Before starting a business in India a foreign company may open a liaison office in India so that the preliminary steps to carry on the business can be done conveniently. Such liaison office would enable the company to form a base to estimate a market potential for the product, to market the product, to access the economic viability /feasibility of launching the product into the Indian Market.
Hence before starting an investment in India a foreign company or a non-resident should form a branch office, Liaison office or a Project office depending upon the requirements. The setting up of project office, branch office or liaison office is governed by the provisions of Foreign exchange management regulations ,2000.
A Liaison office also sometimes referred to as ‘representative office ‘can undertake only liaison activities. It can only act as a channel of communication between Head office abroad and parties in India. It is not allowed to undertake any business activity local trading or business activities and cannot have any income in India.
It is the simplest form of structure. It is merely an extension of the head office to another country. It has no legal entity of its own.
As per RBI notification no FEMA 22/2000 -RB dated 3rd May 2000, ‘Liaison Office’ means a place of business to act as a channel of communication between the Principal place of business or Head Office 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 permitted to carry out following activities:
- Representing in India the parent company or group companies.
- Promoting export import to /in India.
- Promoting technical or financial collaboration between parent / group companies and companies in India.
- Acting as a communication channel between parent companies and Indian companies.
The parent foreign company intends to open a liaison office into India has to fulfill following conditions:
- The parent company should have a profit-making track record during the immediately three fiscal years in the home country.
- Net worth of the parent company should not be less than USD 50,000 or its equivalent.
The liaison office in India must comply with the following conditions:
- Not to undertake any activity of a trading, commercial or industrial nature.
- Not to enter any business contracts in its own name without the RBI’s Permission.
- The liaison office shall not charge any commission, fees or any other remuneration for liaison activities rendered by it in India.
- The expenses of the office in India shall be met exclusively out of the funds received from the head office through normal banking channels.
- Foreign companies that set up a liaison office in India are not permitted by the RBI to acquire immovable property in India for carrying on their activities. However they are permitted to take property for office or for residence on lease for a duration for period not exceeding 5 years without seeking permission from RBI
Income tax compliances
- Liaison office of a body corporate which registered in a foreign country has to file a return of income in India.
- Liaison office will be responsible for tax deduction at source on the salary paid to the Indian employee as well as expatriate employees as well as other payments in respect of rent, contractors etc.
- A liaison office is obliged to obtain PAN as well as TAN under the Income tax provisions
- Liaison office has to file a certificate from the auditors on yearly basis to RBI certifying that the conditions of approval are duly complied with and the expenses of the venture are met out by the inward remittances out of the banking channel.
- Liaison office is required to be registered with the registrar of companies.
- Liaison office should periodically obtain foreign inward remittance certificate from the bank at the time of remittance.
- Liaison office should additional get itself registered under Shop & establishment Act & Professional tax if required by the law of the state or union territory.
For more Income tax compliances read another post “Emerging tax issues & Litigation -Liaison office”