For foreign companies that plan to set up their business operations in India, Liaison Office (LO) is the best option. The aim of setting up a Liaison Office is to explore possible business opportunities in another country by gathering relevant business information. Apart from this, starting a Liaison Office facilitates exports and helps a foreign company to have their presence in another country from worldwide business outlook.
A Liaison Office is also known as a Representative Office. A liaison office can undertake only liaison activities in India. In other words, it can act as a medium of communication between Head Office (which is outside India) and parties in India.
A wholly owned subsidiary can belong to the same industry as that of the parent company or it can belong to a different industry altogether.
Definition of Liaison Office as per FEMA
‘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.
A Liaison Office is set up by a foreign company to undertake liaison activities in India. Setting up a Liaison Office in India helps companies to tap the existing business potential in India by gathering information about possible market opportunities and framing appropriate business strategies.
It acts as a channel of communication between Head Office abroad and parties in India. In other words, a liaison office acts as a marketing channel to provide information about the foreign company and its products to the prospective customers in India.
A person resident outside India or a foreign company abroad is permitted by the Reserve Bank of India to establish a liaison office in India. However, it may undertake or carry on only those business activities that are specified by the law. These activities are:
- Acting as a marketing channel between the Head office abroad and parties in India.
- Representing the foreign company (parent or Group Company) in India by providing information about the products to Indian customers.
A person resident outside India or a foreign company abroad is permitted by the Reserve Bank of India to establish a liaison office in India, provided it meets the following criterion:
- Net worth equal to USD 50,000 or more., and
- Profitable financial track record of the immediately preceding three years in the original country of registration.
However, if a person resident outside India or a foreign company abroad are not financially sound and are subsidiaries of other companies, then, in that case, it may furnish a Letter of Comfort from the parent company. In such cases, the parent company has to satisfy the prescribed criterion for net worth and profit.
In case where the foreign company is not able to open the Liaison office within 6 months from the date of approval letter due to reasons beyond its control, then the AD Category-I bank may consider granting an extension of time for a further period of 6 months for setting up the office with the prior approval of RBI.
As annual compliance, a Liaison Office is required to furnish an annual activity certificate to the AD Category-1 Bank, Directorate General of Income Tax, concerned Registrar of Companies and Director General of Police, on or before 30th September of every financial year.