Definition - Liaison Office (LO) Defined in clause 2(e) of Notification No. FEMA 22 /2000-RB dated 3rd May 2000• Liaison Office means a place of business to act as a channel of communication between the principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel;
Suitability• Simple structure• Preparatory step before commencing business in India• Relatively easier and cheaper to set up,• Easier to maintain and close down• Less Compliances• No tax as such
Permitted Activities by LO Representing the parent / group companies Promoting export/import from/to India Promoting technical/financial collaborations between parent/group companies and companies in India. Acting as communication channel between the parent company & Indian companies Any other as permitted by RBI
Restricted Activities for LO• Trading;• Entering into any contracts with Indian residents;• Borrowing funds;• No business should be carried on or revenue generated in India;• All the expenses for the set-up, operation and maintenance of the Liaison office have to be met out of foreign exchange remittances from the foreign company;
Restrictions as per RBI letter• Not to acquire, hold, transfer any property in India without RBI prior approval• Prior approval of RBI required before shifting of Liaison office• Shall not enter into contract in its own name• Shall not borrow/lend any money from/to any person in India without RBI prior permission
Continued…• The office in India shall not render any consultancy or other services directly/indirectly with or without consideration• Shall not have signing /commitment powers except as required for normal functioning of the office , on behalf of head office• Not permitted to charge any commission or receive other income from Indian customers for providing Liaison services
Branch officeDefinition and Permitted activities
Definition – Branch Office (BO)• As per Regulation of Notification No. FEMA 22 /2000-RB dated 3rd May 2000 clause 2(c)Branch shall have the meaning assigned to it in sub-section (9) of Section 2 of the Companies Act, 1956 ( 1 of 1956),
Definition under companies Act “branch office” in relation to a company means— any establishment described as a branch by the company; or any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or any establishment engaged in any production, processing or manufacture
Permitted Activities by Branch Office• Export/Import of goods• Rendering professional or consultancy services.• Carrying out research work, in which the parent company is engaged.• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
Contd…• Rendering services in Information Technology and development of software in India.• Rendering technical support to the products supplied by parent/group companies.• Foreign airline/shipping company.• Representing the parent company in India and acting as buying/selling agent in India.
Restricted Activities for BO• Prohibited from expanding its activities or undertake any new trading, commercial or industrial activity other than that expressly approved by RBI.• Restricted from accepting deposits in India.
Foreign Exchange • Sub-section (6) of Section 6 of the Foreign ExchangeManagement Act, Management Act, 1999 1999 • Foreign Exchange Management (Establishment in India ofReserve Bank of branch or office or other place of business) Regulations, India 2000 • Notification No. FEMA 22 /2000-RB dated 3rd May 2000 Companies Act • Section 591 to 602, both inclusive • Section 9 Income Tax Act • DTAA
Reserve Bank of IndiaRegulation 5 of Notification no 22/2000 of FEMA dated 3 May 2000• Prior approval of Reserve Bank of India (RBI) required• Application to be made in form FNC1• To obtain the Unique Identification Number (UIN)• Approval generally granted in 3 weeks• Permission for a period of three years and to be renewed thereafter.
Companies Act• Section 591 to 602, both inclusive, shall apply to all foreign companies, companies incorporated outside India which, have established a place of business within India;• Fifty percent of the paid up share capital of a company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more body corporate incorporated in India ,or by one or more citizens of India and one or more body corporate incorporated in India, whether singly or in the aggregate, such company shall comply with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India ,as if it were a company incorporated in India.
Government Route/RBI RouteLiaison office Branch office• a profit making track record • a profit making track record during the immediately during the immediately preceding three financial years preceding five financial years in the home country. in the home country.• Net Worth [total of paid-up • not less than USD 100,000 or capital and free reserves, less its equivalent. intangible assets as per the latest Audited Balance Sheet - not less than USD 50,000 or its equivalent.
Reserve Bank of IndiaWhen required REGULATION 3 :- No person resident outside India shall, without prior approval of the Reserve Bank, establish in India a branch or a liaison office or a project office or any other place of business by whatever name called
Documents required for RBI• Form FNC• Translated English version of the Company’s Certificate of Incorporation/Registration, Memorandum & Articles of Association attested by the Indian Embassy/Notary public in the country of registration (Two original copies)• Copies of last three years audited Balance Sheet, Profit & Loss Account of the applicant company/firm (five years incase of BO)• Undertaking that the LO will not carry out any trading and commercial activity in India.• Copy of the Board resolution for opening office in India
Compliance with RBI• Annual Activity Certificates (AAC) from Chartered Accountants• Audited Balance sheet to the designated AD Category I bank and a copy to the Directorate General of Income Tax (International Taxation), New Delhi.• Any other – as prescribed by RBI
A. P. (DIR Series) Circular No. 35 Dated 25 Sept 2012• in addition to the reporting prescribed in terms of aforesaid circulars, all the new entities setting up LO/BO/PO shall also: ▫ submit a report containing information within five working days of the LO/BO/PO becoming functional to the Director General of Police (DGP) of the state concerned in which LO/BO/PO has established its office; if there are more than one office of such a foreign entity, in such cases to each of the DGP concerned of the state where it has established office in India; ▫ a copy of the report shall also be filed with the DGP concerned on annual basis along with a copy of the Annual Activity Certificate/Annual report required to be submitted by LO/BO/PO concerned, as the case may be. ▫ A copy of report thus filed as above shall also be filed with AD by LO/BO/PO concerned.
