India has been growing at a rapid pace to transform into one of the largest and fastest growing market, with having access to some of the best human resources in the world.
There are many options through which one can start business in India.
Setting up Subsidiary or Liaison Office in India can be one of the option for the foreign entities to undertake activities in India. Let’s have a comparative view on both the options:
Comparison of Subsidiary Company and Liaison office
| Subsidiary Company | Liaison Office |
| ‘Subsidiary Company’ implies the company that is controlled by its holding company.
|
‘Liaison Office’ means a place of business to act as a channel of communication between the principal place of business or Head Office. |
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| Particulars | Subsidiary Company | Liaison office |
| PURPOSE BEHIND REGISTRATION
|
It is a corporate entity that can do all activities like manufacturing, trading, provide service etc.
Therefore, if the intention of Foreign Company is to engage in any of the activities in India, it opts for Subsidiary Company. |
Undertakes only liaison activities in India and act as a channel of communication between its head office outside India and Indian parties. It cannot undertake any commercial activities in India.
Therefore, when the purpose of a foreign company is to collect information and run its existing business from India without indulging in full-fledged commercial activity, it opts for Liaison office. |
| CONSTITUTION | 1. Company form of organization
2. Separate legal entity |
1. An extension of the Head Office
2. It is a simple form of structure |
| APPROVALS REQUIRED
|
Approval from Ministry of Corporate Affairs is required | Prior approval from Reserve Bank of India (RBI) and Ministry of Corporate Affairs is required. |
| PERMITTED ACTIVITIES
|
‘Subsidiary Company’ can undertake any activities stipulated in the
Object Clause of the Memorandum of Association of Indian Company.
|
Can undertake only Liaison Activities:
|
| TYPICAL TERMS OF APPROVAL | The conditions for incorporation will be different for Private & Public Limited Companies. | 1. Not to undertake any activity of a trading, commercial or industrial nature.
2. No commission /fees shall be charged or any other remuneration received/ earned by the office in India for the liaison activities. 3. The entire expenses of the office will be met exclusively out of the funds received from head office through normal banking channels. |
| PROFITABILITY CRITERIA FOR SET UP
|
There is no such requirement. | ♦ Net worth: The Net Worth of foreign head office must be above $ 50,000.
♦ Profit making Track Record: The Foreign Parent Company should have profitability track record immediately preceding 3 financial years. |
| TRANSFER PRICING | Applicable | Not Applicable |
| REPORTS TO | Holding Company | Head Office |
| OWNERSHIP INTEREST | The parent organization has more than 50% ownership interest according to its Shareholding in the subsidiary. | The parent organization has 100% ownership interest in the Liaison office |
| RENEWAL OF REGISTRATION | A company can operate till its closure on Going Concern basis. Hence, no renewal required. | Liaison Office License is available for 3 years and can be renewed further. |
| MANAGEMENT | Managed by minimum of 2 directors and one of whom shall be an Indian Resident Director. | Managed by Authorized representative of parent company in India. |
| PERMITTED INCOMES
|
The income of Subsidiary Company will be generated from business activities.
|
The entire expenses of LO will be met from the funds received from head office through normal banking channels.
|
| SUBMISSION OF ANNUAL ACTIVITY CERTIFICATE WITH RBI
|
Not Applicable | Required to be submitted:
♦ On or before September 30: The audited financial statements including receipt and payment account, in case the annual accounts of the office are finalized with reference to March 31, or ♦ Within 6 months from the close of the Balance Sheets: The AAC along with the audited financial statements, in case the annual accounts of the office are finalized with reference to a date other than March 31, |
| PRIOR APPROVAL FROM RBI | No | Yes |
| MAINTENANCE OF PROFIT MAKING TRACK RECORD | No | Yes |
| RESTRICTIONS ON PERMISSIBLE ACTIVITIES | No | Yes |
| CONSIDERING SECTORAL LIMITS | Yes | Yes |
| EXTENSION OF RENEWAL VALIDITY | No | Yes |
| PAYMENT OF DIVIDEND | Yes | No |
| TAXABILITY OF INCOME | Yes | No |
| SUBMISSION OF ANNUAL CERTIFICATE WITH RBI | No | Yes |
| CONDUCTING BOARD MEETINGS/ REMUNERATION TO DIRECTORS | Yes | No |
Pros and Cons of SUBSIDIARY COMPANY
| Pros | Cons |
| 1. Limited Liability. | 1. Compulsory to have an Indian Resident Director during its entire tenure. |
| 2. Lower Tax Rate. | 2. Raising ECBs are subject to RBI Approval. |
| 3. Can freely Expand its activities by altering MOA. | 3. Requirements to conduct mandatory Board Meetings during the Financial year. |
| 4. Liability of Parent Company is limited to the extent of its shareholding. | 4. Taxable Income, Transfer Pricing applicability. |
| 5. At the will of the company, it may decide to shut down its operation. |
Pros and Cons of LIAISON COMPANY
| Pros | Cons |
| 1. Not Subject to taxation. | 1. Unlimited Liability. |
| 2. Not required to comply with various provisions of Companies Act 2013. | 2. Requires reporting of Global accounts before Indian Authorities. |
| 3. No Income Tax and IT Return as there is no Income. | 3. The Assets of the parent company are at risk of attachment for the expenses incurred by LO. |
| 4. Easy to shut down. | 4. Indian Income Tax authorities also try to hold Indian LO as PE of Foreign Company. |
About the Author
Author is Divya Goel, ACS working as Assistant Manager- Company Secretary with Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing their business in India.
Author Bio
