Incorporation of Liaison Office

A LO is in the nature of a representative office set up primarily to explore and understand the business and investment climate. A Liaison Office (LO) is not permitted to undertake any commercial /trading /industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from parent company through normal banking channels. The LO is permitted to undertake following activities only:

• Representing the parent Company in India
• Promoting export/ import from/ to India
• Promoting technical / financial collaborations between the parent company and companies in India
• Acting as a communication channel between the parent company and Indian companies

Any foreign company intending to open a LO in India is required to obtain prior approval from the RBI, the apex bank in India. Approval is usually granted for one to three years and can be renewed on expiry thereof.

Suitability of a LO

The LO generally acts as a communication channel between the parent company overseas and its present or prospective customers in India. The LO can also be set up to establish business contacts or gather market intelligence to promote the products or services of the overseas parent company.

The LO cannot undertake any business activity in India nor earn any income in India. At the time of closure of the LO, RBI grants permission to repatriate the balance in the Indian bank account to the parent company subject to fulfillment of prescribed conditions.

Since the LO is not permitted to earn any income, it should not constitute a taxable entity in India. However, the LO would be required to withhold tax from certain payments and hence is expected to comply with the requisite "tax withholding" obligations under the domestic tax law. To open a LO, the parent company has to apply to the Reserve Bank of India and is normally granted permission within 6 to 8 weeks.

LO is subjected to few restrictions; some of them that deserve to be well understood are reproduced here:

• It cannot carry out any commercial operations in India.
• It must maintain a designated account with the bank in India. This is a special account that only allows inflows from abroad.
• It can neither borrow, nor lend money
• All expenses of the office must be met through inward remittances to the office from abroad (parent company) through the bank. It is not subject to taxation in India
• However, the office must file regular returns to the RBI. Such returns must include Audited Annual accounts and an activity report for the year.

Conditions to be fulfilled -

As per recent circulars of RBI, a Foreign company wishing to set up a LO needs to fulfill following requirements:
Eligibility Criteria for Establishment of LO in India

Reserve Bank Route -
Principal business of the foreign entity falls under sectors where 100 per cent foreign direct investment (FDI) is permissible under the automatic route.

Government Route -
Principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category are considered by the Reserve Bank, in consultation with the Government of India, Ministry of Finance.

• Track Record - a profit making track record during the immediately preceding three financial years in the home country.
• Net Worth - not less than USD 50,000 or its equivalent. [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].

Applicants that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company subject to the condition that the parent company satisfies the eligibility criteria as prescribed.

The Process entails following steps:

1. An application will be submitted to your banker as mentioned at Pt 1 above. They will scrutinise the proposal and forward the same to RBI. In case they have any queries, the same will be sorted out in consultation with KDP.
2. RBI will scrutinise the papers and issue a letter giving permission for the LO. This permission is typically valid for a period of three years.
3. We need to approach the bankers with a copy of this letter and relevant documents or opening of Bank account and on scrutiny of documents, bank account is established.
4. We are expected to obtain following registrations -
   • Permanent Account Number (PAN)
   • Tax Account Number (TAN)
   • Registration with House of Companies (locally called Registrar of Companies- ROC)
   • Unique Identification Number (UIN)
   • Obtain Import Export Code (IEC) - This is not mandatory
5. We are now ready to start operations in India.