Introduction.
A foreign entity can establish its presence in India depending on the proposed activities of such entity, either through the opening of a liaison office (LO), a project office (PO), a branch office (BO) or by directly investing in an incorporated entity such as a company or a LLP. The each mode is permissible for certain activities.
Permitted routes of Entry.
Liaison Office.
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.
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.
Branch Office.
A branch can be opened for specific purposes; it should be engaged in the same activities as the parent company. A BO in India is permitted by the RBI to represent the parent / group companies and undertake the following activities:
- Carrying out research work in which the parent company is engaged.
- Render professional or consultancy services.
- Promote technical or financial collaborations between Indian companies and parent or overseas group company.
- Export and import goods.
- Represent the parent company in India and act as buying / selling agents in India.
- Rendering services in Information Technology and development of software in India.
- Render technical support for the products supplied by parent or group companies.
- Representing a foreign airline/shipping company.
Branch Office is not permitted to carry out retail trading, manufacturing, except manufacturing within Special Economic Zones (SEZ), or processing activities in India.
BO provides the advantage of ease-of-operation and uncomplicated closure. However, since such operations are strictly regulated by exchange control guidelines, a branch may not provide a foreign corporation with the optimum structure for its expansion and diversification plans.
Project Office (PO).
A foreign entity that has secured a contract from an Indian company to execute a project in India can establish a project office in the india without obtaining prior permission of the RBI provided:
- The project is funded directly by inward remittance from abroad; or
- The project has been cleared by an appropriate authority; or
- The project is funded by a bilateral or multilateral international financing agency; 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.
PO is a place of business to represent the interest of the foreign company executing a project in India. Foreign companies planning to execute Engineering, Procurement, and Construction (EPC) / turnkey or any other projects in India can set up temporary project / site offices through setting up PO in India.
General Partnership and LLP.
Foreign Direct Investment (FDI) in a General Partnership is permitted subject to prior RBI approval.
Limited Liability Partnership (LLP) aims to provide the benefits of limited liability to a company, and simultaneously allow its members the flexibility of organizing their internal management on the basis of mutual agreement. LLP is a corporate body and legal entity that has perpetual succession and is separate from its partners. The liability of the partners is limited to their agreed contribution to the LLP.
Foreign Direct Investment (FDI) is permitted under the automatic route in LLPs operating in sectors/activities where 100 per cent FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.
Local Indian Subsidiary Companies.
Foreign entities can setup a wholly-owned subsidiary (WOS) in India in the form of a private company, subject to prescribed Foreign Direct Investment guidelines of Indian authorities. Foreign entities can also establish a joint venture company with an Indian or foreign partner. As compared to LO / BO / PO, a subsidiary company provides the maximum flexibility to conduct business in India. A company can be funded through a mix of equity, debt (both foreign and local) and internal accruals (through reserve and surplus). The liquidation procedure for companies is relatively more cumbersome, however since 01st April, 2020, new rules for winding up of companies have been notified and now liquidation of companies will comparatively be quicker.
Comparison between Branch Office and Indian Subsidiary Company
Comparison between branch office and subsidiary company on the basis of various parameters is discussed below:-
| Particulars | Indian subsidiary of a foreign company | Indian branch office of a foreign company |
| Residential status | Resident of India | Non-resident in india |
| Tax base for Indian tax purposes | Net profits of the Indian subsidiary (including foreign sourced income / profits of foreign branch offices), worldwide income of indian subsidiary is taxable in india. | Net profits of the Indian branch office are only taxable. |
| Eligibility to claim tax treaty benefits in India | Yes (relating to foreign tax credit) | Yes |
| Corporate tax rate | 25%/ 30% (plus applicable surcharge and cess) or special rates of 15%/22% (plus applicable surcharge and cess) as mentioned u/s 115BAA and 115BAB. | 40% (plus applicable surcharge and cess) |
| Minimum Alternate
Tax (MAT) rate |
18.5% (plus applicable surcharge and cess) of the book profits, however MAT is not applicable in case of special rates of 15%/22%. | 18.5% (plus applicable surcharge and cess) of the book profits |
| Dividend distribution tax (DDT) rate | From 01st April, 2020, no dividend distribution tax is payable by the company. However, prior to that 17.65% (plus applicable surcharge and cess) of the dividends distributed, including on transactions deemed to be dividends distributed, including on transactions deemed to be dividend distributions such as, inter alia, reduction of its capital by the Indian subsidiary or liquidation of the Indian subsidiary. | Not applicable |
| Branch profit tax (BPT) | Not Applicable | BPT was proposed to be introduced vide the Direct Tax Code, but has still not been introduced till date |
| Deduction of head office expenses | Not Applicable | Certain head office expenses (subject to conditions) are be deductible in computing the profits under section 44C of the Income-tax Act, 1961 (“Act”) |
| Availability of tax incentives | Yes | Yes (though certain tax incentives such as, inter alia, concessional tax rate of 10% on royalty from patents under section 115BBF of the Act or concessional tax rate of 25% on new manufacturing companies under section 115BA of the Act, are available only to Indian residents / Indian companies) |
| Applicability of Indian Transfer Pricing regulations. | Yes | Yes |
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