This article is written by Utkarsh Nigam of New Law College, Bharti Vidyapeeth University, Pune. The author through this article brings out the best practices for doing business in India through Liaison Office. This article was written by the author while pursuing M.A in Business laws from NUJS.
Introduction
- A liaison office is an office or basically an intermediary which acts as a channel of communication between the head office, located in a different country and parties in India. A liaison office cannot earn any income in India or no income can be accrued in India in the name of a liaison office.
- Therefore the work of liaison offices is limited to only collecting information about the Indian market opportunities and also to impart information about the company and its products to the prospective Indian customers.
- The expenses of such establishments are to be met by the RBI guidelines which tell that expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. Therefore there are no tax implications on the entity as no income is generated in the country.
- But it is to be seen that there no permanent status should be gained by the liaison office as by doing this it will be subjected to tax liability which is high as 44 percent as of now. This is done when a direct business connection is established between the parent company and the liaison office.
- This implies that Related Party transactions must be handled with utmost care and if there is a possibility of this situation then either the company or the office should be ready to prove its dependent nature.
Procedure for Establishment
Firstly a good practice for establishing a liaison office starts from a body corporate which is established outside India, seeking the right channel to establish a Liaison office in India. The applications submitted are approved under following conditions-
- Where the principal business of the foreign entity comes under the bracket of sector where 100 per cent Foreign Direct Investment is allowed under the automatic route. Applications from foreign companies for establishing liaison office in India shall be considered by the Authorized Dealer category bank-1 as per the guidelines provided by the Reserve Bank under delegated powers.
- An application from a person resident outside India shall require prior approval of the Reserve Bank for opening a liaison office if-
- The applicant for the office is a citizen or is registered in Pakistan
- The applicant for the office is a citizen or is registered in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a liaison office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands.
- The principal business of the applicant falls in the four sectors which are Defence, Telecom, Private Security and Information and Broadcasting.
- The application is from a Non-Government Organisation of a foreign government or department of a foreign government. Such applications may be forwarded by the Authorized Dealer category-1 bank to the Reserve Bank who shall process the application in consultation with the Government.
The Reserve Bank also checks the profit making track record of the entity applying for liaison office’s establishment during the immediately preceding three financial years in the home country. The Net worth (total of paid up capital and free reserves less intangible assets as per the latest Audited Balance Sheet or Account Statement by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name ) should not be less than USD 50,000. The application for the establishment of a liaison office in India should be forwarded through an Authorized Dealer Category-1 bank, by the forward entity to the general Manager, Foreign Exchange Department along with relevant documents which includes the English version of the Certificate of Incorporation or Memorandum and Articles of Association attested by the Indian Embassy in the country of registration, and latest audited balance sheet of the entity which is making the application. The Authorized dealer category-1 bank plays a vital role and a responsibility is thus pushed on these intermediaries to exercise due diligence in checking the details of the applicant entity, its background, the details of its promoters, nature of its business, sources of funds etc. and also it is the duty of the AD-1 category bank to ensure the compliance of KYC norms before the application is submitted to the Reserve Bank.
A liaison office at first is given a license to operate in the country for an initial period of three years but this period can be extended for a period of three years from the date of expiry of the original approval granted by the Reserve Bank by the designated Authorized Dealer category-1 bank. Such extension has to be granted within one month from the receipt of the request. The extension application for the liaison offices of banks and insurance companies are to be submitted directly to the respective concerned departments that are Department of Banking Regulations and Insurance Regulatory and Development Authority. For this purpose the applicant office should comply with the following conditions in order-
- The Liaison office should have submitted the Annual Activity Certificates for the previous years and
- The account of the Liaison office maintained with the designated Authorized Dealer Category-1 bank is being operated according to the terms and conditions stipulated in the approval.
Also, no extension will be provided to the Liaison office of Non-Banking Financial Companies and entities engaged in construction and development sectors (excluding infrastructure development companies). After the completion of the validity period of three years these entities have the option to close down the business or get converted into a Joint Venture business or to a wholly owned subsidiary in confirmation with the Foreign Direct Investment Policy.
Also after the case of Bar Council of India vs AK Balaji and Ors. The Hon’ble Supreme court directed the Reserve Bank not to grant any permission to a foreign law firm to open any liaison office in India till further orders in this regard. However, the court mentioned that the law firms which have been granted permission before the date of judgement for opening liaison offices may be allowed till the permission is valid. No new permissions can be granted as of now to any law firm for opening a liaison office.
