There are several options available to the foreign investor when it comes to establishing a Representative style office in India. Listed below are three separate scenarios, which are dependent upon the type of business model you wish to run. Businesses looking at invoicing for services, import export or manufacturing in India are advised to look at private limited company formations (wholly foreign-owned) which we shall cover next week. However, for sourcing or certain other service industries, and for projects and short term manufacturing contracts, these structures will suffice as explained:
A liaison office may be established with the approval of the Reserve Bank of India. However, this is normally a formality. The role of a liaison office is limited to collection of information, marketing of exports/imports (without entering into any contracts) and facilitation of technical/financial collaborations. The liaison office cannot undertake any commercial activity, directly or indirectly. All expenses for establishing and running the liaison must be met through inward remittances, no income can be generated locally. As the liaison office is not permitted to be engaged in any commercial activity, it earns no income and is therefore generally not liable to pay any income tax.
Foreign companies planning to execute specific projects in India can set up temporary project site offices in India for facilitating that project. The Reserve Bank of India has previously given approval, and has granted general permission for foreign entities to establish project offices, subject to certain conditions.
Foreign companies engaged in manufacturing activities abroad may set up branch offices in India for the purposes of export/import of goods, rendering professional or consultancy services, research and development, promoting technical or financial collaborations, representing the parent company, acting as buying/selling agents, rendering services in information technology and development of software, or rendering technical support to the products supplied by the parent/group companies/shipping companies. Foreign companies may set up branch offices in designated special economic zones (SEZs) for undertaking manufacturing and service activities. The company must register with India’s Registrar of Companies. The Reserve Bank of India then gives approval, the company pays Indian taxes (tax is higher than that of an Indian company – 41.86 percent compared to 33 percent), then may remit profits of branch outside of India (subject to RBI guidelines).
A branch office can perform almost all of the activities that a parent company can perform in India without the hassle of incorporation. A branch office typically carries out the following activities: entering into contracts for the import/export of goods; rendering professional or consultancy services; R&D; promoting technical or financial collaboration; acting as buying/selling agents; and rendering services or technical support. One major advantage of a branch office is the ease of setting up and exiting the entity.
Investors must weigh the legal and tax benefits of various business organizations to determine the best model for their business. Investors should note restrictions on the activities that are imposed on business organizations, such as with the branch and liaison office. On the whole, companies remain the most popular mode of business organization among investors, although specific needs of certain investors may compel another choice of corporate entity.
This article was written for the India business news website, India-Briefing.com. The site is contributed to by Dezan Shira & Associates who maintain business advisors and accountants in Mumbai and other Indian cities.
Dezan Shira also write for the Vietnam business news website, Vietnam-Briefing.com.