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Establishing a Branch Office in India with ARKC Advisors

Expanding into the Indian market can be a strategic move for foreign companies seeking to tap into one of the world’s fastest-growing economies. One way to do this without directly investing in or establishing an Indian subsidiary is by setting up a branch office. At ARKC Advisors, we provide expert guidance and support to foreign companies looking to establish a branch office in India, ensuring full compliance with all regulatory requirements.

What is a Branch Office?

A branch office is a business presence in India established by a foreign company to engage in certain approved activities. Unlike a liaison office, which is limited to non-commercial activities, a branch office allows a foreign company to undertake trading or commercial activities in India. However, these activities must be pre-approved by the Reserve Bank of India (RBI).

Scope of Activities for Branch Offices

Branch offices are permitted to undertake only those activities approved by the RBI. Typically, these activities include:

• Export and Import of Goods: Facilitating trade between the parent company and Indian markets.
• Professional or Consultancy Services: Providing specialized services such as legal, engineering, or financial consulting.
• Research and Development: Conducting research activities aligned with those of the parent company.
• Technical and Financial Collaborations: Promoting partnerships between Indian companies and the parent/overseas group companies.
• Representation: Acting as a representative of the parent company in India, including serving as a buying or selling agent.
• Information Technology and Software Development: Providing IT services or developing software in India.
• Technical Support: Offering technical support for products supplied by the parent or group companies.
• Foreign Airline/Shipping Operations: Operating as a branch for foreign airlines or shipping companies.

In Special Economic Zones (SEZs), 100% Foreign Direct Investment (FDI) is allowed in setting up a stand-alone branch. However, such branches are restricted to operating solely within the SEZ and cannot conduct business activities outside the SEZ, including interactions with branches or subsidiaries of the parent company in India.

Approval Process

To establish a branch office in India, an application must be submitted to the RBI in the prescribed form. The approval process generally takes four to five weeks. However, if the application is referred to a relevant administrative ministry for comments (as may be required for banking entities), the processing time may increase. It is important to note that no prior RBI approval is needed to set up a branch office in a SEZ, as per the provisions of the SEZ Act.

Remittance Facilities

Upon receiving RBI approval, a branch office is permitted to open a bank account in India. This account can be used to meet expenses related to the branch’s operations in India and to credit income generated from these activities. Branch offices are allowed to repatriate profits generated in India on an ongoing basis, subject to compliance with certain procedural requirements.

Taxation of Branch Offices

A branch office is considered an extension of a foreign company in India, meaning that any income earned by the branch is subject to taxation under Indian law, as per the Income-tax Act, 1961. However, if a tax treaty exists between India and the foreign company’s home country, and the provisions of the treaty are more beneficial, the foreign company may elect to be taxed under the treaty provisions.

Exit Options: Closing a Branch Office

The process for closing a branch office in India typically takes six to eight weeks. The foreign company must submit an application with the required documentation to the Central office of the RBI. Additionally, the company must deregister with the Registrar of Companies (ROC).

Establishing a Project Office in India with ARKC Advisors

Expanding into new markets is a crucial step for foreign companies looking to tap into India’s vast business potential. When a foreign company secures a contract in India and needs to establish a temporary base to execute a specific project, setting up a project office is the most efficient solution. At ARKC Advisors, we offer expert assistance in establishing and managing project offices in India, ensuring compliance with all regulatory requirements.

What is a Project Office?

A project office is a temporary business presence established by a foreign company in India for the sole purpose of executing a specific project or contract. Unlike a liaison office, a project office is designed to facilitate the completion of particular contracts, allowing foreign companies to establish a base in India for the duration of the project.

Conditions for Establishing a Project Office

Foreign companies can open a project office in India without the need for prior approval from the Reserve Bank of India (RBI), provided certain conditions are met. These conditions ensure that the project is legitimate and financially supported. Specifically, a foreign company can establish a project office in India if:

• The Project is Funded by Inward Remittance: The project must be funded directly by remittances from abroad.
• Funding from International Agencies: The project is financed by a bilateral or multilateral international financing agency.
• Clearance by Appropriate Authorities: The project has received approval from the relevant authorities in India.
• Term Loan Granted to the Indian Contractor: A company or entity in India that has awarded the contract must have received a term loan from a public financial institution or bank in India for the project.

