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Difference between Liaison Office vs. Head Office

Navdisha Sehgal
17 Mar, 2021 17 Mar, 2021
Difference between Liaison Office and Head Office

As per the RBI guidelines, a foreign company can open Liaison Office and Head office in India. These offices have a limited scope to perform activities that are permitted in India.

In this article, we will discuss the difference between Liaison office and Head office.

Liaison Office

Liaison Office is also known as a representative office. It is set up to explore the business and understand the investment climate. It can undertake only liaison activities. The Liaison office and head office are different from each other, except for the fact that these are established for the purpose of representing its parent company.

Head Office

A branch office mirrors the function of a parent company. The offices are established to perform similar business operations as the foreign parent company at different locations in India. Branch offices can carry on substantially the same business as the parent company. The Liaison office and head office are different from each other, except for the fact that these are established for the purpose of representing its parent company.

Difference between Liaison Office and Head Office

BasisLiaison OfficeHead Office
MeaningIt acts as a representative office and a communication channel between the parent company and the parties in India. An extension of the head office. It has not separate legal standing of its own. It is not allowed to undertake any commercial activity (directly or indirectly) and it cannot increase income in India.The companies incorporated outside India engaged in trading activities or manufacturing can set up a Head Office in India with prior approval of RBI.It has a right to accrue income.It has no separate legal entity.These are generally engaged in the activity of the parent company.
Permitted ActivitiesIt is representing the parent company or group companies in India. To promote import-export from & to India. To promote the technical/ financial collaborations between the parent/group companies and companies in India. Acts as a channel between the parent company and the Indian companies.It deals with the import or export of goods.To render professional or consultancy services.To carry out research work in the area in which the parent company is engaged.To promote the technical/ financial collaborations between the parent or group companies and the companies in India.Foreign airline or shipping company.To render technical support supplied by the parent or group companies in India.It represents the parent company in India and acts as a buying or selling agent in India as well.To render services in IT and development or software in India.
Time Limit for setup3 to 4 months are required for it to set up, contingent to RBI permissions.  3 to 4 months are required for it to set up, contingent to RBI permissions.  
Criteria for set upFrom the immediately preceding 3 financial years in the home country, the parent company must have a profit-making track record.The net worth of the parent company must not be less than 50,000 USD or its equivalent.An authorized Indian person to represent before RBI & RoC.From the immediately preceding 5 financial years in the home country, the parent company must have a profit-making track record.The net worth of the parent company must not be less than 100,000 USD or its equivalent.An authorized Indian person to represent before RBI & RoC.
Time Limit of approvalIt is generally 3 years; however, application for an extension.It is generally 3 years; however, application for an extension.
Liabilities of the entityIt has unlimited liability. The parent’s company assets are at risk of attachment for the expenses that occurred.It has unlimited liability. The parent’s company assets are at risk of attachment if the liability exceeds its assets.
Registrations requiredThe following registrations are required (post-formation): PAN/TANShops & EstablishmentImport Export CodeRoC registrationProfession taxThe following registrations are required (post-formation): PAN/TANShops & EstablishmentImport Export CodeRoC registrationProfession taxGST
Permitted Incomes/ ReceiptsThe Liaison Office’s expenses will be met through its parent company’s funds, received through normal banking channel.There is no increase in income in India.There can be no borrowings in India.The expenses will be met either through the funds received from the parent company or through income generated in India.There can be no borrowings in India.
Annual ComplianceStatutory audit by Chartered Accountant.The annual filings of the audited accounts of Liaison Office, Global Accounts with RoC.The annual submission of the Activity Certificate must be with RBI and AD Bank.Filing of quarterly TDS Returns.Filing of the audited accounts with the Directorate of Income Tax, New Delhi.Filing of Form 49C with the Income Tax department (in this case, no IT returns because of no income.)Statutory audit by Chartered Accountant.The annual filings of the audited accounts of Liaison Office, Global Accounts with RoC.The annual submission of the Activity Certificate must be with RBI and AD Bank.Filing of quarterly TDS Returns.Tax Audit in case turnover exceeds INR 1 cr;Filing of monthly, quarterly and annual GST Returns and GST Audit.Filing of Annual Income Tax Return.  
TaxabilityThere is no income, so no tax.It is treated as foreign company ad is taxed under: 41.60 % (income < 1 cr.);42.43 % (income < 10 cr.)43.68 % (income > 10 cr.)
Dividend to Parent CompanyThere is no dividend because of any income.The dividend paid is tax-free.
Repatriation of Funds to Parent CompanyIt can be done on closure.Profits can be easily repatriated, subject to tax implications in India.
Closure of EntityThere is no winding-up procedure to close the Liaison Office. It needs to file an application of closure with the RBI.There is no winding-up procedure to close the Liaison Office. It needs to file an application of closure with the RBI.
AdvantagesIt is not a separate legal entity. Thus the cost of compliance is less.It is ideal when no income increase in India.It is easy to shut down.It is not a separate legal entity. Thus the cost of compliance is less.Funds are easily repatriated.There is no tax on dividends.It is easy to shut down.
DisadvantagesIt has unlimited liability.It requires reporting the Global accounts to the Indian authorities.The Income Tax authorities try to hold the Indian Liaison Office as “PE” of a foreign company.It has unlimited liability.It requires reporting the Global accounts to the Indian authorities.It may lead to be treated as “PE”.The tax rates are higher.Funds can’t be borrowed from Indian financial institutions.Future collaboration with an Indian partner is not possible.

Conclusion

The article talks mainly about the difference between Liaison office and Head office and the process of setting up, along with its advantages & disadvantages. As per the RBI guidelines, a foreign company can open Liaison Office[1] and Head office in India. These offices have a limited scope to perform activities that are permitted in India. The Liaison office and head office are different from each other, except for the fact that these are established for the purpose of representing its parent company and other objectives as discussed above.

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