The Foreign Exchange Management Act (FEMA) defines liaison office as ‘a place of business to act as a channel of communication between the principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial / trading / industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel’.
Foreign investors or Foreign companies can open a liaison office in India for promoting and facilitating the parent company business activities and can act as best communication channel between the foreign parent company and Indian company. With the liaison office, the foreign parent company will get help in entering into the Indian market and exploring and studying the Indian market situation for their business growth. Foreign corporations are permitted to open liaison/representative offices in India (subject to obtaining specific approval from the RBI), to undertake liaison activities on their behalf. These offices act as a communication channel between the Head Office of foreign corporations and parties in India.
RBI master circular
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 the principle business of the foreign entity falls in sector accepting 1000% FDI, is permissible in the automatic route.;
Government Route – Where principle business of the foreign entity falls under the sectors where 100 percent 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 application by a foreign entity is to filed in Form FNC-1 with the following attachments with AD Category-I Bank:
a) A notarized and apostilled copy of the Certificate of Incorporation, memorandum, and Article of Association and copy of last three years audited balance sheet of Parent Company. Translated copy is also required of all the documents.
b) Complete Address details of the parent company outside India
c) An brief on business activity to be done at the liaison office.
d) Bank details of the parent company
e) A Certificate from Banker of the parent company stating the commencement date and no default statement as per the prescribed format.
f) NOC from state police authorities (applicable only specified countries)
g) Letter of authorization for authorizing a resident representative to look after operations of Liaison Office.
The approval process generally takes 20 to 24 week and permission to operate a liaison office is granted for a period of three years, which can be extended at a later date. The liaison offices established with the reserve bank approval will be allotted a unique identification number. It shall also obtain a Permanent account number from the income tax authorities for setting up an office in India.
Applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company as per Annex -2, 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 the 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.
Foreign Exchange Management Act, 1999
All new entities setting up LO/BO shall submit a report containing information, as per the 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 an office in India
The liaison office in each year must file an Annual Activity Certificate (AAC), prepared by a chartered accountant, to the RBI verifying the office’s activities are within its charter. An AAC should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year. If an LO wants to open more than one bank account in India, it has to obtain prior permission of the RBI through its AD Category – I bank justifying the reason for the additional account.
Under Companies Act, 2013
Liaison office must register with the Registrar of Companies within thirty days of setting up of establishment by filing the form prescribed by the Ministry of Corporate Affairs (MCA) Along with the following documents:
Income tax compliance
A liaison office of the foreign company can not engage in any commercial activities, and the parent company shall meet all the expenses of the liaison office. A liaison office is a foreign company and the Indian government taxes the profits of such entities when it carries out the transactions which amount to commercial activities through a permanent establishment (PE) at higher rates. As of now the tax on the profit of the foreign company is 40% in contrast to the tax rate @ 22% on Indian company.
The income tax on a Liaison Office can be imposed by Indian tax authorities when it is established that the transaction amounts to commercial operation through PE.
A Liaison Office can undertake the following activities in India: