Brief Introduction.
Liaison Office (LO) is a type of unincorporated entity of a foreign enterprise to act as a communication channel between the foreign enterprise and parties in india. Such offices are generally set up by the foreign enterprise for collection of data, market research, representing the enterprises in india etc.
Permissible Activities through Liaison Office.
Set up of an Liaison Office is permitted by RBI to undertake the following activities:-
- Represent the parent company or group companies in India
- Undertake market research
- Promote export and import from and to India
- Promote technical and financial collaborations between parent and group companies and companies in India
- Act as a communication channel between the parent and Indian companies
An LO is not allowed to make any commercial or industrial or trading activity in India. Expenses of such offices are to be met entirely through inward remittances of forex from the head office outside India.
The procedure and guidelines for setting up an Liaison Office is governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, read with the RBI’s Master Direction on Establishment of Branch Office (BO) / Liaison Office (LO) / Project Office (PO) in India by foreign entities, as amended from time to time.
Approval Requirement for setting up Liaison Office.
Approval of Reserve Bank of India
A body corporate incorporated outside India, desirous of opening a LO in India shall require prior approval of RBI in the following cases:
- Where applicant is citizen of Pakistan or Registered / Incorporated in Pakistan.
- Where applicant is citizen of following countries or registered or incorporated in:-
- Bangladesh
- Sri Lanka
- Afghanistan
- Iran
- China
- Hong Kong
- Macau and;
the application is for opening LO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands.
- Where the applicant is Non-Government organisation (NGO), Non-profit organization or a Body/ Agency/ Department of a foreign government.
- The principal business falls in the sectors i.e. Defence, Telecom, Private security and information and broad casting.
Approval from Regularity authorities.
The following applicant are also required to take the prior approval for setting up liaison office in india.
- Foreign insurance companies can establish Liaison offices in India only after obtaining prior approval from Insurance Regulatory and Development Authority (IRDA).
- Foreign banks can establish LO in India only after obtaining prior approval from the Department of Banking Regulation (DBR), RBI.
No Requirement of Permission.
Other than above mentioned categories, a body corporate incorporated outside India, desirous of opening a LO in India, can set-up such office with the approval of Authorised Dealer (AD) Bank in India and does not require prior approval of RBI.
Procedure of making application.
Conditions for setting up Liaison Office
While sanctioning approval for setting up Liaison Office (LO) for foreign enterprises, the AD bank to consider the following norms:-
Profits:- Foreign company should have a profit making track record during the immediately preceding 3 financial years in the home country.
Net Worth:– Net worth of foreign company should not be less than US$ 50,000 or its equivalent.
Further, Net Worth means total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called. An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) from its parent/ group company, subject to the condition that the parent/ group company satisfies the above criteria for net worth and profit.
Other conditions:- In case the LO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse. In cases where the non-resident enterprise is not able to open the office within the stipulated time frame due to reasons beyond its control, the AD Category-I bank may consider granting extension of time for a further period of six months for setting up the office. Any further extension of time shall require prior approval of RBI.
Authority for filing Application.
The application for setting up LO in India is to be submitted by the non-resident entity in Form FNC to a designated AD bank along with the prescribed documents. The AD bank shall after exercising due diligence in respect of the applicant’s background and satisfying itself as regards adherence to the eligibility criteria for establishing LO and compliance with the extant KYC norms, grant approval to the foreign entity for establishing LO in India. Before issuing the approval letter to the applicant for LO, the AD category-I bank shall forward a copy of the Form FNC along with details of the approval proposed to be granted by it to RBI for allotment of Unique Identification Number (UIN) to each LO. After receipt of UIN from RBI, AD bank shall issue the approval letter to the entity for establishment of LO in India.
In addition to approval by AD Bank or RBI, Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous a LO in India shall have to register with the concerned state police authorities. In these cases, copy of approval letter shall be marked by the AD bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi.
Procedure post approval.
Once foreign company begins a LO, is required to register with the Registrar of Companies (ROC) as required under the Companies Act, 2013. A foreign company which has established a place of business in India should file required documents with the Registrar of Companies for registration within 30 days of establishment of place of business in India in Form FC-1.
Validity of Liaison Office.
