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This article is written by M.S.Bushra Tungekar, from the University of Mumbai Law Academy. In this article, the author discusses the key differences between a subsidiary company and a liaison office.

Introduction

India is one of the fastest-growing markets having a lot to offer from skilled unskilled labour to technological advancement and distribution channels. Indian markets have something to offer to everyone. Which makes it a lucrative destination for foreign investors and foreign companies to diversify and expand their business in Indian markets. Now with the emerging easing of doing business in India policies, the government is also encouraging foreign companies to do business in India.

A foreign company is a company or a body corporate that has been incorporated outside India. Such a company has a place of business in India either itself or through an agent. The business can be conducted by the company physically or through electronic mode as defined under Section 2(42) of the Companies Act, 2013.

The foreign investments are governed by various rules and regulations, Foreign exchange Management Act, 1999 (FEMA), policies and regulation by the Reserve Bank of India, foreign direct investment policies (FDI), and Companies Act, 2013. 

The foreign company in order to start a business in India has the following options: 

  • Establishing a Wholly owned subsidiary company.
  • Establishing a Liaison Office.
  • Establishing a joint venture with an Indian Company.
  • Establishing a Project Office.
  • Establishing a Branch Office.
  • Establishing Limited Liability Partnerships (LLPs).

In this article, we shall be discussing how a subsidiary company differs from a liaison office.

Comparison of a subsidiary company and liaison office

Subsidiary Company 

Liaison office

Meaning 

A company that is controlled by another company known as the parent or the holding company. A subsidiary company’s majority stake is owned by the parent or the holding company.

A holding company establishes a Subsidiary company to gain synergies such as diversification of risk, tax benefits.

A subsidiary company is considered a separate legal entity on its own. 

Therefore the liabilities, taxes, and governance are independent for a subsidiary company.

A liaison office is also known as a representative office set up as an extension of the head office. A liaison office can only undertake liaison activities. 

The office does not undertake any business or commercial or industrial activities either directly or indirectly in India.

It only acts as a medium for communication between the head office and the Indian parties. 

The roles and functions of a liaison office are very limited.

Definition 

A subsidiary company has been defined under sub-section 87 of Section 2 of the Companies Act 2013. 

The Act defines a subsidiary company as a company wherein the parent company has control over the composition of the board of directors and controls at least 51% of the total voting power. 

The control over the voting power can either be direct or along with other subsidiary companies.

The Reserve Bank of India regulates the establishment of a liaison office or of a branch office or a project office in India.

RBI regulates the establishment through Regulations may be called the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. 

Section 2(e) of the FEMA regulation defines a liaison office as a place of business that acts as a medium of communication between the head office or principal office and the entities in India. 

Furthermore, the section prohibits a liaison office from conducting any business or industrial or commercial or activity neither directly nor indirectly.

A liaison office under the FEMA regulation shall maintain itself out of inward remittances received by them from abroad, through normal banking channels. 

Constitution 

It is a company in itself.

A liaison office is an extension of its head office. It has a simple structure.

Legal status 

A subsidiary company is a separate legal entity. A foreign entity may control it, but it is still considered an Indian company. 

A liaison office is not a separate legal entity. It is considered as an extension of its principal office. It is deemed as a foreign entity.

Criteria for set up 

There are certain eligibility criteria to be fulfilled for setting up a subsidiary company in India.

The criteria are as follows: 

  • The subsidiary company must have at least 2 shareholders. 
  • The company must also have at least 2 directors. Out of the 2 directors, one must be an Indian resident.
  • The directors are required to have the Director Identification Number (DIN).

There is no requirement for minimum capital or to provide for any financial track record. 

There are certain eligibility criteria to be fulfilled for setting up a liaison office in India. 

The company applying for establishing a liaison office in India must be financially sound. 

The criteria are as follows:

  • The company must have a profit-making track record for a period of 3 immediately preceding financial years in the home country of the company.
  • The foreign entity must have a total net worth of more than USD 50,000 or its equivalent. 

Net worth being:- total paid-up capital + free reserves – intangible assets (as per the latest audited balance sheet or Account Statement, which has been certified by a Registered Accountant or like).

Time taken to incorporate

It takes approximately 2 to 3 months to incorporate a Subsidiary company in India.

It takes approximately 4 to 6 months to incorporate a liaison office in India.

Purpose for registration 

A subsidiary company is considered as an Indian entity, having a separate legal status. Therefore it can conduct business activities such as manufacturing or trading, etc.

If a foreign entity wishes to engage in business activities in India opts for a subsidiary company. 

A Liaison company cannot engage in business activities such as manufacturing or trading, etc. It can only engage in intermediary activities. Therefore if a foreign entity wants to collect information and conduct business in India without engaging in complete commercial activity.

Then the entity can go for establishing a liaison office in India.

Requirements for registration

The following registrations will be required:

  • Permanent Account Number (PAN) card or TAN card
  • Professional Tax
  • Goods and Services Tax 
  • Registration under Shops & Establishment Act
  • Import Export Code

The following registrations will be required:

  • Permanent Account Number (PAN) card or TAN card
  • Professional Tax
  • Registrar of Companies Registration
  • Import Export Code
  • Registration under Shops & Establishment Act

Renewal of Registration

The company registration is valid until the company is winded off or shut down. And as long as it meets the annual compliances required.  

Therefore there is no renewal of registration of a subsidiary company required.

According to the FEMA (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, Section 4(d)( I) states that a non-resident person can establish a liaison office in India for 3 years.

