FEMA

Branch Office and Liaison Office under FEMA

09 Sep, 2020

Foreign Companies have established their presence in India since 1990. Due to restrictive trade practices followed in the past, India had limited foreign regulation policy. After liberalization in 1991, foreign investment in India was promoted. This led to many companies establishing a branch office and liaison office in India. However, these establishments have to follow specific guidelines under the respective foreign exchange laws in India. The Reserve Bank of India has brought out master directions as well as circulars related to setting up branch office and liaison office in India.

Law Related to Setting up of Branch Office and Liaison Office in India

The Reserve Bank of India (RBI) has brought out the Foreign Exchange Management Act^[1], 1999 in India to deal with foreign exchange transactions. Foreign companies have to comply with the rules related to setting up companies in India. Under section 6(6) of the Foreign Exchange Management Act, 1999 (FEMA) the establishment of the Branch office and liaison office in India is analyzed. This section has to be read with Notification No. FEMA 22/2000-RB dated May 3, 2000.

Difference between Branch Office and Liaison Office in India

In this article, we are going to cover the aspects regarding the branch office and liaison office in India. Foreign companies that want to run their businesses in India have to comply with the respective foreign exchange regulations to form such offices.

The following are the differences between setting up a branch office and liaison office in India:

Sl No	Information	Branch Office	Liaison Office
1.	Criteria for Setting up	Any form of a body corporate which is incorporated outside India is eligible to set up a branch office in India. There is no difference for this related to a setting up a branch office and liaison office. The branch office is also known by the terminology BO. For ease of reference, the same is used by authorised banks as well as the Reserve Bank of India. To secure permission for setting up a branch office in India, then compliance under the FEMA rules is mandatory. The same permission is required for a branch office and a liaison office.	A company which is established outside India would come under the criteria for setting up a liaison office outside India. The terminology also knows the liaison office as LO. For ease of reference, this terminology is used by the Reserve Bank of India as well as authorised banks. Respective permission is required from the RBI for setting up the liaison office in India. The permission is the same for the branch office and liaison office.
2.	Entry Routes	There are two routes for Foreign Direct Investment in India, i.e. the automatic route as well as the approval route (government route). For setting up a branch office if the investment does not require any prior approval from the government, then it would be considered as the automatic route. If the branch office is engaged in an activity or sector that does not require approval, then the automatic route would be used. However, if approval is required from the government, then permission would only be granted if approval is sought first. Hence both the branch office and liaison office use the above routes for foreign direct investment.	Like a branch office, the liaison office also requires approval, if it is engaged in a specific sector which requires prior approval from the government of India. If a foreign investment comes from a liaison office which is 100% under the automatic route, then such form of investment would be permitted. Therefore for Foreign direct investment, the treatment of branch office and liaison office is the same.
3.	Financial track record	For a branch office, the track record for the previous five years has to be provided to the respective authority. The track record of the company for the previous five years is taken into consideration.	For branch office and liaison office, the requirement of financial track record in the home country is different. For a branch office is financial requirement track record is for five years. Whereas, for a liaison, the financial track record for three years would be more than sufficient.
4.	Net Worth Requirement	Net worth can be understood as the total amount of paid-up capital of the company and reserves minus the intangible assets. The net worth requirement has to be certified by a Certified Public Accountant or an auditor registered with the respective authority. The net worth requirement for a branch office is USD 100,000 or any other foreign currency, which is equal to the above value.	The net worth requirement for a branch office and liaison office is different. The net worth requirement for a liaison office is USD 50,000 or any other foreign currency, which is equal to the above value. On comparison to the above, the net worth requirement for a branch office is USD 100,000.
5.	Usual Activities Carried Out	A branch office represents the parent company or a foreign-owned entity. Hence, usually, the activities which are carried out by the parent company would be carried out by the branch office. Usually, the activities which are carried out by the branch office would include manufacturing activities as well as any form of servicing activities.	The activities carried out by a branch office, and liaison office is not similar. Usually, a liaison just acts as a liaison( representative) for the foreign-owned company or the parent company. Liaising activities are usually carried out for these purposes. Any form of inward remittance of foreign investment is allowed to carry out liaising activities in India on behalf of the parent company. The liaison office is also known as a representative office, as this office represents the parent foreign-owned company. Usually, activities only relating to research, the liaison office carries out marketing for the future of the parent company. Hence the liaison office is merely carrying out co-ordinating activities.
6.	Application	The process of application for a branch office and liaison office is the same. Along with the required documents, the application has to be submitted to the Foreign Exchange Department of the RBI.	The application for a branch office and liaison office is similar. The applicant has to provide the application form to the foreign exchange department of the RBI.
