How to set up a Liaison office in India
Neeraj Agarwal
I Neeraj Agarwal, am a Fellow Member of ICAI, practicing under the banner of M/s AAN & Associates LLP, a firm based out of Banglore Mumbai.
I am also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020)
I am also holding Bachelor of Commerce (B. Com) degree from Calcutta University (Passed in 2011).
I have corporate working experience in Wipro. After working in Wipro for a short period I started my practice in late 2013 and have been in practice so far for the last 10 years. I have also completed a Certificate Course by ICAI on IND-AS in 2020. I have also cleared Social Auditor Exam conducted by NISM.
I have been inducted as a Special Invitee to the Sustainability Reporting Standard Board, ICAI for the FY 2023-24.
Introduction: What is a Liaison Office?
A liaison office serves as a communication link between a foreign corporation and its Indian clients or business partners. It is prohibited from engaging in any commercial operations in India, including generating income or conducting sales. Its operations are restricted to promotion, market research, and liaison work.
A liaison office is allowed to conduct only limited, non-commercial activities, such as:
- Promote exports and imports to or from India.
- Enable technical or financial collaboration
- Represent the parent company
- Serve as a channel of communication
The Reserve Bank of India (RBI) provides extensive guidelines for foreign firms establishing Liaison Offices (LOs), Branch Offices (BOs), or Project Offices (POs) in India under the Foreign Exchange Management Act (FEMA) of 1999.
1. Approval Routes:
a. Reserve Bank Route: For foreign entities with principal businesses in industries that allow 100% Foreign Direct Investment (FDI) via the automatic route.
b. The Government Route: Required for non-automatic sectors or entities such as NGOs, NPOs, and government bodies.
2. Eligibility criteria:
a. Branch Offices must have a five-year profit track record in their home country, while Liaison Offices require only a three-year track record.
b. The latest audited balance sheet requires a minimum net worth of USD 100,000 for BOs and USD 50,000 for LOs.
3. Permissible Activities:
a. Liaison Offices can represent the parent company, promote exports/imports, and serve as a communication route. They are prohibited from engaging in any commercial or industrial activity and must fund activities with foreign exchange from the parent firm.
b. Branch offices can export and import goods, provide professional services, conduct research, and represent their parent company. They are not permitted to engage in retail trade or manufacturing operations.
c. Project Offices are permitted to execute specialized projects in India, often funded by inward remittances or international financing agencies.
4. Application Process:
a. To apply, submit Form FNC through a designated Authorized Dealer (AD) Category-I bank to the RBI’s Foreign Exchange Department in New Delhi.
b. Required documents include the certificate of incorporation, the latest audited balance sheet, and a letter of comfort (if applicable).
5. Validity and extension:
a. Liaison Offices are allowed for three years, with potential extensions granted by AD Category-I institutions based on compliance with reporting requirements.
b. Branch Offices must meet all approved conditions; however, there is no specified validity period.
6. Closure Procedures:
a. To wind up operations, companies must provide their selected AD Category-I bank with essential documentation, such as the RBI consent letter, auditor’s certificate, and confirmation of no current legal procedures.
b. The AD bank can allow the remittance of winding-up proceeds after checking compliance with all regulatory requirements.
7. General conditions:
a. LOs, BOs, and POs must file an Annual Activity Certificate (AAC) to both the RBI and the Directorate General of Income Tax (International Taxation).
b. Certain countries, such as Pakistan, Bangladesh, Sri Lanka, Iran, and China, require RBI approval before establishing offices in India.
c. BOs and POs may purchase immovable property for their operations, subject to certain criteria.
Post RBI Approval :
1. Obtain a Permanent Account Number (PAN) from the Income Tax Department. Complete Form 49A to obtain the PAN, which is mandatory for tax and regulatory compliance.
2. Open a Bank Account:
a. Open a non-interest-bearing account with an Authorized Dealer (AD) Category-I bank to receive inward remittances.
b. Submit the RBI approval letter, FNC form, and PAN card to the bank.
3. Register with the ROC (Registrar of Companies):
a. Submit Form FC-1 to the Ministry of Corporate Affairs (MCA) within 30 days after LO creation.
b. Required documents include an RBI permission letter and a notarized or apostilled certificate of incorporation or registration.
c. Board resolution authorizing the liaison office setup – Details of the authorized representative – Power of Attorney in favor of the representative – Address verification (rent agreement or proof of ownership)
4. Register with Police Authorities (if applicable):
a. If the parent company is from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau, the LO should register with the Ministry of Home Affairs (MHA) via FIPB and local police.
5. Register with the Tax Authorities (TAN, GST if applicable):
a. Obtain a TAN (Tax Deduction Account Number) if required.
b. Register for GST if the LO provides taxable services (generally not necessary since LOs cannot conduct business).
6. Submit an Annual Activity Certificate (AAC):
a. Obtain AAC from a chartered accountant to confirm that LO actions are compliant with RBI requirements.
b. Annually, submit AAC to the RBI and the AD Bank.
7. File Form 49C with the Income Tax Department:
a. Annually, LOs must file Form 49C with the Income Tax Department to report their activity in India.
8. Maintain statutory registers and submit compliance returns:
a. Maintain accurate accounting records.
b. File all required forms under FEMA, Companies Act, and tax legislation.
c. Avoid revenue-generating activities.
Eligibility for Representative of Liaison Office:
S.No. | Eligibility Criteria | Details |
1 | Employment with Parent Company | Must be a direct employee or officer of the foreign parent company. |
2 | Non-Indian Citizenship (Optional) | Preferably a foreign national, though Indian nationals can also represent. |
3 | No Engagement in Commercial Activities | Should not undertake any business or commercial transactions in India. |
4 | Valid Visa Requirement | Must hold a valid Employment Visa endorsed by the Liaison Office. |
5 | Clean Background and Financial Standing | No criminal record; should meet RBI/GOI guidelines on financial integrity. |
Documents needed for appointment:
- Board Resolution or Power of Attorney in favour of the individual.
- Provide passport/ID and address proof.
- Individual’s consent letter to act as authorized representative.
- Photograph and contact information.
- Submit PAN application (if not already available).
Major duties:
- Responsibilities include coordinating with RBI, ROC, Income Tax, and other relevant authorities.
- Maintain accounting records and compliance documentation.
- Submit the Annual Activity Certificate (AAC) and other reports.
- Manage banking and inward remittance procedures.
- Ensure the liaison office does not engage in any commercial activity.
Conclusion:
Setting up a liaison office in India requires RBI clearance, completing eligibility requirements, and complying with regulatory filings to ensure lawful operations that serve the non-commercial and representational interests of the foreign parent company.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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