Liaison Office in India
ABOUT LIASION OFFICE
A Liaison Office (LO) is a representative office established by a foreign company in India to act as a communication channel and promote its business interests without engaging in any commercial or trading activities. It is a non-revenue-generating entity that enables foreign companies to explore business opportunities and establish a presence in India without forming a subsidiary or branch office.
A Liaison Office is not a separate legal entity; it operates as an extension of the foreign parent company. As such, it does not require the formal appointment of directors like an incorporated entity.
BENEFITS OF FORMING LIAISON OFFICE
- It allows foreign companies to explore the Indian market before making significant investments & analyze trends in Indian markets closely
- Enables foreign companies to promote their brand, products, or services without undertaking actual business transactions
- Since it does not engage in revenue-generating activities, the regulatory and tax compliance requirements are comparatively simpler
- Acts as a communication channel between the foreign parent company and Indian businesses or government authorities
- As Liaison Offices are prohibited from earning revenue or engaging in commercial activities, they are not subject to income tax in India
- Insights gained through a Liaison Office can help in deciding whether to establish a Branch Office, Project Office, or wholly-owned subsidiary later
- Since a Liaison Office cannot engage in revenue-generating activities, there is no need for significant capital investment for business operations
- Closing a Liaison Office is simpler than closing other types of entities
BASIC REQUIREMENTS FOR FORMING LIAISON OFFICE
- The Liaison Office must appoint an authorized representative in India to oversee operations and act as a point of contact with regulatory authorities.
- The applicant entity must be a foreign company or body corporate incorporated outside India.
- The Liaison Office is established to represent the parent company in India and engage in permitted non-commercial activities. These activities must align with RBI guidelines under the Foreign Exchange Management Act (FEMA), 1999
- The parent company must meet the following financial criteria:
- Profitability: A track record of profitability for the preceding three years.
- Net Worth: A minimum net worth of USD 50,000, certified by a chartered accountant or equivalent authority.
- The Liaison Office's operational expenses must be funded entirely through inward remittances from the parent company. It cannot generate revenue or undertake profit-generating activities in India.
- The parent company must submit proof of securing the contract and details of the funding arrangement
- Establishing a Liaison Office requires prior approval from the Reserve Bank of India (RBI). The application is processed through an Authorized Dealer (AD) Bank in India
DRAWBACK OF LIAISON OFFICE
- Limited Scope: Operations are strictly restricted to representational and non-commercial activities. The Liaison Office cannot engage in any revenue-generating business or trading activities in India.
- No Revenue Generation: A Liaison Office is entirely dependent on the foreign parent company for funding through inward remittances. It cannot generate its own income in India, which limits financial autonomy.
- Approval Dependence: Establishment requires prior RBI approval under FEMA guidelines. Renewal or changes in operations often necessitate additional approvals, making the process time-consuming.
- Temporary Presence: While it can exist for an extended period, its role remains limited to acting as a communication channel and conducting non-commercial activities, restricting its utility for long-term strategic expansion
- Compliance Burden: Despite not engaging in commercial activities, the
Liaison Office must adhere to multiple regulatory requirements, including annual filings with the RBI, ROC, and tax authorities
Closure Formalities: Winding up a Liaison Office involves compliance with regulatory authorities, such as the RBI and tax authorities, which can be a lengthy and complex process.
Inflexibility for Business Growth: A Liaison Office cannot transition into a profit-making entity or engage in business expansion without converting into a Branch Office or subsidiary, which involves additional legal and procedural requirements.
WHAT ALL YOU WILL GET FROM REGISTER YOUR STARTUP
- One Digital Signature for Authorized Signatory
- PAN of the Project Office
- TAN of the Project Office
- Bank account opening documents
- Approval letter from RBI
- Certificate of Registration of the Liaison Office, including name and address
STEP-BY-STEP PROCESS FOR ESTABLISHING A LIAISON OFFICE IN INDIA
The application for establishing a Liaison Office in India is submitted Step-by-Step Process
Application Submission to RBI:
The application for establishing a Liaison Office (LO) must be submitted in Form FNC to a designated Authorized Dealer (AD) Category 1 Bank along with the prescribed documents.