Permissible Activities
The most important thing for ensuring the best practise of doing business through liaison office is abiding by the activities to which a liaison office is limited to and thereby complying with the norms formed by the Reserve Bank in regards to this area.
A Liaison Office can undertake the following activities in India
- Representing in India the parent company / group companies.
The liaison office can undertake the operation of representing the foreign entity in India but cannot take order or supply any order as this will be deemed to a business and any income accrued through business will be taxable.
- Promoting export / import from / to India.
A liaison office can also be started for promoting export import services in the country. Also vide RBI/2015-16/185 A.P. (DIR Series) Circular No.16 foreign entities who want to operate as Online Payment Gateway Service Providers are required to open a liaison office in the country with the prior approval of Reserve Bank before operationalizing the arrangement with any AD category-1 bank.
- Promoting technical/financial collaborations between parent/group companies and companies in India.
- Acting as a communication channel between the parent company and Indian companies.
Formalities to be Undertaken
The liaison office, after it has been established with the approval of Reserve Bank will also be allotted a Unique Identification Number. The liaison office as a method of best practise are also required to obtain a Permanent Account Number from the Income Tax Department on setting up the office in the country. The liaison office is required to register itself with the Registrar of Companies (ROC) within thirty days of its establishment by filing Form-44 through the Ministry of Corporate Affair’s online portal (MCA website). The following documents are required to be submitted while filing the form too-
- A copy of the liaison office charter or Memorandum & Articles of Association in English;
- Full address for the enterprise’s principal place of operation outside of India;
- Name and address of the liaison office in India;
- List of directors;
- Name and address of the company’s official representative based in India (e.g. the person authorized to accept delivery of notices and documents served to the company).
If a foreign insurance company wants to establish a liaison office in India, firstly it has to obtain a special permission from the Insurance Regulatory and Development Authority (IRDA) and then after getting the necessary permission it will follow all the above mentioned steps. Similarly foreign banks are required to obtain permission under Banking Regulation Act for operating a liaison office in India.
A liaison office may approach a designated Authorized Dealer category-1 bank in India to open an account to receive remittances from its Head Office. Also the liaison office is not permitted to maintain more than one bank account without the prior approval of the Reserve Bank. The following transactions which are allowed are-
- Funds received from Head office for meeting the regular expenses through normal banking channels.
- Refund of Security Deposits paid by liaison office or the head office
- Refund of taxes, duties etc. paid from office’s account
- Sale of proceeds of assets of the Liaison office.
- The debits should include the needs for meeting local expenses
A liaison office on its own, in case of a sole liaison office or a nodal office situated in India in case of multiple liaison offices have to submit an Annual Activity Certificate (AAC) at the end of the financial year along with the required documents to the designated Authorized Dealer category-1 bank as well as to the Director General of Income Tax (International Taxation). This certificate needs to be submitted to the above mentioned authorities so that the Authorized Dealer bank can scrutinize or check that the activities undertaken by the liaison office are in accordance with the terms and conditions of the approval given and in case of any unfavourable findings the same should be reported to the General Manager, Reserve Bank of India.
Further in ensuring good practise, applications coming from the countries of from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan shall also have to register their offices with the state police authorities for necessary records.
If the foreign entity is desirous of opening additional liaison offices in the country it shall submit its application to the Authorized dealer category-1 bank in a fresh FNC form. The limit of four offices (one each in every zone north, south, west, east) if is exceeded it shall only be done with the prior approval of Reserve Bank and the applicant is required to identify one of the offices as a nodal office which shall coordinate the activities and relations between all the offices operating in the country. The liaison office has to intimate and get a prior approval of the Authorized dealer category-1 bank if it shifts its office from one city to another.
However no prior approval is required in case the address is shifted within the city limits only, in this case intimation clause is only to be complied with. In case if the liaison office is desirous of undertaking additional activities the request for the same should be submitted to the Reserve Bank justifying the need for the same in the prescribed manner as specified by the Reserve Bank. Authorized Dealer Category-1 bank may, based on their business prudence, Board approved policy and compliance to extant rules/regulations stipulated by DBR, RBI extend fund/non-fund based facilities to Branch and Project Offices only and not to liaison offices. Every liaison office are required to transact only through one Authorized Dealer Category-1 bank who shall be responsible for all the due diligence work and KYC formalities done for establishing the liaison office. Liaison offices which are present at multiple locations are required to transact through their designated Authorized Dealer category-1 banks but the reporting work should be done by the Authorized dealer of the nodal office in this case. A liaison office is allowed to change their Authorized Dealer category-1 bank if both the original bank and the new bank give their consent in writing regarding the transfer and the original bank confirms the submission of all the Annual Activity Certificates (AACs) and absence of any adverse point in conducting the account by the liaison office.
