Forming an Entity in India

India has made its mark on the world map with the rapidly rising growth rate, notable human resources, technology advancement and the government supporting and encouraging the ease of business. India is expected to takeover Britain in this year to become the world’s fifth largest economy. It is only natural for the global companies to want a piece of pie.

There are many entry modes by which a foreign company can establish an entity in India. The choice of business form entirely depends upon the end goals to be achieved. There are majorly 3 options for foreign companies entering into India:

1. Establish a Liaison office (LO)

2. Establishing a Branch office (BO);

3. Establishing a Wholly owned subsidiary (WOS) / Joint Ventures (JV).

The parent company can also form a Limited Liability Partnership (LLP). However, the Foreign Direct Investment (FDI) policy is very restrictive when it comes to foreign investment in LLP and especially repatriation of monies back to the parent company. Hence it is not a preferred option.

We shall discuss the above 3 entities as modes of investment in India, its advantages and disadvantages in detail below.

Liaison Office (LO), Branch Office (BO) and Wholly Owned Subsidiary (WOS) Company

Basis Liaison Office Branch Office (BO) Wholly owned subsidiary(WOS) / Joint Ventures (JV)
Meaning 1. Liaison Office acts as representative office and acts as a channel of communication between the parent company (Head Office) and parties in India.

2. It is not allowed to undertake any commercial activity – directly or indirectly and cannot thus earn/accrue income in India.

3. It is an extension of Head-office

4. A simple form of structure having no separate legal standing of its own.

1. Companies incorporated outside India engaged in manufacturing or trading activities can setup a BO in India with specific approval of Reserve Bank of India (RBI).

2. It is an extension of Head-office with a right to accrue income.

3. A simple form of structure having no separate legal standing of its own.

4. BO are generally engaged in the activity of its parent company.

An incorporated entity formed and registered under Companies Act, 2013. It is generally a private limited company for a closely held shareholding.

It is distinct and legal entity apart from its shareholders.

Permitted Activities 1. Representing parent company / group companies in India.

2. Promoting export / import from / to India.

3. Promoting technical/ financial collaborations between parent / group companies and companies in India.

4. Acting as a communication channel between the parent company and Indian companies.

1. Export/import of goods.

2. Rendering professional or consultancy services.

3. Carrying out research work, in areas in which the parent company is engaged.

4. Promoting technical or financial collaborations between parent / group companies and companies in India.

5. Representing the parent company in India and acting as buying/ selling agent in India.

6. Rendering services in Information Technology and development of software in India.

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

8. Foreign airline/shipping company.

Any activities as stipulated in the “Object Clause” of the Memorandum of Association of the Indian Company subject to Indian laws and regulations.
Time Limit for setup It generally takes 3-4 months to setup a BO, as permissions from RBI take time. It generally takes 3-4 months to setup a BO, as permissions from RBI take time. Around 1-2 months.
Criteria for set-up 1. Parent Company should have a profit making track record during the immediately preceding three financial years in the home country.

2. Net Worth of the Parent Company not less than USD 50,000 or its equivalent.

3. An authorized Indian person to represent before RBI and ROC.

1. Parent Company should have a profit making track record during the immediately preceding five financial years in the home country.

2. Net Worth of the Parent Company not less than USD 100,000 or its equivalent.

3. An authorized Indian person to represent before RBI and ROC.

1. A private limited company to be incorporated requires minimum 2 shareholders and 2 directors. The minimum capital requirement has been done away with.

No requirement of track record of parent company.

2. The company at the time of incorporation and during the entire tenure of its existence has to compulsorily have an Indian executive director on board.

Time Limit of approval Normally 3 years from the date of approval. On completion of the time period, application for extension can be made. Normally 3 years from the date of approval. On completion of the time period, application for extension can be made. At will – till the company decides to shut down its operations.
Liabilities of the entity The liability of LO is unlimited. The assets of parent company are at risk of attachment for the expenses incurred by the LO. The liability of the Branch is unlimited. The assets of the parent company are at risk of attachment in case the liabilities of the branch exceeds its assets.

 

The liability of the Parent company is limited to the extent of its shareholding in the WOS/JV.

The assets of the parent  company are not subject to any attachments

Registrations required: The following registrations (post formation) will be required:

(a) PAN / TAN;

(b) Shops & Establishment;

(c) Import Export Code;

(d) Registrar of Company (ROC) registration;

(e) Profession Tax

The following registrations (post formation) will be required:

(a) PAN / TAN;

(b) GST;

(c) Shops & Establishment;

(d) Import Export Code;

(e) Registrar of Company (RO(C) registration;

(f) Profession Tax

The following registrations (post incorporation) will be required:

(a) PAN / TAN;

(b) GST;

(c) Shops & Establishment;

(d) Import Export Code;

(e) Professional Tax

Permitted Incomes / Receipts 1. Entire expenses of LO will be met from the funds received from head office through normal banking channels.

2. No Income accrual in India

3. No Borrowings in India.

1. Entire expenses of BO will be met either from income generated in India or from the funds received from head office through normal banking channels.

