India: Liaison Office

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On this Page:

- India: Nature of a Liaison Office
- India: Formation of a Liaison Office
- India: Ongoing Formalities for a Liaison Office
- India: Employing Staff for a Liaison Office
- India: Taxation of a Liaison Office

India: Nature of a Liaison Office

The liaison office is often the initial route chosen by a foreign company interested in the Indian market. A liaison office will not be taxable in India provided that it limits its activities to representing its parent, and carrying out promotional and, indeed, 'liaison' activities on behalf of its parent. Permission must be obtained from the Reserve Bank of India. A liaison office that earns revenue in India will be in breach of its permission and may be taxed heavily.

There have been a number of cases which have determined the limits of permissible activity for a liaison office, some of them yielding surprising results which might seem to contradict the law; so it is necessary to be very careful and take local legal advice before following this route.

Companies without a significant profits record and/or a reasonable amount of capital may find it hard to get permission for a liaison office.

• Three copies of Form FNC1;
• A notarised English version of the certificate of incorporation and the Statutes of the parent company (Memorandum and Articles of Association);
• The applicant's latest audited balance sheet;
• A letter from a senior official of the applicant stating the purpose of the intended liaison office;
• A banker's reference;
• A letter or board minute from the applicant authorizing the local representative;
• Proof of residence and passport copies for the proposed personnel of the liaison office;
• A letter of request for the opening of a 'QA22C' bank account (one that only permits incoming funds from abroad).

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India: Ongoing Formalities for a Liaison Office

A liaison 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 though no tax is going to be due.

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India: Employing Staff for a Liaison Office

Liaison 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 liaison office will require an Employment Visa, although if only short visits are 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 liaison 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.

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India: Taxation of a Liaison Office

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

There are a number of ways in which a liaison office may be found liable to pay corporate tax. The most basic situation is one in which the liaison office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, leading to an apportionment of the parent company's income to its Indian activities.

The governing legislation is section 9(1)(i) of the Income Tax Act, and provided that the liaison office stays strictly within this wording, if will probably be immune from taxation. But the authorities are quite aggressive in their interpretation of the Act, and advance rulings may be advisable if there is any danger that the liaison office can be associated with significant Indian-source income, even though it does not pass through the bank accounts of the liaison office.

There are a number of relevant cases, including Angel Garment Ltd (287 ITR 341), Motorola Inc and Others v DCIT (95 ITD 269), Gutal Trading Est (278 ITR 643), Western Union Financial Services Inc (101 TTJ 56), IAC v Mitsui and Co Ltd (39 ITD 59) and UAE Exchange Centre LLC (268 ITR 9). Most of these support the immunity of liaison offices from taxation, but the last one in particular is worrying.

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

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