7.	Granting Application	The procedure for granting the application for a branch office and liaison office is similar. When the application is granted for a branch office, a unique identification number is generated (UIN). Apart from this for calculation of tax, a ‘Permanent Account Number’ (PAN) is granted to the applicant.	A similar procedure is allowed for granting an application for a liaison office when compared to a branch office.
8.	Documents	*The following documents have to be submitted for setting up a branch office in India:* Memorandum of Association Articles of Association and other forms of incorporation documents. All the above documents must be in English format.	The documents required for a branch office and liaison office would be the same. However, when the liaison office is carrying out activities, particularly relating to marketing. These activities have to be mentioned in the objects clause of the Memorandum of Association.
9.	Major Services	Branch offices are companies that are registered outside India. However, these companies are mainly engaged in manufacturing and trading activities. Such companies are established as branch offices in India. A company that is manufacturing products such as spare parts of a car would come under manufacturing activities. Hence a foreign automobile maker would establish a branch office in India to carry out such activities.	Liaison offices are called as representative offices to carry out work related to liaison on behalf of a foreign parent company. *Such activities would include:* Research and Development. Development of marketing activities for the parent company. Hence the activities which are carried out by a liaison office are different from that of a branch office.
10.	Other forms of activities which are allowed	Even other forms of activities which are carried out by a branch office and liaison office are different. *The following activities are allowed to be carried out by a branch office:* Importing and Exporting Goods and Services under respective laws. For the above purposes, procurement and the sale of these goods are allowed after they have been imported into India. Any form of professional consultancy services would be allowed under the other form of activities carried out by a branch office. For example, sales advice may be required for specific manufacturing industries. A branch office can also carry out research and development activities. However, the R & D activities must be for the foreign-owned parent company. Usually, the activities which are carried out by the parent company will be carried out by the branch office. For example, a foreign-owned software company may set up an R & D department for trying out a different form of software products in India. Any form of representation activity, such as representing the parent company or acting on behalf of the parent company as a buying or selling agent, would be allowed to be carried out. Information Technology Services and any other form of information technology-enabled services would be allowed to be carried out to establish a branch office in India. Airline companies that want to set their operations in India would develop a different form of manufacturing centres as well as service centres in India. Foreign Shipping Companies developed as hubs would be considered to set up their businesses as a branch office.	Branch office and Liaison Office carry out a different form of activities. In comparison to the activities which are carried out by a branch office, the activities carried out by a liaison office are limited. A liaison office can carry out the following activities: Representing the Foreign Company in India. One of the main activities which are carried out by a liaison office is representation. A liaison office can also carry out marketing activities. Market research is one of the main marketing activities which are carried out by a liaison office. If the foreign-owned parent company is represented by the liaison office or subsidiary companies are represented by the liaison office, then such activities are also permitted. Financial and Technical Collaboration is also allowed to be carried out by a liaison office. For example, if there is a foreign insurance company wanting to establish a liaison office, then specific consent must be taken from the Insurance and Regulatory Development Authority of India (IRDAI). Similarly, if the company is a foreign-owned bank, then specific consent has to be taken from the Department of Banking Regulation, RBI.
11.	Operation	Branch offices are allowed to operate as per the requirements of the RBI. They would be allowed to operate in Special Economic Zones (SEZ) as well as other places in India.	Branch office and Liaison office are allowed to operate as per the requirements of the RBI.
12.	Validity	Branch office and liaison office have a specific validity for a particular period. After the period expires, the applicant has to apply to the respective authority for renewal of the certificate of registration. If the authority feels that the applicant fulfils the required eligibility criteria, then the same will be granted to the applicant. For the branch office, there is a specific period in which the applicant is allowed to carry out permitted activities.	For a liaison office, the validity period can be extended for up to 3 years from the expiry period of the date on which the license is expired. However, to ensure that the license is renewed, the documentation must be in order. Apart from this, the applicant must ensure that the account maintained by the liaison office with the authorised bank is compiled according to the rules related to FEMA.
13.	Extension	Extension of activities of a branch office would be dependent on the prevailing market conditions at that time.	An extension would be allowed for the liaison office. However, specific compliance has to be maintained under different laws. For extension of banks, permission must be taken from the banking department of RBI, and for insurance companies, permission has to be taken from the IRDAI.

Conclusion

Under FEMA regulation, a foreign company can establish either a branch office or liaison office. Depending on the activities carried out in India, the foreign office can establish two types of offices. If the activities carried out by the office established in India are marketing then establishing a liaison office would be suitable. However, if the activities carried by the office established in India are typically manufacturing and service-based, then establishing a branch office would be ideal.

Read our article:FEMA Compliance on Export of Goods and Services

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