Further, the liaison office registration maybe is renewed for an extension of 3 years on the expiry of the original registration.

However, the registration for Non-Banking Financial companies, companies engaged in the construction and development sectors, is sanctioned only for a period of two years.

Upon expiry of 2 years, the said companies will either have to shut down or get converted into a Joint Venture/Wholly Owned Subsidiary in accordance with the existing Foreign Direct Investment policy.

Transfer pricing 

Transfer pricing is applicable to subsidiary companies. 

The price at which the goods and services are transferred from a subsidiary company to a parent company or to another subsidiary under the same parent company is controlled and decided by the management.

Transfer pricing is not applicable to the Liaison office.

Management 

A subsidiary company is managed by the board of directors. 

The head office appoints a representative to manage the Liaison office in India. 

Ownership 

The parent company has a majority stake in the subsidiary company. The stake of 51% belongs to the parent company according to the shareholdings.

In the case of a liaison office, the entire 100% ownership lies with the parent company.

Reporting 

A subsidiary company reports to the parent or the holding company.

The liaison office reports directly to the head office of the company.

Criteria for Meetings

The Companies Act 2013, lays down the criteria for meetings conducted by a subsidiary company.

The given below are the criteria:

  • Conducting at least one board of directors meeting every quarter. 
  • Conducting at least 1 shareholders meeting annually. 

There are no such minimum criteria for meetings applicable to a liaison office.

Permitted activities 

The subsidiary company has an object clause mentioned in the Memorandum of Association, which is in accordance with the rules and regulations of the governing laws.

The object clause defines and lays down the list of activities that the subsidiary company will undertake.

Permitted activities for a liaison office has been laid down under Schedule II of According to the FEMA (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016. 

The following activities carried by the Liaison office is permitted:

  • Act a representative in India for the parent company or the group of companies.
  • Promote export or import from or to India.
  • Promotion of financial or technical association between parent companies and entities in India.
  • Act as a channel of communication between the Indian entities and the parent company. 

Permitted incomes

The subsidiary company can accrue income from business in India.

It is also permitted to raise funds by the way of borrowings from banks and financial institutions.

However, the external commercial borrowings with respect to a subsidiary company require the approval of the reserve bank of India.

The expenses incurred by the liaison office will be met out of the funds that have been received by it from its head office.

The funds would be received through normal banking channels.

The liaison office is not permitted to accrue any income in India.

The liaison office can neither borrow in India.

Dividend to the parent company

The parent or the holding company receives dividends from its subsidiary company.

The dividend is to be paid to the parent company after the deduction of the dividend distribution Tax.

Since the liaison office does not engage in any commercial activities neither does it make any profit.

Therefore neither any dividend nor any profits or surplus is given to the parent company. 

Repatriation of funds to the parent company

A subsidiary company has two ways to repatriate funds to the parent company. It can either pay out of profits as dividends or it can buy back the shares of the company.

The dividend will be subjected to the Dividend Distribution Tax (DDT).

The remittance must be made through an authorized dealer. 

It can also be repatriated through royalties. 

According to Rule 6(1) of Foreign Exchange Management (Remittance of Assets) Regulations, 2016, a liaison office established in India must apply to the Authorised Dealer for remittance of assets on closure or remittance of its winding up funds.

The application is to be supported by the following documents:

  • Copy of permission issued by the Reserve bank of India for establishing a Liaison Office. 
  • Auditors certificate (the contents of the auditor certificate are further explained under Rule 6(1)(B) of the Foreign Exchange Management (Remittance of Assets) Regulations, 2016. 
  • Authentication by the applicant that no legal cases are pending in India in any of the courts.
  •  Report of the registrar of companies in case of winding up of the Liaison office in India.

Liabilities of the entity  

The liability of the holding company is limited in nature.

It only extends up to the shareholding of the apparent company in the subsidiary company. 

The Liability of the parent company is unlimited in the case of the Liaison office.

The Parent company is liable for Acts or commission of acts of the liaison office.

Borrowings 

The subsidiary company can borrow from financial institutions and banks.

A liaison office cannot borrow funds locally. It has to sustain itself from the funds given by the head office. 

Taxability 

A subsidiary is required to pay taxes according to the Indian Income Tax Act.

Since the liaison office does not accrue any income, it is not liable to file for income tax.

However, the liaison office has to submit Form 49C to the Income Tax Department.

Winding up and closure of entities

A subsidiary company has to follow a length procedure established under the Companies for its closure or winding up.

However, a redundant subsidiary company i.e. non-functional for 2 years can be closed by an application for strike-off of the subsidiary company.  

The process for the closure of a liaison office is easier compared to the Subsidiary company.

The liaison office has to file an application for closure to the Authorised Dealer Category – I bank.

Advantages of a subsidiary company 

  • Very limited liability of the parent company.
  • Is permitted to freely expand the business activities in India. 
  • Tax rates are low.
  • Separate legal entity. 
  • Can raise funds by the way of borrowings from banks and financial institutions.

Disadvantages of a subsidiary company 

  • The cost of compliance is high. 
  • The need to pay dividend distribution tax.

Advantages of a liaison office 

  • Less compliance cost as it is not a separate legal entity.
  • Easy winding off procedure. 
  • No taxability issues as there is no income accrual.
  • A liaison office is not required to follow many compliances.

Disadvantages of a liaison office

  • Unlimited liability on the parent organization.
  • There is a need to submit the reports of global accounts of the company to the Indian authorities.

References  


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