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Informative Note on Liaison Office for a foreign entity in India

Informative Note on Liaison Office for a foreign entity in India

LIAISON OFFICES (LO) IN INDIA BY FOREIGN ENTITIES

According to FEMA Guidelines, A Liaison Office (LO) is “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”. The intent of opening a liaison office in India by a foreign entity is to capture local recognition amongst the Indian market players. 

Objectives of Establishing a Liaison Office: –

1. It acts as a representation of foreign establishment in India.

2. Promotion of imports and exports.

3. Exploring the business conditions.

4. Understanding the nature of the Indian Market.

5. To Enhance Goodwill by maintaining, bringing foreign Technology into India.

6. Establish healthy communication Between the foreign principals and the parties with the motive to create market opportunities.

Some of the Important conditions for Establishing a Liaison office in India are: –

  1. Net worth Requirement: The foreign parent company must have a profitable track record of the last three years with a net worth of more than $ 50,000/- duly supported by a financial statement which should be attested by the Auditor.
  2. No Income Generating Activity: Foreign parent company can provide financial aid/assistance to the Liaison Office, but such an office is not allowed to generate any income from it. Liaison offices can only represent such foreign parent companies in India.
  3. Name of Liaison Office: The name of the Liaison office set up in India must be the same as that of the foreign parent company located outside India.
  4. Taxation in India: Since a liaison office is not meant to earn any income in India it is generally not liable to pay any income tax but when the LO becomes a permanent establishment in India, it will be taxed as a foreign entity at a rate of 40%.

Permitted Activity of Liaison Office in India

The liaison office of a foreign corporation can do limited activities in India and to be precise only four kinds of activities are permitted. Following is the list of activities that have been allowed for a Liaison Office in India, as prescribed under regulation 4(b) of the Notification number FEMA 22 (R)/2016-RB dated March 31, 2016.

  • To represent the parent or group companies in India
  • To engage in activities which are in the nature or promotion of Import or Export
  • To promote technical or financial collaborations between parent/group companies or companies in India.
  • To act as a channel of communication between the parent company and the Indian Company(s).

Routes to get Approval from RBI:

  • Automatic Route: the proposed foreign entity does not require any prior approval from RBI or the Government of India if the permitted activity falls under permitted 100% FDI.  Please note that the applicant must not be from a country sharing Land borders with India.
  • Approval Route: To get approval through this route, there are the following circumstances that need to be fulfilled:
  • The applicant company must have a headquarter at, or an applicant needs to be a citizen of Pakistan, China, Sri Lanka, Iran, Afghanistan, Bangladesh, Hong Kong, or Macau, and the applicant is for opening a BO/LO/PO in Jammu and Kashmir, Andaman and Nicobar Island and Northeast region.
  • The Principal Business activities must fall under the following four sectors namely, (i) Private security, (ii) Telecom (iii) Defence, and information (iv) Broadcasting. 
  • The applicant must be an NGO.

List of Documents required for Registration of Liaison Office in India

Documents from the Parent Company Established Outside India

  1. Certificate of Incorporation / Registration of Foreign Company
  2. Notarized / Apostilled Memorandum of Association (MOA) and Articles of Association (AOA)
  3. List of Details in respect of Directors/Key Executives
  4. Details of shareholders of the applicant company
  5. Net worth certificate attested by Certified Public Accountant (CPA)
  6. Audited financial statement of the last three preceding years
  7. Banker’s Report from the applicant’s banker in the host country
  8. Name and address of the liaison office in India
  9. Full address of enterprise’s Principal place of operation outside of India

       Documents required from the Authorised Signatory             

  1. 5 Passport size Coloured Photographs.
  2. Passport – 5 Copies
  3. Business Visa Copy with Immigration Stamp of arrival
  4. National Identity Card – 5 Copies
  5. Board Resolution Appointing the Authorised Representative
  6. Power of Attorney in the name of Authorised Representative
  7. Latest Address Proof (Bank Statement/ Electricity/ Water Bill/ Phone Bill)

Process & Timeline for Liaison office Registration in India

Step 1: Application for Digital Signature of Authorised Signatory

A digital signature is the equivalent of a physical or paper signature under the Information Technology Act. As per the new process, all applications to the registrar of companies are filed in digital format which needs to be authenticated by the digital signature of the proposed shareholder and director, as the case may be. The filing process starts with the issue of digital signature.

Step 2: Filing of Application with RBI through the AD bank

The application for registration of a Liaison office of a foreign company is filed in form FNC 1 to the reserve bank of India through AD Bank (Authorised Dealer). The AD Bank plays a crucial role as all the communication to the RBI must be routed through them. We have an excellent relationship with many banks in India, which certainly helps in applying to the RBI and Follow up.

Step 3: Verification of KYC from Banker of Parent Company

After FNC 1 Form is filed with the AD Bank, a request for verification of documents is sent to the banker of the foreign company. This process is also known as swift-based verification. After receipt of confirmation of the documents from the foreign banker, the application is submitted to the RBI for their approval. The RBI may seek clarification or any additional document which needs to be submitted.

Step 4: Approval of RBI for Liaison Office Registration in India

There is a specific policy of approving the establishment of a liaison office by the AD Banker itself and only in cases where the automatic route is not available the cases are forwarded for prior approval of the RBI. The process of approval after swift verification is for a week.

Registration of Liaison office with the ROC

Upon receipt of approval from RBI for the Liaison office, the Liaison office needs to be registered with the Registrar of Companies based on the jurisdiction of holding principal place of business in India.

Step 5: PAN Card, Tax Deduction Number & Bank A/c Opening

Income Tax Department allots a unique 10 Digit alphanumeric number as a permanent account number, also known as PAN Number. To comply with TDS provisions, every taxpayer needs to obtain a Tax Deduction Account Number. These identification numbers are essential to compliance with the tax rules. The bank account of the liaison office can be opened after the allotment of Pan Number by the Income Tax Department.

Step 6: Registration with State Police

Finally, the liaison office needs to register it with the state police (In the office of the superintendent of Police). The application must be accompanied by the RBI approval and KYC of all authorized persons in India and the foreign company.

Step 7: GST Registration & IEC

By this time the Liaison office would have received the Bank Account and checkbook, we would need a copy of the cheque for making application for GST Registration and Import Export Code (if required) for the Liaison Office of the foreign Company,

We at Legallands shall provide a full-service work-oriented approach for setting up the Liaison Office for the foreign entity considering the rules, regulations, and laws of the Indian territories.

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