DifferenceLiaison Office Branch Office Can carry Business ActivityCannot carry BusinessActivity Cannot take the loan and advancecannot take the loan andadvance Can meet requirement otherwise than by ForeignCan meet requirement by Inward remittanceForeign Inward remittance requirementrequirement only bringingfunds from outside India.
Documents Required –RBI• Copy of the letter of approval of Reserve Bank of India for establishment of LO/BO in India.• Board resolution of foreign/parent company duly notarised/counslarized• Power of attorney from foreign/parent company duly notarised/counslarized in favour of person signing documents for closure.• Certificate by LO/BO on pending legal proceedings in Indian courts or enquiries from Enforcement Directorate.
Auditors certificate on computation of the remittable amount and that there are no unpaid liabilities as on closure date. that there are no fixed assets owned by the Branch office. in lieu of no objection certificate from Income Tax Department. confirming that no proceeds accruing from sources outside India has remained un-repatriated to India.
…Closure Requirements – With RBI Certificate of LO/BO that it does not own any immovable property in India. Certificate by LO/BO that it does not own any deposits, loans and advances. An undertaking by LO/BO for remittance of surplus to head office.
• Regulated by Foreign Exchange Management (Remittance of Assets) Regulations, 2000.• Regulation 6• Application to RBI
Documents required• a) Copy of the Reserve Bank’s permission for establishing the branch/office in India• b) certified copy of the audited balance-sheet and profit and loss account for the relevant year;• c) Auditors certificate certifying, - ▫ i) indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; ▫ ii)confirming that all liabilities in India including arrears of gratuity and other benefits to employees etc. of the Liaison office have been either fully met or adequately provided for; ▫ iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India;
Liaison office Branch office• Not taxable as not permitted to • Taxed at the rate at which carry on any commercial foreign company are taxed in activity in India*. India• Required to file the Income • Required to file the Income Tax return. Tax return.* subject to further discussion
Business• On the basis of Permitted business activities as per the RBI regulation it is not allowed to carry on any BUSINESS activity [trading, commercial or industrial] in IndiaBut needs independent examination from Income tax perspective
Whether taxable? • Section 2(13) Income Tax Act defines business as “business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade ,commerce or manufacture
• The activity of the patent company are purely commercial in nature• Liaison office is not earning profit It is assisting in earning profit for commercial activity it is not necessary that every activity should result in earning revenue
Taxability • Section 4 • Charging Section of Income Tax Act • Section 5 • Scope of total income – Resident /non resident • Section 6 • Residence in India • Section 9 • Income deemed to accrue or arise in India
Taxability of Income Resident Non resident Ordinarily not ordinarily Non resident resident resident accrues or received or all income from arises or is deemed to be whatever source deemed to received in derived which— accrue or arise India in India the income which received or accrues or accrues or arises to accrues or him outside India notdeemed to be arises or arises to him included unless received in deemed to outside India : derived from India India accrue in India
Taxability- Non Resident• Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.
Section 6 factors Determining • Individual – Physical presence • HUF, Firm, AOP – Non-Resident where Control and Management of its affairs wholly outside India • Others - Control and Management of its affairs wholly outside India • A company is said to be resident in India in any previous year, if— (i) it is an Indian company ; or (ii) during that year, the control and management of its affairs is situated wholly in India. Company Non-resident if foreign company or Control and Management of its affairs is not situated wholly in India
Section 9• All income accruing or arising, whether directly or indirectly, through or from any BUSINESS CONNECTION in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.
Business connection• business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident,— (a)has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or (b)has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (C)habitually secures orders in India, mainly or wholly for the non- resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non- resident
• Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business
Taxability - Liaison office• As per Section 9(1)(i) of the Act, an LO would be deemed to be liable to tax on its income in India in case it constitutes a ‘business connection’ of its foreign parent in India.
Continued…• The taxability, if any, of LOs in India could be said to be broadly governed by ▫ Section 9(1)(i) of the Income Tax Act, 1961 (Act), ▫ Double taxation avoidance agreement [DTAA] where the foreign parent is from a country with whom India has entered into a DTAA. Article 5 (on permanent establishment [PE]) read with Article 7 (on business profits)
Article 5 – Permanent establishment• “permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on
Article 7- Business profits• Business profit derived from other country taxable in that other country only if the entity has permanent establishment in that country
• As per Article 5 read with Article 7 of the relevant DTAA, an LO would be taxable in India, in case it constitutes a PE of its foreign parent in India. Further, even if the LO is held to be a ‘business connection’/ PE of its foreign parent in India, only so much of the profits as are attributable to the operations carried out by the LO in India, would be liable to tax in India.