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Establishment of Liaison Office in India by Foreign Entities

By gkkedia Dt. May 26th, 2020

As you all know, you all are welcome in India to explore the Indian market and get benefitted without committing major resources. You can establish your own liaison office which will help you to promote your entities and establishment of a communication channel between you and India.

We are G.K.Kedia & Co., a Chartered Accountancy firm provide you all about how to establish a liaison office and what are the RBI’s and ROC compliances.

Let’s firstly understand the meaning of liaison office.
Meaning

  • Liaison Office acts a representative office and acts as a channel of communication between the parent company and parties in India
  • It is not allowed to undertake any commercial activity-directly or indirectly and cannot thus earn/accrue income in India.

 
General Criteria for Estbalishing Liaison Office(lo) in India
A body corporate incorporated outside India (including a firm or other association of individuals), desirous of opening a Liaison Office (LO) / Branch Office (BO) in India have to obtain permission from the Reserve Bank under provisions of FEMA 1999. The applications from such entities in Form FNC (Annex-1) will be considered by Reserve Bank under two routes:-

  • RBI Route:- Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
  • Government Route:- Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non – Government Organisations / Non – Profit Organisations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

 
Cases where RBI’s prior approval needed
An application from a person resident outside India for opening of a BO/LO/PO in India shall require prior approval of Reserve Bank of India and shall be forwarded by the AD Category-I bank to the General Manager, RBI who shall process the applications in consultation with the Government of India, in the following cases:

  • The applicant is a citizen of or is registered/incorporated in Pakistan.
  • The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
  • The principal business of the applicant falls in the four sectors namelyDefence, Telecom, Private Security and Information and Broadcasting.However, prior approval of Reserve Bank of India shall not be required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted.
  • The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. However, if such entity is engaged, partly or wholly, in any of the activities covered under Foreign Contribution (Regulation) Act, 2010 (FCRA), they shall obtain a certificate of registration under the said Act and shall not seek permission under FEMA 22(R).

NOTE:- Permission to operate a liaison office is granted for a three-year period, which can be extended at a later date (maximum three-year extension).

Additional Criteria for Setup a Liaison Office in India

  • Parent company should have a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.
  • If a company does not meet these requirements, but is subsidiary of a another company may submit a Letter of Comfort (LOC) (Annex A) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.

 
Permitted Activities

  • 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.

Note:- For carrying out other activities, RBI permission is required. For this application may be submitted through AD(Authorized Dealer) justifying its need.

Procedure for Application of Starting Liaison Office in India

  • Designate a Bank and branch where your account will be opened (post-approval) who will be an Authorized Dealer Bank (AD Bank) for your Liaison Office in India.
  • The application for establishing BO / LO/ PO in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category – I bank along with the prescribed documents mentioned in the Form and the LOC, wherever applicable.
  • English version of Certificate of Incorporation, Memorandum Of Association(MOA) & Articles Of Association(AOA) of the parent company duly attested by the Indian Embassy or notary public in the country of registration.
  • Audited Balance sheet of the applicant company for the last three years.
  • Bankers’ Report from the applicant’s banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank.
  • Power of Attorney in favour of signatory of Form FNC in case the Head of the overseas entity is not signing the Form FNC.
  • The AD Category-I bank shall after exercising due diligence in respect of the applicant’s background, and satisfying itself as regards adherence to the eligibility criteria for establishing BO/LO/PO, antecedents of the promoter, nature and location of activity of the applicant, sources of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for establishing BO/LO/PO in India. The AD Category-I banks may frame appropriate policy for dealing with these applications in conformity with the FEMA Regulations and Directions.
  • However, before issuing the approval letter to the applicant, the AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each BO/LO.
  • After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO/LO in India. This is in order to enable the Reserve Bank to keep, maintain and upload up-to-date list of all foreign entities which have been granted permission for establishing BO/LO in India, on its website.
  • Apply to ROC to obtain a “Certificate of Establishment of Place of Business” within 30 days of the establishment of its place of business in India in form FC-1 along with copy of RBI Approval. The following documents must also be provided:-
  • A notarized and apostilled copy of the liaison office charter or Memorandum and Articles of Association in English.
  • Full address of the enterprise’s principal place of operation outside of India
  • Name and address of the liaison office in India.
  • List of Directors
  • Name and address of the company’s official representative based in India (the person authorized to accept delivery of notices and documents served to the company).

  
MCA grants FCRN (Foreign Company Registration Number) to the liaison Office as an identification upon registration.

  • The validity period of an LO is generally for three years, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only.
  • An applicant that has received a permission for setting up of a BO/LO/PO shall inform the designated AD Category I bank as to the date on which the BO/LO/PO has been set up. The AD Category I bank in turn shall inform Reserve Bank accordingly. In case an approval granted by the AD bank has either been surrendered by the applicant or has expired without any BO/LO/PO being set up, the AD Category I bank shall inform RBI accordingly
  • The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO/LO/PO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse. In cases where the non-resident entity is not able to open the office within the stipulated time frame due to reasons beyond its control, the AD Category-I bank may consider granting extension of time for a further period of six months for setting up the office. Any further extension of time shall require the prior approval of Reserve Bank of India in this regard.

