Sponsored Links
08/15/2018 20 plazas to come up for Brand Khadi...Read More
08/15/2018 Ambani’s new content coup...Read More
08/15/2018 Bajaj Auto unveils its first car, the RE60...Read More
08/15/2018 Godrej Interio partners with Linet for healthcare biz...Read More
08/15/2018 Honeywell Turbo Tech to expand turbocharger portfolio in India...Read More
::News
Polls

FDI in Retail will affects farmer?

View Results

Loading ... Loading ...
Choice of vehicle
Depending upon its business needs, a foreign company can choose between setting-up a Liaison Office (LO), a Branch Office (BO) or a Project Office (PO) instead of incorporating/investing in an Indian company under FDI Guidelines.

Eligibility criteria for foreign companies wanting to set-up Liaison Office/Branch Office in India

A Foreign Company can establish a LO or a BO in India with prior approval from the RBI if it is engaged in a sector where 100 precent FDI is permitted under the Automatic Route as per the FDI policy. In other cases and that of Non Governmental Organisations (NGO), Not for Profit Organization (NPO), Government Bodies, Departments are considered and approved by the RBI with prior permission of the Government. The application needs to be filed with the RBI through an Authorized Dealer (Banker).

The LO/BO approval of RBI is location specific and subject to guidelines issued in this regard. The RBI also monitors its activities through authorized dealers (Bankers) on an ongoing basis primarily by seeking an Annual Activity certificate for the LO’s operation from its Auditors in India. Such Certificate now is also required to be cofiled with the Income Tax Authorities.

There exist eligibility criteria and procedural guidelines for establishment of LOs by foreign entities in India. The foreign entity needs to have a successful profit making track record during immediately preceding 3 years in the home country. Further, a net worth of not less than USD 50,000 is also required.

The foreign company proposing to set-up a BO in India needs to have a successful profit making track record during immediately preceding 5 years in the home country. Further, a net worth of not less than USD 100,000 is also required.

Foreign companies that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company in the prescribed format subject to the parent company satisfying the eligibility criteria.

Post set-up in India, various registrations and compliance obligations entail on the LO/BO including obtaining a Unique Identification Number from the RBI. In view of sizable paperwork and time frame obligations, the entire process needs to be carefully planned and implemented.

Liaison Office

A LO is permitted to act as a channel of communication or carry out a liaison role between the head office or group companies and the parties in India and is not permitted to undertake any commercial or trading or industrial activity, directly or indirectly.

The LO is obliged to maintain itself and meet its expenditure through inward remittances from the Head Office. An LO is generally approved only for specified period which is subject to renewal and in certain sectors, the LO is obliged to upgrade into a Company (wholly owned subsidiary or joint venture) post the initial approval period.

The Bankers/Authorized Dealers are now authorised to extend the validity period of liaison offices of foreign entities and also deal with closure application of such liaison offices in India.

The LO of Foreign banks obtaining prior approval from RBI under the Banking Regulation do not need separate RBI approval under the foreign exchange regulations. Similarly foreign insurance companies are permitted to set-up LO without RBI approval subject to necessary approval from the Insurance Regulatory and Development Authority of India.

Branch Office

A foreign company is permitted to establish a BO in India to undertake prescribed commercial activities and is generally suitable for manufacturing and trading companies wanting to market/sell their products in India or IT Enabled/Consultancy Firms wanting to render services in India.

The activities permitted for a BO does not include manufacturing (unless set up in SEZ for which set up and operation is governed under that separate regulations) and domestic/retail trading.

No prior approval is required to set up a BO in SEZ to undertake manufacturing or service activity provided 100 percent FDI under Automatic Route is allowed in this sector and subject to other conditions.

The BO of Foreign banks obtaining prior approval from RBI under the Banking Regulation do not need separate RBI approval under the foreign exchange regulations.

The Bankers/Authorized dealers are now authorized to deal with the closure application of such Branch office of foreign company in India.

Project office

Foreign companies undertaking projects in India and satisfying prescribed requirements can set up PO for the purpose of executing the project.

The requirement of obtaining prior RBI approval for PO that meets specified conditions has been dispensed with and only post factor filings are obligated. Similarly it can be wind up without any specific approval by relevant filings through Bankers.

A PO can only undertake activities relating to and incidental to the execution of specific projects in India and has to wind up post the completion of the Project.

A PO can is permitted to open, hold and maintain one or more foreign currency accounts subject to prescribed conditions / parameters. A PO is allowed to remit intermittent surplus to its Head office.

Local Indian subsidiary or joint venture company

Subject to FDI Guidelines and Foreign Exchange Regulations discussed in the above chapters, a foreign company can set up its own wholly owned Indian Subsidiary or Joint Venture Company with an Indian or Foreign Partner.