The validity of an LO is normally for three years except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity is two years only. LOs opened by such entities i.e. entities engaged in construction and development (excluding infrastructure development companies) shall not be allowed any extension of time. Upon expiry of the validity period, the LOs shall have to either close down or be converted into a Joint Venture / Wholly Owned Subsidiary in conformity with the extant Foreign Direct Investment policy. Any requests for extension of time for LOs may be submitted before the expiry of the validity of the approval, to the AD Category-I bank concerned under whose jurisdiction the LO/Nodal office is located. The designated AD Category – I bank may extend the validity period of LOs for a period of 3 years from the date of expiry of the original approval / extension granted subject to compliance with specified conditions.
Opening and Operation of Bank Account.
LO may open an account with the designated AD category I Bank in India for receiving remittances from its head office outside India. It may be noted that LO shall not maintain more than one bank account at any given time without the prior permission of RBI. The permitted credits and debits to the account are laid down in the Master Direction on Establishment of LO / BO / PO in India by foreign entities.
Each LO is required to transact through one designated AD bank only who shall be responsible for the due diligence and KYC norms of the LO. LO present in multiple locations, is required to transact through their designated AD. However, the AD of the nodal office is required to comply with all the reporting norms. LO can change their existing AD Category-I bank subject to both the AD banks giving consent in writing for the transfer and the transferring AD bank confirming submission of all Annual Activity Certificate (AACs) and absence of any adverse features in conducting the account by the LO.
Application for Addition Office and/or Activity.
Requests for establishing additional LOs may be submitted to the AD Category-I bank in a fresh FNC form. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier. Following norms to be observed where there is request for additional offices:-
- If the number of offices exceeds 4 (i.e. one BO / LO in each zone viz; East, West, North and South), the applicant has to justify the need for additional office/s and it shall require prior approval of RBI.
- The applicant may identify one of its offices in India as the Nodal Office, which will coordinate the activities of all of its offices in India.
- Whenever the existing LO is shifting to another city in India, prior approval from the AD Category-I bank is required. However, no permission is required if the LO is shifted to another place in the same city subject to the condition that the new address is intimated to the designated AD Category-I bank. Changes in the postal address may be intimated to the CO Cell, New Delhi by the AD Category-I bank at the earliest.
Requests for undertaking activities in addition to what has been permitted initially (Annex C) by RBI/ AD Category-I bank would require prior RBI approval.
Reporting Requirement by Liaison Office.
The Annual Activity Certificate (AAC) as at the end of March 31 each year along with the documents laid down needs to be submitted by the following:
- In case of a sole LO, by the LO concerned;
- In case of multiple LO, a combined AAC in respect of all the offices in India by the nodal office of the LOs.
The LO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi.
Transfer of assets of Liaison Office.
Proposals for transfer of assets may be considered by the AD Category-I bank only from LO who are adhering to the operational guidelines such as submission of Annual Activity Certificate (AACs) (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation); have obtained PAN from IT Authorities and have got registered with ROC under the Companies Act 2013, if necessary. Also:
- Transfer of assets by way of sale to the Joint Venture (JV) / Wholly Owned Subsidiary (WOS) be allowed by AD Category-I bank only when the non-resident entity intends to close their LO operations in India.
- A certificate is to be submitted from the Statutory Auditor furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or written down value (WDV) value and sale consideration to be obtained. Statutory Auditor should also confirm that the assets were not re-valued after their initial acquisition. The sale consideration should not be more than the book value in each case.
- The assets should have been acquired by the LO from inward remittances and no intangible assets such as good will, preoperative expenses should be included. No revenue expenses such as lease hold improvements incurred by the LO can be capitalised and transferred to JV/WOS.
- AD Category-I bank must ensure payment of all applicable taxes while permitting transfer of assets.
- Credits to the bank accounts of LO on account of such transfer of assets will be treated as permissible credits.
- Donation by LO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organisations may be permitted by the AD category-I banks after satisfying itself about the bona fides of the transaction.
Closure of Liaison Office.
Requests for closure of the LO and for remittance of winding-up proceeds, if any may be submitted to the designated AD Category – I bank by the LO or their nodal office, as the case may be along with the following documents:
- Copy of the RBI approval for establishing the LO.
- Auditor’s certificate:
- Indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant and indicating the manner of disposal of assets;
- Confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the office have been either fully met or adequately provided for; and
- Confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
- Confirmation from the applicant / parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.
- A report from the ROC regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the office in India.
- The designated AD Category – I banks has to ensure that the LO had filed their respective AACs.
- Any other documents, specified by RBI/AD Category-I bank while granting approval.
Designated AD Category-I bank may allow remittance of winding up proceeds in respect of offices of banks and insurance companies, after obtaining copies of permission of closure from the sectoral regulators along with the documents mentioned above.
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