Note:- Applications for establishing a BO/LO in India by foreign banks and insurance companies will be directly received and examined by the Department of Banking Regulation (DBR), Reserve Bank of India, Central Office and the Insurance Regulatory and Development Authority (IRDA), respectively. No UIN for such representative offices is required from the Foreign Exchange Department, Reserve Bank of India.

Opening of Bank Acccount by Liaison office(lo)
An LO may approach the designated AD Category I Bank in India to open an account to receive remittances from its Head Office outside India.

NOTE:- LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India.

The permitted Credits and Debits to the account shall be:
Credits

  • Funds received from Head Office through normal banking channels for meeting the expenses of the office.
  • Refund of security deposits paid from LO’s account or directly by the Head Office through normal banking channels.
  • Refund of taxes, duties etc., received from tax authorities, paid from LO’s bank account.
  • Sale proceeds of assets of the LO.

Debits

  • Only for meeting the local expenses of the office.

 
Annual Activity Certificate by Liaison Office
LO is required to submit Annual Activity Certificate (Annexure 4), as at the end of March 31 along with the required documents by the following:-

  • In case of a sole LO, by the BO/LO/PO concerned;
  • In case of multiple LOs, a combined AAC in respect of all the offices in India by the nodal office of the LOs

 
Annual Activity Certificate – the LO has to obtain Annual Activity Certificate from practicing Chartered Accountant and to file the same with the following;

  • Authorized Dealer Bank
  • Director General of Income Tax (International Taxation)

 
The designated AD Category – I bank shall scrutinize the AACs and ensure that the activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given. In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with the copy of the AAC and their comments thereon.

Extension of Validity Period of the Approval of Liaison Office(lo)
Requests for extension of time for LOs may be submitted before the expiry of the validity of the approval, to the AD Category-I bank concerned under whose jurisdiction the LO/nodal office is located.

The designated AD Category – I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted if the applicant has complied with the following conditions and the application is otherwise in order:

  • The LO should have submitted the Annual Activity Certificates for the previous year, and
  • The account of the LO maintained with the designated AD Category – I bank is being operated in accordance with the terms and conditions stipulated in the approval letter.

 
Registration with State Police Authorities
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO/LO/PO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.

Application for Additional Offices and Activities
It may be permitted by submission of additional Form FNC. If there are no changes in documents submitted earlier, Form FNC need not be resubmitted.

  • To identify one office as Nodal Office to coordinate the activities of all offices in India
  • Where the no. of additional offices exceeds 4, applicant to justify the need and to seek prior approval of RBI.
  • Whenever the existing LO is shifting to another city in India, prior approval from the AD Category-I bank is required (No permission required if shifting is in the same city).

 
For carrying out other activities, RBI permission is required. For this application may be submitted through AD (Authorized Dealer) justifying its need.

Compliance Required

  • Annual submission of Annual Activity Certificate.
  • Statutory Audit by CA.
  • Filing of Quarterly TDS returns
  • Filing of audited accounts with Directorate General of IT, New Delhi within 60 days of closure of F.Y.
  • Filing of Form 49C with Directorate General of IT within 60 days of closure of F.Y.(no IT return as there is no income).

 
Closure of Liasion Office
For closure of LO, necessary documents shall be filed with AD, and then application for the closure shall be forwarded by AD along with following documents:-

  • Copy of RBI approval letter for establishment of LO (Sectoral regulator’s approval in case of banking co./insurance co.)
  • Auditor’s Certificate:-
  • Indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant;
  • Indicatingthe manner of disposal of assets;
  • Confirming that all liabilities in India including arrears of gratuity and other benefits and
  • Confirming that no income accruing from sources outside India have remained unrepatriated to India
  • No Objection/Tax Clearance Certificate from Income Tax Authority for the remittances
  • Confirmation from the applicant/parent company that no legal proceedings in any Court and there is no legal impediment to the remittance.
  • A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the BO /LO in India, wherever applicable.
  • Any other documents, specified by Reserve Bank of India/AD Category-I bank while granting approval.

 
Transfer of Assets of Liaison Office
Proposals for transfer of assets may be considered by the AD Category-I bank only from BOs/LOs/POs who are adhering to the operational guidelines such as submission of AACs (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation); have obtained PAN from IT Authorities and have got registered with ROC under the Companies Act 2013, if necessary. Also,

  • Transfer of assets by way of sale will be allowed by AD Category-I bank only when the nonresident entity intends to close their LO operations in India.
  • A certificate is to be submitted from the Statutory Auditor furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or written down value (WDV) value and sale consideration to be obtained. Statutory Auditor should also confirm that the assets were not re-valued after their initial acquisition. The sale consideration should not be more than the book value in each case.
  • The assets should have been acquired by the BO/LO/PO from inward remittances and no intangible assets such as good will, pre-operative expenses should be included. No revenue expenses such as lease hold improvements incurred by the BO/LO can be capitalized and transferred to JV/WOS.
  • AD Category-I bank must ensure payment of all applicable taxes while permitting transfer of assets
  • Credits to the bank accounts of LO on account of such transfer of assets will be treated as permissible credits.
  • Donation by LO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organization may be permitted by the AD category-I banks after satisfying itself about the bonafides of the transaction.

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