WHEN TO SET UP A LIAISON OFFICE IN INDIA?

Liaison Office : Basic Concepts 

In a previous article we explained the different India Market Entry Options, and in this article we talk about one of those options.  A Liaison Office is one of simplest the options for foreign companies when you want to set up your own subsidiary in India, but it is also one of the most limited. This article helps you understand what a Liaison Office is, when it’s right for you and helps you understand the Legal Position on Liaison Offices.   

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 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. 

1. Promoting export / import from / to India. 

1. Promoting technical / financial collaborations between parent / group companies  and companies in India 

1. Acting as a communication channel between the parent company and Indian companies. 

Steps taken 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 Authorized Dealer Bank (AD Bank) for your Liaison Office in India 

1. File an application with all necessary documents to the Reserve Bank of India (RBI) through AD Bank  

1. Obtain approval of RBI 

1. Apply to ROC and to obtain a “Certificate of Establishment of Place of Business in India ” 

1. Apply for registration for PAN with Income Tax Authority  

1. Apply for registration for TAN with Income Tax Authority 

1. Open account with Bank and to obtain account number  

1. Obtain registration under Shop and Establishment Act (depends on location) 

1. Obtain registration under Professional Tax (depends on location) 

1. Obtain Import Export Code (if samples have to be imported) 

After receipt of the necessary documents it may take 2 to 4 month time to complete all the above steps. 

Ongoing Compliance Requirements 

There are various ongoing reporting requirements for a LO: 

1. Return with Director General of Police (DGP) – the LO has to submit a report (in the format prescribed by RBI) within 5 working days of an LO becoming functional to the DGP of the state where the LO is established.  Thereafter a report has to be submitted along with Annual Activity Certificate to DGP on annual basis till the existence of LO.  A copy of the report will also be submitted to AD Bank.  

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 has also confirm RBI about its Permanent Account Number (PAN) and “Certificate of Establishment of Business Place in India” issued by office of ROC. 

1. Annual Activity Certificate – the LO has to obtain Annual Activity Certificate from practicing Chartered Accountant and to file the same with the following: 

1. Authorized Dealer Bank 

1. Director General of Income Tax (International Taxation) 

1. Director General of Police 

1. Return with ROC – the LO is required to file an annual audited financial statement (with enclosures) to the office of Registrar of Companies along with latest consolidated financial statement of parent company  duly notarized and certified by Indian Embassy/Consulate office having proper jurisdiction on the office location of the parent company. If the language of the parent company is other than English, then the same has to be translated by certified translator before starting the process of notarization and certification. Apart from the financials, LO is also to provide the list of all place of business along with 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  

Approval to set up an LO is granted by RBI to establish your India Liaison office initially for a 3 year period. However if desired, your LO can apply for 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 extension at least 1 to 2 month before the expiry of the initial time period.  

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 your have registered or partnerships you are getting into. Closure of your LO needs to be done with ROC and with RBI: 

ROC 

1. Identify a date of closure of LO activity 

1. Terminate employment contract(s) with Employees and complete full and final settlements 

1. Obtain a Board Resolution for closure of the LO and empowering authorized person to file application with ROC 

1. File an e-form with ROC and obtain approval of ROC 

RBI 

1. Copy of original approval letter granted by RBI 

1. Auditor’s certificate 

1. Confirmation that no legal proceedings are pending and no legal impediment to remittance  

1. Report from ROC 

1. NOC from Tax Authority                  

 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 seems really 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.