- January 22, 2019
- Posted by: Numbro
- Category: FEMA
Introduction of Branch Office
A Branch Office (“BO”) is one of the entry vehicles of a foreign company to enter India and understand the Indian market subject to certain conditions where RBI guidelines need to be adhered.
Office is setup by a foreign company in India to carry out the BRANCH activity for its business. The foreign company can have revenue from the Indian Branch office, only from the activity allowed by the Reserve Bank of India; it has to meet all its expenses of Indian office through remittances from the Head office or through the revenue generated from the Indian operation permitted by the Reserve Bank of India.
Key features of Branch Office
- A branch office requires an approval from the Reserve Bank of India (RBI).
- It is suitable for a foreign company to test and understand the Indian market.
- Branch office can carry additional business activities only with the prior approval from the Reserve Bank of India.
- The Name of Indian Branch office shall be same as that of the parent company.
- The Governing Body for granting Branch office governance is Reserve Bank of India.
- It is suitable for foreign companies looking to setup a temporary office in India and not interested or not planning to have long term plans for the Indian operations.
- All the expenses of the Branch office are met by the head office, if it does not have the revenue from Indian operations.
Pre-Requisites for a Foreign Company to Have Branch Office in India
- Profit making track record during the immediately preceding five financial years in the home country.
- Net Worth of not less than USD 100,000 or its equivalent [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.
- Proprietary concerns set up abroad are not allowed to establish Branch Offices in India.
Permitted activity of Branch Office in India
Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India and undertake the following activities in India;
- Export/Import of goods.
- Rendering professional or consultancy services.
- Carrying out research work, in which the parent company is engaged.
- Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
- Representing the parent company in India and acting as buying/selling agent in India.
- Rendering services in Information Technology and development of software in India.
- technical support to the products supplied by parent/group companies.
- Foreign Airline/shipping Company.
Prohibited activities by the Branch
Companies incorporated outside India prohibited doing following activities through branch office in India.
- Retail trading activities of any nature is not allowed for a Branch Office in India
- A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
- An entity may file a request for undertaking activities in addition to what has been permitted initially by the RBI. Such a request may be submitted through the designated AD Category -I bank to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai, justifying the need with comments of the designated AD Category – I bank.
Introduction of Project Office
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
- the project is funded directly by inward remittance from abroad; or
- the project is funded by a bilateral or multilateral International Financing Agency; or
- the project has been cleared by an appropriate authority; or
- 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.
Key Features of Project Office
- Foreign Companies can set up temporary Project/Site Offices in India to execute specific projects.
- Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.
- Like a branch office, a project office is also subject to income tax (subject to Double Taxation Avoidance Agreement).
- Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
- 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.
- Project offices have general permission to carry out permitted / incidental activities from lease property subject to lease period not exceeding five years.
Transfer of assets to be allowed by AD banks only when the foreign entity intends to close their PO operations in India.
Introduction of Liaison Office
‘Liaison Office‘ means a place of business to act as a channel of communication between the principal place of business or Head Office or 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. No person resident outside India shall without prior approval of the Reserve Bank open in India a liaison office except as laid down in these Regulations.
Pre-requisites for a foreign company to have Liaison office in India
- A profit-making track record during the immediately preceding three financial years in the home country &
- Net worth of not less than USD 50,000 or its equivalent.
Permitted activity of liaison office in India
Permitted activities for a liaison office in India of a person resident outside India
- Representing the parent company / group companies in India.
- Promoting export / import from / to India.
- Promoting technical/ financial collaborations between parent / group companies and companies in India.
- Acting as a communication channel between the parent company and Indian companies.
Key Features of Liaison Office
- A liaison office of a foreign company in India is usually not considered a PE on the ground that it is set up to carry out preparatory or auxiliary activities (which does not constitute business activities).
- The name of Indian liaison office shall be same as parent company.
- The governing body for the Liaison office License is Reserve Bank of India.
- It is suitable for foreign Companies looking to setup a temporary office in India to liaison its existing business with Indian clients.
- The Liaison office does not have any ownership, it is just extension of the exiting company in the foreign country.
- All the expenses of the Liaison office are met by the head office, hence the funds shall be received from head office account only.
- The License for the Liaison office is given for three years and shall be renewed every 3 years.