The application includes details of the parent company, proposed activities of the LO, and financial credentials of the applicant.
Letter of Comfort (LOC) (if applicable):
If the applicant is a subsidiary and does not meet the financial soundness criteria, it can submit an LOC from its parent/group company.
The parent company must meet the required net worth and profitability standards.
Approval by AD Bank:
The AD Bank reviews the application, verifies compliance with KYC norms, and ensures that the activities of the LO align with the RBI’s guidelines.
If the application is approved, the AD Bank grants permission for the establishment of the LO and reports the same to the RBI.
Validity Period:
The validity of the Liaison Office is typically granted for three years, subject to renewals as required.
Establishment Timeline:
The Liaison Office must be set up within six months of receiving the approval letter.
If the establishment is delayed, the approval may lapse unless an extension is granted by the AD Bank or RBI.
Notification of Establishment:
Upon setting up the Liaison Office, the applicant must notify the AD Bank of the establishment date, which the AD Bank, in turn, reports to the RBI.
If the approval is surrendered or expires without establishment, the AD Bank must inform the RBI.
Documentation Preparation:
Gather necessary documents, such as the Certificate of Incorporation, Memorandum and Articles of Association (MOA/AOA), audited financial statements of the parent company, and proof of office address in India.
Registration with Registrar of Companies (RoC):
Register the Liaison Office with the Ministry of Corporate Affairs (MCA) and obtain a Certificate of Registration under the Companies Act, 2013.
PAN and TAN Application:
Apply for a Permanent Account Number (PAN) and a Tax Deduction and Collection Account Number (TAN) for tax compliance purposes.
Bank Account Setup:
Open a bank account in the name of the Liaison Office for managing inward remittances and operational expenses.
GST Registration (Optional):
Register for Goods and Services Tax (GST) if the office intends to interact with vendors or receive services that may require compliance with GST laws.
Registration Requirement with Police Authorities
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau, or Pakistan intending to open a Liaison Office in India must register with the state police authorities.
For individuals from these countries, the AD Category-I Bank will forward a copy of the approval letter to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi, for necessary action and record-keeping
CHECKLIST FOR FORMING LIAISON OFFICE IN INDIA
Parent Company Documents:
- Certificate of Incorporation of the parent company.
- Board Resolution authorizing the establishment of the Liaison Office.
- Financial statements of the parent company for the past three years.
Project Documents:
- Letter of Intent detailing the purpose and scope of activities of the Liaison Office in India.
- Business plan or explanation of how the Liaison Office will facilitate the parent company’s business in India.
Authorized Representative Details:
- Identification and contact details of the authorized signatory in India.
- Power of Attorney authorizing the individual to act on behalf of the parent company
Compliance Documents:
- Form FNC-1 (if RBI approval is required).
- Application for PAN and TAN.
Other Considerations
- Documents must be notarized and/or apostilled, as required by Indian regulations.
- Ensure all documents are submitted in English or accompanied by certified translations.
POST-INCORPORATION COMPLIANCE FOR A LIAISON OFFICE (LO) IN INDIA
Once a Liaison Office (LO) is established in India, it must adhere to several compliance requirements under Indian laws and regulations. These include filings with various authorities such as the RBI, GST, Income Tax Department, and other relevant agencies. Below is a comprehensive guide to the post-incorporation compliance for a Liaison Office:
1. Reserve Bank of India (RBI) Compliance
- Annual Activity Certificate (AAC):
Submit the AAC certified by a Chartered Accountant to the designated AD Category-I Bank and the RBI.
This certificate confirms that the activities undertaken by the Liaison Office align with the terms of approval from the RBI.
The AAC is due within six months from the end of the financial year.
- Utilization Reporting:
Submit details of funds received from the parent company and their utilization for the liaison office's approved activities.
2. Registrar of Companies (RoC) Compliance
- Annual Filing: File Form FC-3 (Annual Accounts and List of Place of Business) with the RoC.
