Entry Strategies for Foreign Investors

A Liaison Office functions as a representative office set up primarily to explore and understand the business and investment climate. Any foreign company intending to establish a Liaison Office in India is required to obtain prior approval from the RBI, the Apex Bank of India which may take up to 2-4 weeks for processing of the application. Approval is usually granted for 3 years and can be renewed on expiry thereof. The company is also required to register itself with the Registrar of Companies (ROC) and to comply with certain procedural formalities, as prescribed under the Companies Act, 1956.

The Liaison Office is permitted to undertake following activities only:

• Representing the parent Company in India
• Promoting export / import from / to India
• Promoting technical / financial collaborations between the parent company and companies in India
• Acting as a communication channel between the parent company and its present or prospective customers in India

However there are certain restrictions on Liaison Offices, which are as follows :

1. The Liaison Office cannot undertake any business activity in India nor can it generate any income in India without the approval of RBI.
2. All expenses of the office must be met through inward remittances to the office from abroad through normal banking channels. However, at the time of closure of the Liaison Office, RBI grants permission to repatriate the balance in the Indian bank account to the parent company.
3. It is not subject to taxation in India. However, liaison office would be required to withhold taxes from certain payments.
4. It cannot borrow, lend money, or accepts deposits.
5. It cannot acquire, hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India, without prior approval of RBI.
6. However, the office must file regular returns to the RBI. Such returns must include Audited Annual Accounts and an Annual Activity Certificate by a Chartered Accountant.

Advantages

• Easy operations
• Less formalities
• Simple closure process
• Normally, the transactions between the liaison office and the parent entity are not subject to Transfer Pricing (TP) regulations

A foreign company, which has secured a contract to execute a project in India is allowed to set up Project Office in India. Project office approvals are granted only for the specific project being executed in India and must close after the project is completed. The offices may repatriate outside India, the surplus of the project on its completion subject to certain conditions prescribed by RBI.

The company establishing project office in india is also required to register itself with the Registrar of Companies (ROC) and to comply with certain procedural formalities, as prescribed under the Companies Act, 1956

General permission has been granted by the Reserve Bank of India to set up a project office in india by a foreign entity, if the following conditions are satisfied.

• It has secured from an Indian company a contract to execute a project in India; &
• The project is funded by inward remittance from abroad; or
• The project is funded by a bilateral or multilateral International Finance Agency; or
• The project has been cleared by an appropriate authority; or
• A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

Advantages

1. Easy operations
2. Less formalities
3. Simple closure process

Normally, the transactions between the project office and the parent entity are subject to Transfer Pricing (TP) regulations

Permission to set up a branch office is granted by the Reserve Bank of India. Branch office of a foreign company in india upon approval from the RBI must be compulsorily registered under the (Indian) Companies Act, 1956. Upon registration under the Companies Act 1956, the branch office can carry on its business activities in the same way as a domestic company.

A branch office so approved and registered can carry on the following activities:

• Export / Import of goods
• Rendering professional or consultancy services
• Carrying out research work, in which the parent company is engaged
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company
• Representing the parent company in India and acting as buying / selling agents in India
• Rendering services in Information Technology and development of software in India
• Rendering technical support to the products supplied by the parent / group companies
• Foreign airline / shipping

Advantages

1. Unlike a liaison office, branch offices can generate revenue from the sales in the local market and repatriate the profits to the foreign parent company.
2. Funding is possible through the receipts from the parent company and from business operations in India.
3. Branch offices set up with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines.

Restrictions

• A branch office cannot carry on any manufacturing activities. Manufacturing activities can be carried on only through the means of a company incorporated in India.
• A branch office of a foreign company in india is taxed at higher rates of corporate income tax than a domestic company.

Normally, the transactions between the project office and the parent entity are subject to Transfer Pricing (TP) regulations.