/ When To Set Up A Liaison Office in India

Dhrub Thakur | Company Secretary – Head Legal Compliance | Maier+Vidorno

Liaison Office: Basic Concepts

In our previous article, we explained the different India Market Entry Strategies and the options for company formation. Here we will focus on just one of those options: the Liaison Office. We write a separate article about this as it is one of the popular options for foreign companies to enter into the Indian market to test the water without creating a new entity. This article helps you understand what a Liaison Office is, when is it right for you and gives you an understanding of the Legal Position of a Liaison Office.

What is a Liaison Office?

The Foreign Exchange Management Act (FEMA) defines Liaison Office as “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 master circular of RBI states that a Liaison Office (“LO”) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of a Liaison Office should be met entirely through the foreign exchange from your Head Office outside India. Therefore, the role of a Liaison Office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an “AD Category I bank”. A Liaison Office can undertake the following activities in India:

1. Representing in India the parent company/group companies
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

Steps to set up Liaison Office

In order to establish a liaison office and to make it workable, you need different kinds of approvals and registrations from different government authorities:

1. Designate a Bank and branch where your account will be opened (post-approval) who will be an Authorized Dealer Bank (AD Bank) for your Liaison Office in India
2. File an application with all necessary documents to the Reserve Bank of India (RBI) through the AD Bank
3. Obtain approval of RBI
4. Apply to ROC to obtain a “Certificate of Establishment of Place of Business in India ”
5. Apply for registration for PAN with Income Tax Authority
6. Apply for registration for TAN with Income Tax Authority
7. Open an account with the Bank and to obtain account number
8. Obtain registration under Shop and Establishment Act (depends on location)
9. Obtain registration under Professional Tax (depends on location)
10. Obtain Import Export Code (if samples have to be imported)

Maier+Vidorno has a lot of experience with registering companies for foreign companies, and we can tell you that after receipt of the necessary documents it will take 2 to 6 months time to complete all the steps. In reality, RBI approval alone will take 2-3 months, so it is realistic to plan 4-6 months to have everything in place.

Ongoing Compliance Requirements

There are various ongoing reporting requirements for a LO:

1. Reporting to RBI about address and others – the LO has to report its office address to the RBI within 6 months of approval. It also has to report RBI about its Permanent Account Number (PAN) and “Certificate of Establishment of Business Place in India” issued by the office of ROC.
2. Annual Activity Certificate – the LO has to obtain Annual Activity Certificate from practicing Chartered Accountant and to file the same with the following;
   • Authorized Dealer Bank
   • Director General of Income Tax (International Taxation)
3. Return with ROC – the LO is required to file the following: annual receipt and payment statement, an assets and liabilities statement duly audited by practicing local Chartered Accountants to the office of Registrar of Companies (ROC); along with the latest consolidated financial statement of parent company (duly notarized and certified by Indian Embassy / Consulate office that has proper jurisdiction in the office location of the parent company). If the language of the parent company is other than English, then this will have to be translated by a certified translator before starting the process of notarization and certification. Apart from the financials, LO must also provide the list of all place of business, along with a copy of approval obtained if any. ROC filing has to be done before 6 months from the date of closure of books of accounts of LO.

Renewal of registration

Initial approval to set up an LO is granted by RBI to establish your India Liaison office for a 3 year period. If desired, your LO can apply for an extension of the same to its authorized dealer Bank. The AD Bank, in consultation with RBI, has the power to grant an extension for a further period of 3 years (subject to confirmation of certain compliance requirements). The LO should apply for an extension at least 1 to 2 months before the expiry of the initial time period.

Do you want to register your business in India?

Closing a Liaison Office in India

Once you decide to close your operations – usually because you now need a more extensive set up in India – then you need to wind it up properly so that it doesn’t have unintended consequences on future operations and any new companies you have registered or partnerships you are getting into. Closure of your LO needs to be done with ROC and with RBI: ROC

1. Board Resolution passed by the parent company with the intention to close the LO in India
2. Identify a date of closure of LO activity
3. Terminate employment contract(s) with Employees and complete all full and final settlements
4. Obtain a Board Resolution for the closure of the LO and empowering authorized person to file an application with ROC
5. File an e-form with ROC and obtain approval of ROC

RBI

1. Board Resolution passed by the parent company with the intention to close the LO in India
2. Copy of original approval letter granted by RBI along with Extension letter granted if any
3. Auditor’s certificate
4. Confirmation that no legal proceedings are pending and no legal impediment to remittance
5. Report from ROC or closure of registration with ROC

Any assets that the LO is holding (e.g. computer, laptop, car, etc.) in its books need to be transferred before applying for the closure of the LO with ROC and RBI. These can be transferred by sale to a Joint Venture or Wholly Owned Subsidiary of the parent company in India. However, RBI approval is required before any transfer of assets following due process of law. Before filing your application for closure with ROC/RBI, ensure that any reporting has been taken care of already by your LO. During closure with RBI, request your AD Bank to remit any money left in the account to your promoter company and only after that is done then you can close the Bank Account. The Government of India has shown that it is committed to making it easier to do business in India and each of these steps has been simplified and made more efficient, but you may still need help. If you do, contact M+V’s Company Formation team who have great expertise in setting up all types of company and solving many problems for companies who got stuck or made errors while registering their companies. M+V’s consulting teams can also help with understanding the market; finding a partner; recruiting your team and solving problems.  Our operations teams support foreign companies every day to run their payroll, accounts and logistics, their after sales and their online sales.  Contact us to know more.