India: Branch

ASIA/PACIFIC HOME PAGE | VIEW A DIFFERENT TAX JURISDICTION

Back to top

India: Formation of a Branch Office

Under the Companies Act 1956, in order to open a branch office, a domestic company must pass a Board resolution specifying:

• The business to be carried on by the branch;
• The individual to be appointed manager of the branch; and giving
• Authorization to a parent company official to make provision for necessary support of the branch.

If the branch is to carry on activities which are other than incidental to those of the parent company as laid down in its Memorandum and Articles of Association of the company, then a special resolution is required, and a declaration must be made on e-Form No.20A with the Registrar of Companies within thirty days of passing the resolution, which itself must be reported on e-Form No.23.

For a foreign company to open a branch office, it must obtain permission from the Reserve Bank of India (RBI), which will include the following conditions:

• The branch office cannot expand its activities or undertake any new trading, commercial or industrial activity other than those which are expressly approved by the RBI;
• The entire expenses of the branch office in India will be met either out of the funds received by it from abroad through normal banking channels or through income generated by it in India;
• The branch office cannot accept any deposits in India;
• Commissions earned by the branch office from parties abroad for any agency business will be repatriated to India through normal banking channels.

In order to open a branch office, the foreign company needs to submit a formal application to the Chief General Manager, Exchange Control Department (Foreign Investment Division), RBI Central Office, Mumbai on form FNC-1. The application must include the following details:

• The operating history of the company worldwide;
• Proposed interests and activities in India;
• Reasons for wanting to open a branch office and
• Any foreign exchange implications.

Once permission has been obtained, the branch office can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax collection number). Visas for foreign staff can now be issued and bank accounts opened.

Branch offices may remit their profits outside India, net of applicable Indian taxes and subject to RBI guidelines. They need not retain any profits as reserves in India. In certain cases, where income is deemed to have originated in India and such income includes royalties, fees for technical services, interest and capital gains, branch offices may repatriate profits to their Head Office without obtaining prior approval from RBI.

Back to top

India: Ongoing Formalities for a Branch Office

A branch office is required to file annual audited financial statements with the RBI and the Registrar of Companies; tax returns also have to be filed, even if no tax is going to be due

Back to top

India: Employing Staff for a Branch Office

Branch offices can hire local and foreign staff.

The Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. The family members of an individual holding a work permit are also permitted to work. Indian Consulates issue work permits and visas prior to arrival.

Normally a foreigner employed by a branch office will require an Employment Visa, although if only short visits atre being made a Business Visa may be sufficient.

The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by branch offices in India and for supervision of the individuals during their stay.

Registration with the police is required witin 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos. An HIV/AIDS test result must also be filed, within 30 days.

Visas can be extended, through another set of bureaucratic procedures.

Back to top

India: Taxation of a Branch Office

If a branch office receives no income, then nominally it will not have to pay tax. If, however, income is attributed to the office, tax will be due at 40% plus surcharges and education 'cess' (totalling 42.23%). The Direct Taxes Code, which may or may not come into force in April, 2012, would reduce the tax rate on non-resident business to 30%, but would impose a 15% branch profits tax, thus worsening the existing position for foreign companies, since there is little scope to set foreign expenses against the income attributed to a local operation.

If a branch office pays its staff, it must comply with withholding tax and social security obligations.

A branch office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, possibly leading to an apportionment of the parent company's income to its Indian activities, even if the branch office receives no income of its own directly.

If a branch does have taxable income of its own, which will often be the case, expenses incurred by the parent company will be deductible only up to the level of 5% of total income. The status of employee salaries and expenses paid outside the country is not clear; they are however not likely to be deductible from Indian-source income.

Corporate taxation is dealt with more fully here, and individual taxation is dealt with more fully here. Incentive schemes are dealt with here.

Back to top