|
In many
commercial instances it is not necessary to incorporate a
subsidiary in India or an independent trading company in India;
a Branch Office in India may meet all commercial requirements.
In order to be in a position to make that choice the benefits
and disadvantage of both options must be understood. First of all we must differentiate between setting up a
Branch Office and setting up a Liaisons Office, since this will
provide an instant insight as to its relevant characteristics. A
Liaison Office is only permitted to do what its name suggests –
act as a intermediary between the foreign principal enterprise
and the Indian customers. It may not engage in any other
commercial activity with the objective to earn a profit. For
example a Liaisons office may not issue invoices and may not
receive purchase orders from customers in India and pass them on
to the foreign principal enterprise. It may not import goods and
supply the same to the customer. A Branch Office on the other
hand, may engage in all of these commercial activities as if it
were a local company. A subsidiary on the other hand provides
for the added advantage of separating the risk taken by the
parent company to that taken by the subsidiary. In the following
we introduce some relevant legislation.
Setting up a Branch Office in India - An Introduction
The rules and
regulations relevant to setting up and running a Branch Office
are governed by the Foreign Exchange Management Act,
2000 (FEMA 2000).
Definition of Branch Office in India
In accordance to
Regulation 2(c), a “Branch” shall have the meaning assigned to
it in sub-section (9) of Section 2 of the Companies Act, 1956 (1
of 1956). In sec. 2(9) of the Companies Act,1956 a Branch is
defined as follows: Branch office in relation to a Company
means-
(a) any
establishment described as a branch by the company; or,
(b) any
establishment carrying on either the same or substantially the
same activity as that carried out by the head office of the
company; or
(c) any
establishment engaged in production, processing or manufacture.
It is paramount
to note that although the above regulations borrow the
definition of “branch” from the Companies Act, it does not
automatically imply that only foreign companies can establish
Branch Offices in India. All types of “Persons” such as individuals,
partnership firms etc. are eligible to open a Branch Office in India.
2. Residential Status of a “Branch”
In order to make
a decision on whether a Branch office is a suitable vehicle for
Investing in India the reader must understand the residency of
the chosen vehicle and it’s associated tax status. The residency
status of a Branch is defined and governed by FEMA, the Foreign
Exchange Management Act. In accordance to section 2(v)(iii) of FEMA
a “Person resident in India includes an office, branch or agency
in India owned or controlled by a person resident outside India.
Thus, all such branches or offices would become persons resident
In India. Thus the profits derived from the Indian Branch Office will
be taxable for income tax in India.
3. What activities may a Branch Office in India engage in?
A further vital
consideration to making a decision to open a Branch Office is to
understand the permitted activities a Branch Office may carry
out. They are as follows:
1. Export/Import
of goods
2. Rendering
professional or consultancy services.
3. Carrying out
research work, in which the parent company is engaged.
4. Promoting
technical or financial collaborations between Indian companies
and parent or overseas group company.
5. Representing
the parent company in India and acting as buying/selling agent
in India.
6. Rendering
services in Information Technology and development of software
in India.
7. Rendering
technical support to the products supplied by parent/group
companies.
8. Foreign
Airline/shipping Company.
The above is
quite an extensive list of permissible activities and usually a
Branch Office in India will suffice for any type of commercial requirements a
foreign investor may have. In fact once the permission has been
received by the Reserve Bank of India (RBI) to register a Branch
Office in India then the list of permitted activities is on par
to a general permission to carry out any or all of the above
activities. However if the Branch Office intends to conduct
activities that are not listed on the above list then a special
permission has to be applied for from RBI for such excluded
activities. EFS can and will assist in obtaining such a
permission. contact:
info@e-f-s.net
4. Procedure for Setting up a Branch Office in India
In accordance to
regulation 3, a Branch Office in India may only be set up with
the prior approval obtained by the Reserve Bank of India (RBI).
In course of
obtaining approval from the RBI EFS will submit a form known as
form FNC-1 on the clients behalf and submit this along with the
following documentation from the Principal Enterprise, the
foreign Investor:
-
Copies of the last
three years audited Balance Sheet,
-
Three years
of audited Profit & Loss
Account
-
Certification and
Confirmation of the Intended Business Activities in India
-
Translated
English version of the Company’s Certificate of
Incorporation/Registration,
-
Translated
English version of the Memorandum & Articles of Association
-
English version
of the Copy of the Board resolution for opening office in India
-
Reasons for
opening office in India and details of business transacted,
details of customers, vendors etc.·
-
Company’s profile
with brief history, product details, group companies etc.
-
Special power of Attorney in favour of EFS Consultants Pvt, or
our assigned local representative duly notarised
6. Details on Opening a Bank Account for the Indian Branch
Office
The Branch Office
can open a bank account in its name with any bank in India. It
can even avail credit facilities from the Bank like Cash Credit,
Overdraft etc. without permission of the RBI as its status is
‘person resident in India’ and it will be treated on par with
any other business established in India.
7. Tax Implications and Remittance Guidelines for the Indian
Branch Office
A person resident
outside India permitted by the Reserve Bank of India under Regulation 5,
to establish a Branch Office or Project Office in India, may remit
outside India the profit of the branch or surplus of the Project
on its completion or the end of its financial year, net of
applicable Indian taxes, on production of the following
documents, and establishing the net profit or surplus, as the
case may be, to the satisfaction of the authorised dealer
through whom the remittance is effected.
Details of the
Remittance Regulations of a Branch Office in India.
1..Certified copy
of the audited balance-sheet and profit and loss account for the
relevant year
2. a. Chartered
Accountant's certificate certifying, a. the manner of arriving
at the remittable profit,
2b. that the
entire remittable profit has been earned by undertaking the
permitted activities, and
2c. that the
profit does not include any profit on revaluation of the assets
of the branch.
At EFS we will assist you in
receiving all the Reserve Bank of India (RBI) approvals and will
register your Indian Branch Office in a Location of your choice
or preference. |
