Formation of liasion office, registration and income tax

Formation of Liasion office

Why is it formed:

Foreign companies can open a liaison office in India to facilitate and promote the parent company’s business activities, and act as a communications channel between the foreign parent company and Indian companies. Unable to engage in commercial, trading, or industrial activities, liaison offices must be sustained by private, inward remittances received from their foreign parent company.

Approval and Qualifications:

The Foreign Exchange Management Act (FEMA) governs the application and approval process for the establishment of a liaison or branch office. Under the Act, foreign enterprises must receive specific approval from the RBI to operate a liaison office in the country. Applications are to be submitted through Form FNC (Application for Establishment of Branch/Liaison Office in India). The approval process generally takes 20 to 24 weeks and permission to operate a liaison office is granted for a three-year period, which can be extended at a later date. An enterprise must also meet the following conditions before qualifying for the establishment of a liaison office:

• For Branch Office — a profit making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.

Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called].

• For Liaison Office — 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.

Each year, the liaison office must file an Annual Activity Certificate (AAC), prepared by a chartered accountant, to the RBI verifying the office’s activities are within its charter. An AAC should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year.

ROC requirements:

Within 30 days of establishment, the liaison office must register with the Registrar of Companies (RoC) by filing Form 44 through the Ministry Of Corporate Affaiirs . The following documents must also be provided:

• A copy of the liaison office charter or Memorandum & Articles of Association in English;
• Full address for 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 (e.g. the person authorized to accept delivery of notices and documents served to the company).

Extension of Validity of the Approval of Liaison Offices

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 by the Reserve Bank, 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 years 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.

PERMISSIBLE ACTIVITY:

A person resident outside India who desire to establish branch/liaison offices in India can undertake or carry on any activities permitted by RBI . They cannot undertake any activity not permitted.

Permitted activities for a branch office in India of a person resident outside India:

• Export/import of goods.
• Rendering professional or consultancy services.
• To carry research work in which the parent company is engaged.
• To promote technical or financial collaborations between Indian companies and parent or overseas group company.
• Representing the parent company in India and acting as buying/ selling agent in India.
• Rendering services in Information Technology and development of software in India.
• Rendering technical support to the products supplied by parent/group companies.
• Representing a foreign airline/shipping company.

Permitted activities for a liaison office in India of a person resident outside India:

• Representing the parent company/group companies in India.
• To promote export / import from / to India.
• To promote technical/ financial collaborations between parent/group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.

Compliances by Liaison office in India

• Maintenance of Books of Account
• Deduction of TDS 
• Getting Annual Accounts audited.

Annual Reporting by Branch Office to various Govt. agencies:

1. Filing of Annual Activity Certificate (AACs) with AD / RBI signed by the Auditors, as at end of March 31, along with the audited Balance Sheet on or before September 30th. 
2. Filling of accounts along with the list of all principal places of business in India established by foreign company- In form FC-3.
3. File annual return with Registrar of Companies (ROC) – In form FC-4- Normal ROC Fees Rs. 6,000/- (Rupees Six Thousand)
    file return along with 49C and AAC with Income Tax department.
4. The Central Board of Direct Taxes has prescribed Form 49C to be submitted by a non-resident having an liaison office (LO) in India. The annual statement in Form 49C is to be submitted in electronic form within 60days from the end of financial year.
    
5. A copy of the report as per the prescribed format to DGP of concerned state.

Closure of Branch/Liaison Offices

At the time of winding up of Branch/Liaison offices the company has to approach the designated AD Category - I bank with the following documents:

• Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the BO / LO.
• 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, and indicating the manner of disposal of assets;
  • Confirming that all liabilities in india including arrears of gratuity and other benefits to employees, etc., of the office have been either fully met or adequately provided for; and
  • Confirming that no income accruing from sources outside india (including proceeds of exports) has remained un-repatriated to india.
• Confirmation from the applicant/parent company that no legal proceedings in any court in india are pending 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 office in india.
• Any other document/s, specified by the reserve bank while granting approval. The designated ad category - i banks has to ensure that the bo / los had filed their respective annual activity certificates with the reserve bank for the previous years, in respect of the existing branch/liaison offices. Confirmation about the same can be obtained from the central office of the reserve bank in the case of bos and from the regional office concerned in the case of LOs.

  W.r.t the application made by a BO/LO for making remittance of its winding up proceeds, the designated AD Category - I bank may permit the remittance subject to the directions issued by the Reserve Bank in this regard from time to time and payment of applicable taxes in India, if any.

Closure of such BO / LO has to be reported by the designated AD Category - I bank to the Reserve Bank (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO / LO have been scrutinized and found to be in order. If the documents are not found in order or cases are not covered under delegated powers, the AD Category - I bank may forward the application to the Reserve Bank, with their observations, for necessary action. All the documents relating to the BO / LO operations may be retained by the AD Category - I bank for verification by the internal auditors of the AD / inspecting officers of the Reserve Bank.

Income Tax Liability

As per section 139 every person shall file a Returns of Income (RoI). Person as per section 2(31) includes company and as per section 2(17) company includes foreign company having presence in India. However, Liaison office ('LO') does not have a presence in India (refer the country DTAA(double taxation avoidance agreement) which your company is in existence normally Liaison offices are not considered to have presence in India.

The Liaison Office has to confine itself to preparatory and auxiliary activities only so as to not attract the charging provisions as contained in the IT Act, 1961. So long as the Liaison Office does not enter into negotiations with the customers in India for import or purchase of goods by the Indian customers from the principal company, it cannot be said to constitute a permanent establishment(PE) in India.

Reporting of activities of liaison offices

Foreign companies or firms or associations of individuals operate in India through a branch or a liaison office after approval, by Reserve Bank of India. The branch constitutes a permanent establishment of the foreign entity and is, therefore, required to, file a return of income along with requisite details. A non-resident does not file a return of income with regard to its liaison office,on the ground that no business activity is allowed to be carried out in India.

It is proposed to seek regular information from non-residents regarding the activities of their liaison offices in India. A new, section 285 is, therefore, proposed in the Income-tax Act mandating the filing of annual information, within sixty days from the end of the financial year, in the prescribed form and providing prescribed details by non-residents as regards their liaison offices.

This amendment is proposed to take effect from 1st June, 2011.