A liaison office is a vital communication bridge between a foreign company’s head office and the Indian market. It facilitates market research, information dissemination, and promotion of the parent company’s products without engaging into revenue-generating activities in India. Let’s deep dive into the essential steps and compliance requirements to establish a liaison office in India.
What is the Purpose and Scope?
A liaison office is not established to conduct commercial activities or to earn income in India. Its primary functions include market research, product promotion, and communication with potential Indian clients on behalf of the parent company overseas.
Mandatory RBI Approval:
Under the Foreign Exchange Management Act (FEMA), approval from the Reserve Bank of India (RBI) is mandatory for setting up a liaison office. The application must be submitted through an Authorized Dealer Category-1 bank, and RBI grants a Unique Identification Number (UIN) upon approval. The RBI also checks the profit-making track record of the entity applying for liaison office’s establishment for the immediately preceding three financial years in the home country.
Identify the Right Location:
Choose a strategic location for the liaison office, typically in major metropolitan cities known for their business infrastructure and economic significance.
Appointment of a Resident Representative:
The liaison office must appoint a resident representative to act as the main point of contact between the parent company and the Indian authorities.
Funding and Tax Implications:
The expenses of such establishments are abided by the RBI guidelines, which indicate that expenses of such offices are to be funded entirely through inward remittances of foreign exchange from the Head Office outside India. Hence, there would be no tax implications on the entity, as no income would be generated in the Indian territory.
Permissible Activities:
A liaison office can perform the following activities from its office in India:
- Represent the parent company / group companies in India.
- Promote export / import to-from India.
- Promote technical/ financial collaborations between parent / group companies and companies in India.
- Act as a communication channel between the parent company and Indian companies.
Registrations to be Undertaken:
The liaison office is required to open a bank account with an Authorized Dealer Category-1 bank.
Additionally, the liaison office should obtain following registrations:
- Register with Registrar of Companies (ROC), and
- Permanent Account Number (PAN)
- Tax Deduction Number (TAN)
- Registration with 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.
- Other local registrations, if any applicable like, Professional Tax, Shop & Establishment etc.
Reports and Compliance Activities:
The liaison office is required to make various monthly, quarterly, half yearly and annual compliance on regular basis. Mentioned below is the list of few important compliances applicable to Liaison office:
- Statutory Audit of Annual Financial Statements
- Filing of Annual India Tax Return
- Submission of Annual Activity Certificate (AAC)
- Filing of Annual Form 49-C – Annual Statement under section 285 of the Income-tax Act, 1961
- Filing of Form FC-3 – Annual accounts along with the list of all principal places of business in India established by foreign company
- Filing of Form FC-4 – Annual Return of a Foreign Company
- Other Applicable Compliances like TDS, PF, PT, Shop & Establishment etc.
Establishing a liaison office in India can be a valuable step for foreign companies looking to explore the Indian market. By adhering to RBI guidelines and maintaining proper compliance, a liaison office can effectively act as a conduit for successful business operations between the parent company and the Indian market.