2. No Borrowings in India.

1. All Incomes arising out of business in India.

2. Borrowings allowed from financial institutions in India.

3. External Commercial Borrowings (ECB) are subject to RBI approval.

Annual Compliance (a) Statutory Audit by Chartered Accountant;

(b) Annual filings of audited accounts of LO, Global accounts with ROC;

(c) Annual submission of Activity Certificate with RBI and AD Bank;

(d) Filing of quarterly TDS Returns;

(e) Filing of audited accounts with Directorate of Income Tax, New Delhi.

(f) Filing of Form 49C with the Income Tax department (no IT Return as there is no income).

(a) Statutory Audit by Chartered Accountant;

(b) Tax Audit in case turnover exceeds INR 1 cr;

(c) Annual filings of audited accounts of BO, Global accounts with ROC;

(d) Annual submission of Activity Certificate with RBI and AD Bank;

(e) Filing of quarterly TDS Returns;

(f) Filing of monthly, quarterly and annual GST Returns and GST Audit.

(g) Filing of Annual Income Tax Return.

(a) Statutory Audit by Chartered Accountant;

(b) Tax Audit in case turnover exceeds INR 1 cr;

(c) Annual filing of accounts and Annual Return with ROC;

(d) Annual compliance with RBI in case of shares allotted to foreign persons;

(e) Filing of quarterly TDS Returns;

(f) Filing of monthly, quarterly and annual GST Returns and GST Audit.

(g) Filing of Annual Income Tax Return.

(h) Conducting of Board meetings – atleast 1 meeting per quarter. 1 Board meeting with atleast 2 directors physically present together for approval of accounts.

(i) Minimum 1 shareholder meeting annually for approval of accounts and appointment of auditor.

Taxability No Income tax as there is no Income. BO is treated as a foreign company and taxed as under:

41.60 %  (income < 1cr);

42.43% (income < 10cr);

43.68% (income > 10cr).

If the annual turnover is less than 250 cr:

26.00 %  (income < 1cr);

27.82% (income < 10cr);

29.12% (income > 10cr).

If the annual turnover exceeds 250 cr:

31.20 %  (income < 1cr);

33.38% (income < 10cr);

34.94% (income > 10cr).

Dividend to Parent Company No Dividend as there is no income. Divided paid to the parent company is tax free. Dividend can be paid to parent company after payment of Dividend Distribution Tax (DDT) @ 20.56%.

Thus total cost of repatriating profits by way of dividend is 42.66% (for companies having turnover less than 250 cr and earning income less than 10cr) compared to 42.43% for BO.

Repatriation of Funds to Parent Company Only on closure of LO. Profits can be freely repatriated to Parent company subject to payment of applicable taxes in India 1. By way of Dividend on payment of DDT;

2. By way of Royalty / Fees for Technical fees;

3. By way of Management fee;

4. Related party transactions (point 2 & 3 or any other transactions) are subject to Transfer Pricing Regulations.

Closure of Entity LO need not go through winding up process for closure. It only needs to file Closure application with the RBI A BO need not go through winding up process for closure. It only needs to file Closure application with the RBI Winding up process for a WOS/JV can be quite lengthy with minimum from 6-8 months and more depending on complexity and type of assets it owns.

However for a redundant WOS/JV (not having any assets / liabilities and not operating business since 2 years) can be simply closed down by filing a Strike-off application.

Advantages 1. Not a separate legal entity hence cost of compliance is less.

2. Ideal if no income accrual in India.

3. Easy to shut down.

1. Not a separate legal entity hence cost of compliance is less.

2. Easy repatriation of funds.

3. No Tax on dividends;

4. Easy to shut down.

1. Separate legal entity for Indian operations;

2. Limited Liability;

3. Lower tax rate;

4. Can freely borrow funds from Indian financial institutions.

External Commercial Borrowings are subject to RBI approval.

5. Future collaboration with Indian investor / partner is possible only for Indian operations.

6. Freely expand its activities by altering its Memorandum of Association.

Disadvantages 1. Unlimited liability;

2. Requires reporting of Global accounts before Indian authorities;

3. Indian Income tax authorities also try to hold Indian LO as “PE” of foreign company.

1. Unlimited liability;

2. Requires reporting of Global accounts before Indian authorities;

3. May lead to being treated as “PE”.

4. Higher tax rate;

5. Future collaboration with Indian investor / partner is not possible.

6. Cannot borrow funds from Indian financial institutions.

1. Attracts DDT on payment of Dividend

2. Cost of compliance is high as it is a separate legal entity and reporting is required before various authorities.

Disclaimer:

  • The above note is subject to change in taxation, FEMA , Corporate and other laws, rules and regulations
  • This note does not form any kind of opinion from our end and before taking any action based on above it is recommended to take consultation from the experts in the subject.

(For any query or question or suggestions Author can be reached at Email: dhruv@mdcoindia.com or Mob: +91 96197 96967

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Qualification: CA in Practice
Company: N/A
Location: Mumbai, Maharashtra, IN
Member Since: 09 Feb 2019 | Total Posts: 2
Virtual CFO, Cross Border Taxation, Transaction Advisory, Business Advisor View Full Profile

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