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:
- Representing in India the parent company/group companies
- Promoting export / import from / to India
- Promoting technical/financial collaborations between parent/group companies and companies in India
- 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:
- 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
- File an application with all necessary documents to the Reserve Bank of India (RBI) through the AD Bank
- Obtain approval of RBI
- Apply to ROC to obtain a “Certificate of Establishment of Place of Business in India ”
- Apply for registration for PAN with Income Tax Authority
- Apply for registration for TAN with Income Tax Authority
- Open an account with the Bank and to obtain account number
- Obtain registration under Shop and Establishment Act (depends on location)
- Obtain registration under Professional Tax (depends on location)
- 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:
- 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.
- 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)
- 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.