If the liaison office is permitted to be upgraded to a branch office then the bank accounts and the Permanent Account Number can be retained and continued.
The liaison office is also required to file an annual receipt and a payment statement, a statement which contains the details of assets and liabilities duly audited by a practising Chartered Accountant registered in India and also a Consolidated Financial Statement of the parent company of whose liaison office is registered in India, which should be duly notarized by the Indian Embassy that has a jurisdiction over the foreign company to the Registrar of Companies (ROC). The documents submitted have to be in English Language and if this is not the case then firstly they have to be translated before notarization and then only they can be submitted. The filing should also mention the places of business along with the copy of approvals if it has obtained in any case. This filing is mandatory in nature and should be done before 6 months from the date of closure of books of accounts of the liaison office.
In cases of transfer of assets the request may be considered by the Authorized Dealer category-1 bank only from the offices who are regularly complying to the norms set by the institutional authorities like filing AAC, obtaining PAN, getting registered under the Companies Act, 2013 with the Registrar. In case of transfer of assets by the way of sale to Joint Venture or Wholly owned subsidiary the Authorized Dealer category-1 bank should allow the following only when the non-resident entity intends to close the liaison office in India. For this purpose a certificate is to be submitted by the statutory auditor furnishing details of the assets to be transferred which would indicate the details regarding acquisition, original price, depreciation till date , present book value or Written down Value and sale consideration to be obtained. It should be noted that the sale consideration cannot be more than the book value in any case. The assets should have been acquired by the liaison office from inward remittances and no intangible assets such as good will, pre-operative expenses should be included in this. The Authorized Dealer category-1 bank should ensure and has the responsibility of making the office pay all the applicable taxes on the transaction while permitting the transfer of assets. The credit in the bank account of the liaison office is treated as a permissible credit in the account of the liaison office. Donations made to other entities which are not for profit or non governmental organisations by the liaison office of old infrastructure can be allowed by the Authorized Dealer category-1 bank after satisfying with the bona fide of the transaction.
Winding-up Procedures and Formalities
For the closure of the liaison office and allowing of the remittances of the winding up proceeds, a request has to be submitted to the designated Authorized dealer category-1 bank by the liaison office or the nodal office representing the offices in the country. The application request has to be submitted with the following documents-
- Copy of the approval by the Reserve Bank or the Authorized Dealer category-1 bank for the establishment of the liaison office.
- Auditors certificate which should indicate-
- The manner in which the remitted amount has come to the country and a statement regarding the assets and liabilities and also the manner of disposal of these assets.
- That the liabilities in the country including arrears of gratuity and other benefits to employees etc. of the office has been paid
- That no income from source outside India has remained un-repatriated to India.
- A confirmation from the foreign entity who has established the liaison office in the country that no legal proceedings against the office are pending in the Indian courts and there is no legal hindrance to the remittances.
- A report from the Registrar of Companies regarding the compliance of the provisions of Companies Act,2013 in case of winding up of the liaison office, wherever applicable. For this report to be given, a board resolution has to be passed by the parent company for closing the liaison office in India which should also mention the date of closure of liaison activities by the office. The employment contracts have to be terminated timely with full and final settlements and at last a board resolution of the liaison office is required which will empower the authorized persons to file an application in an e-form with the Registrar of Companies and take its approval.
- The Annual Activity Certificates has to be filed for the closure which should be ensured by the Authorized Dealer category-1 bank.
- The Designated Authorized Dealer category-1 banks may allow the remittance of the winding up proceeds in case of banks and insurance companies after the approval for the same has been given by the individual sectoral regulators.
The liaison office above all the mentioned steps has to comply with the Goods and Services Tax obligation under reverse tax mechanism for availing certain services like legal services.
The above-discussed points and the compliances are some of the best practises which should be followed by an entity established outside the country if it has to conduct its business through liaison offices. In case of liaison office the entity should comply with the Reserve Bank’s guidelines every time along with the provisions of Foreign Exchange Management Act. It is important to note the significance and importance of designated authorized dealer category-1 banks as they are the most important intermediary through which the liaison office is created and the business is carried out. Following the procedural norms of these entities thus becomes important if a business has to be conducted through the way of liaison office.[1][2][3][4]
[1] Referred https://rbi.org.in/scripts/BS_ViewMasDirections.aspx
[2] Referred https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx
[3] Referred https://www.maiervidorno.com/set-liaison-office-india
[4] Referred http://www.pkpconsult.com/liasion-office.html
