U.S. companies seeking an initial informal and economical means of establishing a presence in India without forming an Indian company should explore setting up a liaison office or a branch office. A liaison office (or representative office) in India is a good option when the activities to be performed do not generate income (for example, exploration of the jurisdiction as a potential market). If, however, the activities to be carried out are expected to generate income, the better alternative is a branch office. With the requisite government approval, these two structures allow a foreign company to operate smoothly in India.
Liaison office
A liaison office, also called a representative office, primarily exists to explore business opportunities in India by conducting market research and gathering relevant data to present to the parent foreign company. Foreign investors or corporations can establish a liaison office to act as a channel of communication between the foreign company abroad and parties in India or to promote technical and financial collaboration between the foreign company and companies in India. The expenses of the liaison office are covered by inbound transfers from the foreign company. A liaison office cannot engage in any commercial activities or generate invoices for customers, but it may hire personnel, lease office space, and acquire computers.
Requirements for setting up a liaison office[1]
- The foreign parent company must show profits for at least three years in a row and have an audited net worth of at least USD 50,000 or its equivalent.
- The name of the liaison office must be the same as the name of the foreign company.
- A liaison office is taxed as a foreign company in India. Since the liaison office does not accrue any income, it is not liable to file for income tax. However, the liaison office must submit Form 49C to the Income Tax Department.
Branch Office
Unlike a liaison office, a branch office is permitted to conduct activities that are similar to those of the foreign parent company. Most foreign companies can use this route to explore the Indian market without incurring the costs of a long-term commitment.
A branch office can undertake only the following activities in India:
- Providing professional or consultancy services;
- Promoting export from or import to India;
- Performing research work in which the foreign company is engaged;
- Encouraging technical/financial collaboration between the foreign company and Indian companies;
- Representing the foreign company in India and acting as an agent for trading;
- Providing services in information technology and software development in India;
- Rendering support (technical) for products supplied by the foreign company; and
- Operating as a foreign airline or shipping company.
Requirements for setting up a branch office[2]
- The foreign company must show profits during the immediately preceding five financial years and a net worth of not less than USD 100,000 or its equivalent.
- At least one director of the branch office must be a resident of India.
- A branch office is not a separate legal entity from its parent company and is subject to the law governing the foreign parent. As a result, in India the branch office will be taxed as a foreign company.
- The branch office must have the same name as the foreign company.
- The foreign company must be engaged in a business that is permitted under the Foreign Exchange Management Act (FEMA).[3]
Visa requirements for foreigners establishing a liaison or branch office
The Ministry of Home Affairs grants a business visa to a foreigner who wishes to establish an industrial/business venture in India. This visa provides for multiple entry for up to five years and allows for a maximum stay of six months per visit. However, U.S. nationals may be able to obtain a ten-year business visa.[4] All business visa holders are required to register themselves with the Foreigners Regional Registration Officer (FRRO)/ Foreigners Registration Officer (FRO) if their aggregate stay exceeds 180 days during a calendar year.
Ambiguity in Application to Foreign Nonprofits
The option to establish a liaison or branch office is technically available to foreign nonprofits, but some ambiguity has arisen due to a 2018 amendment to the FEMA Regulations requiring an entity engaged in activities covered under the Foreign Contribution (Regulation) Act, 2010 (FCRA)[5] to obtain approval under the FCRA and not under FEMA.[6] This seems to indicate that a foreign nonprofit seeking to establish a liaison or branch office must obtain approval through the process set forth in the FCRA, but this process is presumably not available since such offices are not separate legal entities. Thus, further counsel is recommended for nonprofits who wish to explore this path for their foray into India.
Establishing a liaison or branch office in India presents a valuable opportunity for companies seeking to venture into the Indian business landscape and can serve as a strategic avenue for in-depth study of and initial activities into the Indian market.
Disclaimer: This material is provided for informational purposes and does not constitute legal advice. Access or use of this information is not intended to create, and does not constitute, a lawyer-client relationship. No portion should be acted upon without first seeking legal counsel about your specific legal situation.
[1] 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 (“FEMA Regulations”).
[2] See FEMA Regulations.
[3] See Master Circular on Foreign Investment in India, RBI/2009-10/22 Master Circular No.2/2009-10 https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=542#17
[4] FAQs Relating to Work-Related Visas Issued By India, https://www.mha.gov.in/sites/default/files/2022-08/work_visa_faq%5B1%5D.pdf
[5] The FCRA governs nonprofits in India receiving foreign grants.
[6] FEMA Regulations, Sec. 5(d).