater home country tax obligations. Foreign investment in the United States is consistent with these incentives, in that investors from countries that exempt foreign income from taxation concentrate their investments more heavily in low-tax states than do investors from countries that tax foreign income. The taxation of foreign income restricts the attractiveness of investment in low-tax countries to situations either in which ample foreign tax credits are available, or in which investors can profitably defer home-country taxation.
Most countries subject some types of foreign income to taxation. Since this income is also typically taxed by foreign countries in which it is earned, there is considerable scope for ruinous double taxation.
Double taxation occurs when an individual / company is required to pay two or more taxes for the same income, asset, or financial transaction in different countries. Double taxation occurs mainly due to overlapping tax laws and regulations of the countries where an individual / company operates his business.
When an Indian businessman makes a profit or some other type of taxable gain in another country, he may be in a situation where he will be required to pay a tax on that income in India, as well as in the country in which the income was made! To protect Indian tax payers from this unfair practice, the Indian government has entered into tax treaties, known as Double Taxation Avoidance Agreement (DTAA) with 65 countries, including U.S.A, Canada, U.K, Japan, Germany, Australia, Singapore, U.A.E, and Switzerland. DTAA ensures that India’s trade and services with other countries; as well the movement of capital are not adversely affected.
The object of a Double Taxation Avoidance Agreement is to provide for the tax claims of two governments both legitimately interested in taxing a particular source of income either by assigning to one of the two the whole claim or else by prescribing the basis on which tax claims is to be shared between them.
Capital gain tax rates
Under Section 90 and 91 of the Income Tax Act, relief against double taxation is provided in two ways:
Under Section 91, the Indian government can relieve an individual from double taxation irrespective of whether there is a DTAA between India and the other country concerned. Unilateral relief may be offered to a tax payer if:
* The person or company has been a resident of India in the previous year.
* The same income must be accrued to and received by the tax payer outside India in the previous year.
* The income should have been taxed in India and in another country with which there is no tax treaty.
* The person or company has paid tax under the laws of the foreign country in question.
Under Section 90, the Indian government offers protection against double taxation by entering into a DTAA with another country, based on mutually acceptable terms. Such relief may be offered under two methods:
* Exemption method – This ensures complete avoidance of tax overlapping.
* Tax credit method – This provides relief by giving the tax payer a deduction from the tax payable in India.
Indian Policy With Respect To Double Taxation Avoidance Agreements
The policy adopted by the Indian government in regard to double taxation treaties may be worded as follows:
· Trading with India should be relieved of Indian taxes considerably so as to promote its economic and industrial development.
· There should be co-ordination of Indian taxation with foreign tax legislation for Indian as well as foreign companies trading with India.
· The agreements are intended to permit the Indian authorities to co-operate with the foreign tax administration.
· Tax treaties are a good compromise between taxation at source and taxation in the country of residence.
India primarily follows the UN model convention and one therefore finds the tax-sparing and credit methods for elimination of double taxation in most Indian treaties as well as more source-based taxation in respect of the articles on ‘royalties’ and ‘other income’ than in the OECD model convention.
In the recent landmark case of Vodafone v. IT department tax British Telecom giant Vodafone paid Hong Kong based Hutchison International over USD 11 billion to buy Hutchison’s 67% stake in Indian telecom company Hutchison Essar. The transaction was done through the sale and purchase of shares of CGP, a Mauritius based company that owned that 67% stake in Hutch Essar. Since the deal was offshore, neither party thought it was taxable in India. But the tax department disagreed. It claimed that capital gains tax most people paid on the transaction and that tax should have been deducted by Vodafone whilst paying Hutch. The matter went to court and was heard over by the court. Vodafone argued that the deal was not taxable in India as the funds were paid outside India for the purchase of shares in an offshore company that the tax liability should be borne by Hutch; that Vodafone was not liable to withhold tax as the withholding rule in India applied only to Indian residence that the recent amendment to the IT act of imposing a retrospective interest penalty for withholding lapses was unconstitutional. However, this far reaching judgement has reflected upon the effective tax enforcement system of India. Moreover, taxability of foreign income of the company has been adequately addressed by the Indian law.
Taxation of foreign income entails the taxation by one country of income that its residents earn in another country. India limits the foreign tax credit to the lesser of foreign tax paid or local tax payable. The government of India also has been extremely anxious to attract foreign capital. There is extensive empirical evidence that the taxation of foreign income influences the magnitude of foreign investment, and the tax avoidance activities of investors. The simple logic implies that governments acting on their own, without regard to world welfare, should want to tax the foreign incomes of their resident companies while permitting only deductions for foreign taxes paid. Such taxation satisfies what is known as national neutrality. Neutral taxation of foreign income entails considerations not only of the volume and location of investment, but also the effects of taxation on capital ownership. From the standpoint of the home country, foreign taxes are simply costs of doing business abroad, and therefore warrant the same treatment as other costs.
Other Compliances to be made by foreign entities in India
i. Goods and Service tax.
ii. Employees Provident Fund
iii. Employees State Insurance etc.
Source: Companies Act, 2013 and rules made thereunder, Foreign Exchange Management Act, 1999 & rules made thereunder, RBI Guidelines and Circulars and Income Tax Act, 1961 and Rules made thereunder.
Disclaimer: This article contains interpretation of the Act, Rules and personal views of the author are based on such interpretation. Readers are advised either to cross check the views of the author with the Act or seek the expert’s views if they want to rely on contents of this article.
About Author: The above has been compiled by CA Parvesh Kumar, a Member of ICAI. His areas of interest include Foreign Compliances by Corporations, Corporate and Allied Laws, FEMA, Income Tax etc. For any queries or suggestions, he can be approached at [email protected], Contact No- +91-80542-35830.