- Submit Form FC-4 (Annual Return) within 60 days from the end of the financial year, providing details about the activities and financial position of the Liaison Office.
Maintenance of Statutory Registers:
- The Liaison Office is required to maintain certain statutory registers, such as the Register of Foreign Company and other necessary records, in compliance with the Companies Act, 2013.
3. Income Tax Compliance
Permanent Account Number (PAN):
Ensure the Liaison Office has a PAN for all tax-related filings.
Tax Filing:
- File annual Income Tax Returns, indicating that the Liaison Office has not generated any income in India, as it is restricted to non-revenue-generating activities.
- Ensure compliance with Transfer Pricing regulations if there are any inter-company transactions.
Tax Deduction at Source (TDS):
- Although the Liaison Office generally does not earn revenue, if it hires employees or makes any payments subject to TDS, it must deduct and deposit TDS and file TDS returns quarterly.
4. Goods and Services Tax (GST) Compliance (if applicable)
- GST Registration:
Obtain GST registration only if the Liaison Office provides taxable supplies or carries out activities subject to GST. However, since Liaison Offices typically do not generate revenue, this may not apply in most cases.
- Regular GST Filings:
If registered, file monthly or quarterly GST returns (GSTR-1, GSTR-3B) based on the turnover threshold.
5. Financial Compliance
Audit of Accounts:
- Even though a Liaison Office does not generate revenue, it must maintain accounts to reflect the inflow and outflow of funds, and submit them to the designated AD Category-I bank for verification.
Repatriation of Funds:
Ensure proper records of funds remitted to and from the parent company.
- Comply with the Foreign Exchange Management Act (FEMA) regulations to ensure that funds are repatriated in line with RBI guidelines.
6. Other Key Compliances
Labour Laws:
- If the Liaison Office hires employees in India, it must comply with Indian labour laws, including Provident Fund (PF), Employee State Insurance (ESI), and other employee benefits.
Local Regulations:
Adhere to specific state laws such as Shop and Establishment registration, if required, depending on the nature of the Liaison Office's operations.
Employee Settlements:
Manage payroll, tax deductions, and employee benefits like gratuity if applicable. Ensure compliance with the Income Tax Act and other statutory regulations concerning employee benefits.
PROCEDURE FOR CLOSING A LIAISON OFFICE (LO)
To close a Liaison Office (LO) in India and remit its winding-up proceeds, the Liaison Office or its authorized representative must submit a request to the designated AD Category-I Bank (AD Bank). The following documents and steps are required for the closure process:
1. Registrar of Companies (RoC):
Compliance Filings:
File Form FC-4 (Annual Return) for the foreign entity’s activities up to the closure date.
Notify the RoC about the closure of the Liaison Office by submitting Form FC-2 (Return of Closure) along with necessary documents such as the final financial statements, an auditor’s certificate, and a board resolution from the parent company confirming the closure.
2. Reserve Bank of India (RBI):
Winding-Up Approval:
Obtain the approval of the RBI or the AD Bank for remitting the closure proceeds.
Annual Activity Certificate (AAC):
Ensure that all pending AAC filings have been submitted to the AD Bank for the entire period of operation.
3. General Compliance:
Employee Settlements:
Settle all employee-related dues, including salaries, gratuities, and other benefits, if any.
Vendor/Third-Party Payments:
Ensure that all outstanding payments to vendors, contractors, and service providers are cleared.
Legal Confirmation:
A declaration from the applicant or parent company stating that no legal proceedings are pending in any Indian court against the Liaison Office and there are no legal obstacles to the remittance of funds.
4. Annual Compliance:
Proof of Annual Filings:
Provide proof that the Liaison Office has filed its Annual Activity Certificate (AAC) with the AD Bank as required.
5. Sector-Specific Permissions:
Regulatory Permission (if applicable):
For certain sectors, such as banks and insurance companies, copies of sector-specific regulator permissions for closure must be submitted along with the closure request.
6. Additional Documentation:
Any other documents specified by the Reserve Bank of India or the AD Bank during the closure process.