Foreign companies can establish place of business in India as branch office, project office, liaison office, subsidiaries or as joint ventures. Other than subsidiary company, for opening other types aforementioned entities RBI approval is required.
Establishment of branch office/ liaison office / project office or any other place of business in India by foreign entities is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 read with Notification No. FEMA 22(R)/2016-RB dated March 31, 2016.
Applications for foreign companies /entities for establishing branch office/ liaison office / project office in India shall be considered by the AD Category-I bank as per the guidelines given by Reserve Bank of India (RBI) and only if the principal business of the entity resident outside India falls under sectors where 100 percent Foreign Direct Investment (FDI).
Entities making application for opening branch office should have net worth of not less than USD 100,000 and profit making track record for immediate preceding 5 years. Entities making application for liaison office should have net worth not less than USD 50,000 and profit making track record for immediate preceding 3 years. Wherein the applicant is a subsidiary of another company and is not financially content, it may submit a letter of comfort from its parent company.
The validity period of approval for liaison office is for 3 years and in case the entity is engaged in NBFC, construction or development activity the approval is valid for 2 years. Extension is not granted for more than 3 years for entities engaged in NBFC, construction or development activity and will have to convert into Joint ventures/wholly owned subsidiaries
In case of Project Office the validity period of approval the tenure of the project. Permission for setting up Project Office is given provided the entity has secured contract to execute such project in India, along with necessary clearances.
Before the expiry of the validity period application for extension can be applied by these entities by LO/PO. AD catergory-1 bank shall provide such extension if :
1. The Annual Activity Certificate is submitted for the previous years and
2. 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.
PERMITTED ACTIVITIES FOR A BRANCH OFFICE
Normally, the branch office should be engaged in the activity in which the parent company is engaged.
1. Export/import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
5. Representing the parent company in India and acting as buying/ selling agent in India.
6. Rendering services in Information Technology and development of software in India.
7. Rendering technical support to the products supplied by parent/group companies.
8. Representing a foreign airline/shipping company.
PERMITTED ACTIVITIES FOR A LIAISON OFFICE
1. Representing the parent company / group companies in India.
2. Promoting export / import from / to India.
3. Promoting technical/ financial collaborations between parent / group companies and companies in India.
4. Acting as a communication channel between the parent company and Indian companies.
1. The application (Form FNC – 3 copies) shall be submitted to the AD Catergory-1 bank identified by the applicant.
2. AD catergory-1 bank will forward the application to RBI after satisfying itself of the activities, source of fund, KYC norms etc.
3. AD catergory-1 bank will issue approval letter after unique Identification number (UIN) issued by RBI.
4. On receiving the permission, the applicant shall inform the AD Category-1 bank about the date on which BO/LO/PO shall be setup.
5. Where the BO/LO/PO is not setup within 6 months from the grant of approval the same shall lapse. AD bank can grant extension beyond six months where it thinks fit, but any further extension shall require RBI approval.
1. LO may open bank account with AD category 1 bank for receiving remittances but shall not maintain more than one account without prior approval of RBI.
2. BO may approach any AD Category-I Bank in India to open an account for its operations in India.
3. PO can open non-interest bearing foreign currency account subjected to following conditions:
a. PO has been established with permission of RBI.
b. The contract for the PO provides for payment in foreign currency.
c. Each PO can open 2 foreign currency accounts
d. The account shall be subjected to permissible debits and credits.
e. The accounts shall be closed on completion of the project.
The Annual Activity Certificate (AAC) as at the end of the 31st March shall be submitted to AD catergory-1 bank. BO/LO shall also submit copy of AAC to DG (Income Tax). In case multiple BO/LO the entity shall have to submit combined AAC.
BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the AD Category-I bank:
1. A certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year.
2. A Chartered Accountant’s certificate certifying that;
I. the manner of arriving at the remittable profit;
II. the entire remittable profit has been earned by undertaking the permitted activities; and
III. that the profit does not include any profit on revaluation of the assets of the branch.
Remittances by POs pending winding up / completion of the project may be allowed provided:
1. The PO submits an Auditors’ / Chartered Accountants’ Certificate to the effect that sufficient provisions have been made to meet the liabilities in India including Income Tax, etc.
2. An undertaking from the PO that the remittance will not, in any way, affect the completion of the project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.
Request for remittance of winding up proceedings can be submitted to the category -1 AD bank along with the following documents :
1.. Copy of the Reserve Bank’s/AD Category-I bank’s approval for establishing the BO/ LO/ PO.
2. Auditor’s certificate :
i. 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;
ii. 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
iii. confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India.
c. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the BO / LO/ PO and there is no legal impediment to the remittance.
d. 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.
e. The designated AD Category – I banks has to ensure that the BO / LO/ PO had filed their respective AACs.
f. Any other document/s, specified by Reserve Bank of India/AD Category-I bank while granting approval.
TRANSFER OF ASSETS OF BO/LO/PO
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,
i. Transfer of assets by way of sale to the JV/WoS be allowed by AD Category-I bank only when the non-resident entity intends to close their BO/LO/PO operations in India.
ii. 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.
iii. 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 capitalised and transferred to JV/WOS.
iv. AD Category-I bank must ensure payment of all applicable taxes while permitting transfer of assets.
v. Credits to the bank accounts of BO/LO/PO on account of such transfer of assets will be treated as permissible credits.
vi. Donation by BO/LO/PO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organisations may be permitted by the AD category-I banks after satisfying itself about the bonafides of the transaction.