Liasioning Services for Remittance of Funds
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Liasioning Services for Remittance of Funds
A liaison office (LO), also known as a representative office, has a specific and limited scope of operation. Its primary function is to serve as a communication channel between the Head Office abroad and parties in India. Unlike a branch office or a subsidiary, a LO is not allowed to conduct any business or generate income in India. The expenses incurred by such offices must be covered solely through inward remittances of foreign cash from the Head Office outside of India.
The purpose of a LO is confined to activities such as gathering information about potential market prospects and presenting information about the company and its products to prospective Indian clients. These offices are crucial for market research, establishing initial contacts, and understanding the business environment in India.
Permission to open a LO is initially granted for a period of three years. This period can be extended from time to time by the Reserve Bank of India (RBI) through an Authorized Dealer Category-I bank, allowing the LO to continue its communication and information-gathering activities in India.
Benefits of opening an LO in India
Foreign corporations aiming to establish a presence in India have several options, and the choice of business structure depends entirely on their ultimate goals. When it comes to entering India, there are primarily two possibilities:
1. Branch Office: A branch office is an extension of the foreign company and is permitted to carry out business activities in India. While it can generate income, it is subject to higher regulatory requirements and taxation in India.
2. LO (Representative Office): A LO serves as a communication channel between the foreign company's head office and entities in India. It is prohibited from conducting any commercial, trading, or industrial activities. However, it is useful for market research, gathering information, and building initial contacts. One of the advantages of a LO is that it does not generate income in India, making it a suitable choice for foreign companies that do not intend to engage in business operations but want to establish a presence for communication and information-gathering purposes.
The choice between a branch office and a LO depends on the specific goals, business activities, and regulatory compliance preferences of the foreign corporation. In certain scenarios, particularly when the primary aim is communication and market understanding without revenue generation, establishing a LO can be more advantageous due to its limited scope of operation and lower regulatory complexities.
LOs are a popular choice among foreign investors who are new to the Indian markets and may be uncertain about how India's evolving foreign direct investment (FDI) regulations will impact their business operations. Unlike other business structures such as branch offices or subsidiaries, LOs offer foreign companies an opportunity to establish a limited presence in India while keeping their financial, legal, and administrative responsibilities to a minimum.
One significant advantage of LOs is that they are not considered separate legal entities. Consequently, the cost of compliance is generally lower in comparison to other options for establishing a business in India. Additionally, if an investor decides to withdraw from the Indian market, closing a LO is a relatively swift process. Instead of going through complex winding-up procedures, LOs only need to file a closure application with the RBI, simplifying the exit process for foreign investors. This flexibility makes LOs an attractive option for those seeking a low-cost and straightforward way to establish a presence in India.
Activities carried out by the liaison office
In India, a LO is permitted to undertake specific tasks, which include:
Representation: A LO can represent the parent company or a group of companies in India, acting as their communication channel and facilitating necessary interactions.
Facilitating trade: It can promote export and import activities from and into India, fostering international trade relationships on behalf of the parent company or group of companies.
Encouraging collaborations: LOs are allowed to encourage technical and financial collaborations between the parent or group companies and Indian companies. This involves facilitating partnerships, collaborations, and knowledge exchanges in various sectors.
Communication hub: A LO serves as a liaison between the parent company and Indian companies, facilitating discussions, negotiations, and other forms of communication necessary for business interactions.
Procedure for setting up a LO in India
The procedure for opening a LO in India involves adherence to regulations and specific steps. Here is an outline of the process:
1. FEMA regulations: The application and approval process for opening a LO in India is governed by the Foreign Exchange Management Act (FEMA). Foreign firms are required to comply with FEMA regulations when establishing a liaison office.
2. Permission from RBI: Foreign firms intending to open a LO must obtain specific permission from the RBI's Exchange Department. RBI is responsible for granting approval for the establishment of LOs in India.
3. Application submission: Body corporates formed outside India, including businesses or associations of individuals, can apply for the establishment of LOs in India. The application is typically submitted in a specific format, such as Form FNC Annexure 1. This form contains the necessary details about the foreign company and its proposed LO in India.
Foreign companies must carefully follow these steps and fulfill all the necessary requirements to successfully open and operate a LO in India. Compliance with regulations and timely adherence to the stipulated procedures are essential throughout the process.
Is it possible for a foreign corporation to open more than one LO in India?
All proposals for the establishment of additional LOs must be submitted to the AD Category-I bank in a fresh FNC form. However, if there are no modifications to the documents submitted previously mentioned in form FNC need not be submitted again.
If the number of LO offices exceeds four (one LO in each zone - East, West, North, and South India), the applicant has to justify the need for additional office/s and prior approval of RBI is required.
The applicant may identify one of its offices in India as the Nodal Office, which shall coordinate the activities of all its offices in India.
In case the existing LO is shifting to another city in India, prior approval from the AD Category-I bank is required. However, no permission is required if the LO is shifted to another place in the same city, subject to the condition that the new address is intimated to the designated AD Category-I bank.
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FAQs
A Liaison Office is not permitted to undertake any commercial/trading/Industrial activity, directly or indirectly and therefore cannot earn any income in India.
The liaison office can neither borrow, nor lend money.
It cannot acquire, hold, (otherwise than by way of lease for a period not exceeding 5 years) transfer or dispose of any immovable property in India, without prior approval of RBI.
The name of Indian liaison office shall be same as parent company.
The governing body for the Liaison office is AD banker/ Reserve Bank of India.
Suitable for foreign Companies looking to setup a temporary office in India to liaison its existing business with Indian clients.
The Liaison office does not have any ownership, It is just extension of the existing foreign company.
All the expenses of the Liaison office are met by the head office, hence the funds shall be received from head office account only.
The License for the Liaison office is given for three years and the same can be renewed every 3 years.
The liaison office is not subjected to taxation in India as there is no mechanism for the income tax department to examine and ascertain as to whether the activities under taken by it result in any taxable income in India
Liaison Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.
