India: Types of Company
This page was last updated on 11 Dec 2018.
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 correct body – in the case of normal companies, the Reserve Bank of India’s Foreign Exchange Department. 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. Hence it is necessary to be very careful and take local legal advice before following this route.
The establishment of a liaison office is governed by the Foreign Exchange Management Act (2004). Companies without a significant profits record and/or a reasonable amount of capital may find it hard to get permission for a liaison office.
Formation of a Liaison Office
The Reserve Bank of India, the country’s chief bank, grants permission to open a liaison office. The entire process can take anywhere from a few weeks to a few months depending on the industry and India’s relations with the nationality of the parent company. Approval is generally granted for a period of one to three years, on expiry of which the foreign company can apply for a renewal.
The following documents have to be submitted to the Reserve Bank of India (RBI):
- 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).
The RBI involves the Ministry of Finance, the Ministry of External Affairs and the Interior Ministry, and only after they have given permission will the RBI issue a letter of 'no objection' allowing the office to be opened. This process will typically take two to three months, if there are no problems. Welcome to the world of Indian bureaucracy!
Armed with the letter of 'no objection', the liaison office can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax deduction and collection account number). Visas for foreign staff can now be issued and bank accounts opened.
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.
Employing Staff for a Liaison Office
Liaison offices can hire local and foreign staff.
The Ministry of Foreign Affairs is responsible for issuing 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 within 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, though this involves another set of bureaucratic procedures.