If any of these conditions are not met, the foreign company must obtain prior approval from the RBI to establish a project office in India.

Remittance Facilities for Project Offices

Once a project office is established, it is allowed to open and operate a bank account in India, including a foreign currency account. The expenses of the project office can be covered through inward remittances from the head office or from rupee funds received locally under the approved contracts. Outward remittances from the project office’s bank account are permitted, subject to compliance with specific regulatory requirements.

Taxation of Project Offices

A project office is considered an extension of the foreign company in India. As such, any income earned by the project office is taxable under Indian law, in accordance with the Income-tax Act, 1961. It is important for foreign companies to ensure that they comply with all tax obligations to avoid any legal issues.

Exit Options: Closing a Project Office

Closing a project office in India is a relatively straightforward process, especially given the temporary nature of its operations. The closure process typically takes five to six weeks. The required steps for closure depend on how the project office was initially established:

• Approval Route: If the project office was established with RBI approval, an application for closure must be submitted to the regional office of the RBI, along with the prescribed documentation.
• General Permission Route: If the project office was established under general permission, the application for closure should be submitted to the Authorized Dealer.

Establishing a Liaison Office with ARKC Advisors

India, with its dynamic economy and vast market potential, presents a lucrative opportunity for foreign companies seeking to establish a presence. One of the most straightforward and cost-effective ways for foreign entities to enter the Indian market is by setting up a liaison office. At ARKC Advisors, we specialize in guiding businesses through the process of establishing and maintaining liaison offices in India, ensuring compliance with all regulatory requirements.

What is a Liaison Office?

A liaison office serves as a representative office for a foreign company in India. It is the most basic form of business presence allowed for foreign entities in the country. Authorized by the Reserve Bank of India (RBI), the apex exchange control authority, a liaison office allows foreign companies to promote their business interests in India without engaging in direct commercial activities.

Purpose and Activities of a Liaison Office

A liaison office primarily functions as a communication and coordination point between the parent company and its operations or partners in India. The scope of activities permitted for a liaison office is limited, ensuring that it remains a non-commercial entity. Specifically, a liaison office is allowed to:

• Represent the Parent Company: Act as the Indian representative of the parent or group companies.
• Promote Exports and Imports: Facilitate trade between the parent company and Indian businesses.
• Support Technical and Financial Collaborations: Assist in fostering technical or financial partnerships between the parent company and Indian entities.
• Serve as a Communication Channel: Operate as a link between the parent company and its Indian counterparts.

Restrictions on Liaison Offices

While a liaison office can perform several support functions, it is not permitted to engage in any commercial or revenue-generating activities. Specifically, a liaison office in India is prohibited from:

• Earning Income: Liaison offices cannot generate revenue or earn income in India.
• Undertaking Commercial Activities: Engaging in any form of industrial, trading, or commercial operations is not allowed.
• Entering into Agreements: The liaison office cannot sign contracts or agreements on behalf of the head office.
• Borrowing or Lending Money: It cannot engage in any form of financial transactions that involve lending or borrowing.
• Charging Fees or Commissions: The liaison office cannot charge fees or commissions for any services rendered in India.

Approval Process for Setting Up a Liaison Office

Establishing a liaison office in India requires prior approval from the RBI. The process involves submitting an application in the prescribed format. The typical processing time for approval is three to four weeks, though it may take longer if the application needs to be reviewed by the relevant administrative ministry within the Government of India.

Remittance Facilities for Liaison Offices

Since a liaison office cannot generate income in India, it must rely on remittances from its parent company to cover its operational expenses. Any surplus funds in the liaison office’s local bank account can usually be repatriated to the parent company, but typically only when the liaison office is being closed.

Taxation of Liaison Offices

Although liaison offices are not permitted to engage in commercial activities or earn income in India, they are still required to comply with local tax regulations. As per Section 139(1) of the Indian Income Tax Act, all companies, including liaison offices, must file an annual return of income in India.

Exit Options: Closing a Liaison Office

Closing a liaison office in India is a structured process that typically takes five to six weeks. To initiate the closure, an application, along with the required documentation, must be submitted to the relevant regional office of the RBI. KKKD & Co. can assist in ensuring that the closure process is handled efficiently and in full compliance with regulatory requirements