Subsidiary or a Joint venture company can be formed either as a Private limited company or a Public limited company. A private limited company is obliged to restrict the right of its members to transfer the shares, can have only 50 shareholders and is not allowed to have access to deposits from public directly. It is also subject to less corporate compliances requirements as compared to a public company which is eligible for listing on stock exchanges.

A company is regulated inter alia by the Ministry of Company Affairs /Registrar of Companies (ROC) under the Companies Act, 1956. The table bellow highlights certain key differences between a private and public company

A private company can commence business immediately on obtaining a certificate of incorporation from the ROC. A public company is required to obtain a “Certificate of Commencement of Business” by filing additional documents with the ROC.

Particulars Private Company Public Company
Minimum number of shareholders Two Seven
Maximum number of shareholders Fifty Unlimited
Minimum number of directors two three
Maximum number of directors Seven Twelve (can be increased with Government
approval)
Minimum paid –up capital requirement in general INR 1,00,000 (Approx. USD 2200) INR 5,00,000 (Approx. USD 11000)

Comparative summary
A comparative summary of previously discussed business entities is as under:

Particulars Liaison office Branch office Project office Subsidiary/Joint Venture
1. Setting up
requirements
(General)
Prior approval of RBI required. Prior approval of RBI
required.
Prior RBI approval not
required if certain conditions
are fulfilled.
If activities/sectors fall under
Automatic Route, no prior approval but
only post facto filings with the RBI is
obligated.
Otherwise obtain Government/ FIPB
approval and then comply with post
facto filings
2. Permitted
activities
Only liaison, representation,
communication role is permitted.
No commercial or business
activities or otherwise giving rise
to any business income can be
undertaken.
Activities listed / permitted
by RBI can only be
undertaken. Local
manufacturing and domestic
/ retail trading are not
permitted.
Permitted if the foreign
company has a secured
contract from an Indian
company to execute a project
in India.
Any activity specified in the
Memorandum of Association (MOA) of
the company. Wide range of activities
permissible subject to FDI guidelines /
framework.
3. Funding for
local Operations
Local expenses can be met only out
of inward remittances received
from abroad from Head Office
through normal banking channels.
Local expenses can be met
through inward remittances
from Head Office or from
earnings from permitted
operations
Local expenses can be met
through inward remittances
from Head Office or from
earnings from permitted
operations.
Funding may be through equity or other
forms of permitted capital infusion or
borrowings (local as well as overseas
per prescribed norms) or internal
accruals
4. Limitation of
liability
Unlimited liability (limited to the
extent of capital of Foreign
Company)
Unlimited liability (limited to
the extent of capital of
Foreign Company)
Unlimited liability (limited to
the extent of capital of
Foreign Company)
Liability limited to the extent of capital
of Indian Company.
5. Compliance
requirements under
Companies Act
Requires registration and periodical
filing of accounts / other
documents.
Requires registration and
periodical filing of accounts/
other documents.
Requires registration and
periodical filing of accounts/
other documents.
Required to comply with substantial
higher statutory compliance and filings
requirements as compared to LO / BO
6. Compliance
Requirements
under Foreign
Exchange
Management
Regulations
Required to obtain and file an
Annual Activity Certificate from the
Auditors in India with the
Authorized Dealer / Bankers with a
copy to the Income Tax Authorities.
Required to obtain and file an
Annual Activity Certificate
from the Auditors in India
with the Authorized Dealer/
Bankers with a copy to the
Income Tax Authorities.
Compliance certificates
stipulated for various
purposes
Required to file Periodic and Annual
filings relating to receipt of capital
and issue of shares to foreign
investors
7. Permanent
Establishment
(PE)/taxable
presence
LO generally do not constitute PE /
taxable presence under Double
Taxation Avoidance Agreements
(DTAA) due to limited scope of
activities in India
Generally constitute a PE and
are a taxable presence under
DTAA as well domestic
income-tax provisions
Generally constitute a PE and
are a taxable presence under
DTAA as well domestic
income-tax provisions
It is an independent taxable entity and
does not constitute a PE of the Foreign
Company per se unless deeming
provisions of the DTAA are attracted
8. Compliance
Requirements
under Income Tax
Act
No tax liability as generally it
cannot/does not carry out any
commercial or income earning
activities.
Obliged to pay tax on income
earned and required to file
return of income in India.
No further tax on repatriation
of profits.
Obliged to pay tax on income
earned and required to file
return of income in India.
No further tax on repatriation
of profits.
Liable to tax on global income on net
basis.
Dividend declared is freely remittable
but subject to Dividend Distribution
Tax (DDT) of 16.609 percent on
Dividends declared/distributed/paid by
the Indian Company.
Pursuant to DDT, dividend is tax free
for all shareholders. Limited intercorporate
dividend set-off apply.
Share and Enjoy:
  • Digg
  • StumbleUpon
  • del.icio.us
  • Facebook
  • Yahoo! Buzz
  • Twitter
  • Google Bookmarks
  • Add to favorites
  • LinkedIn

Leave a Reply

You must be logged in to post a comment.