While setting up in India, foreign companies should choose an entity structure that caters best to their need. The selection of the right entity structure will help the company establish itself as a strong player in the Indian market and help them reap financial gains.
Popular Market Entry Routes in India:
- Liaison Office
- Branch Office
- Project Office
- Wholly Owned Subsidiary (WOS)
- Liaison Office (LO) Or Representative Office (RO)
Liaison Office is only meant for promoting the parent company’s business activities, spread awareness of the company products or explore further opportunities for business.
They are not allowed to undertake any business activities and can only serve as a channel of communication and coordination for a foreign company in India. LO/RO can facilitate activities such as market research, promotion and networking and it is prohibited to engage in any commercial operations. Thus, they cannot earn any income in India at their own. All the expenses of LO/RO must be met by Foreign HO through Inward Remittance of Foreign Exchange.
A foreign company having profitable track record of immediately preceding three years in the home country and having net worth as per last audited balance sheet not less than USD 50,000 can get an approval from RBI to set up a Liaison office in India for a period of 3 Years and further extension can also be applied through AD Category I Bank.
A LO is required to have an Authorized Representative residing in India and an application must be filled with Registrar of Companies for Registration. MCA grants FCRN (Foreign Company Registration Number) and a valid Permanent Account Number (PAN) issued by Income Tax Authorities of India.
On compliance part LO is subject to statutory audits and is required to file FORM 49C with Income Tax Authorities. Tax audit and Transfer pricing is not applicable to Liaison offices.
2. Branch Office
Branch offices are often used by foreign companies engaged in manufacturing and trading activities in India. They are allowed to represent the parent company but have limited operational capacity. Branch offices are permitted to undertake Import/Export of Goods, Provide Professional/Consultancy Services, research work, acting as buying/selling agent for the parent company. The Branch office cannot undertake to manufacture by itself; however, it can outsource it to Indian Manufacture.
A Foreign company having profitable track record during preceding 5 financial year and having net worth as per last audited balance sheet not less than USD 1,00,000.
All Investments and profits earned by a branch office of a foreign company are repatriable after taxes are paid, but there are two exceptions:
- Certain sectors are subject to special conditions, such as defense.
- Non – Resident Indians (NRIs) specifically choose to invest under non-repatriable schemes.
Rest all the compliances are like Liaison office, wherein Branch office may be required to get their accounts tax audited. Since Branch office is incorporated as foreign company, books of accounts will be subject to statutory audit and profits will be taxable @40% under Indian Income Tax Act.
3. Project Office
Foreign companies having project in India, may choose to establish a project office in India for the sole purpose of executing specific projects. A Foreign Company may choose to have multiple project offices in India, depending on the projects they undertake. These offices are restricted from engaging in any other activity apart from those directly related and incidental to the execution of the project. Permission for the setup of Project office will be granted by RBI for a specified period of the project as stated by Foreign Company. Usually, foreign companies engaged in installation or turnkey projects set up project offices in India.
All Investments and profits earned by a project office of a foreign company are repatriable after taxes are paid.
For all three i.e., Liaison Office, Branch Office and Project office application must be filled in form FNC with an Authorized Dealer Category – I bank. Liaison Office / Branch Office are also required to file Annual Activity Certificates (AAC) along with Audited Financial Statement on or before 30th of September of that year.
4. Wholly Owned Subsidiary (WOS)
Foreign companies seeking to operate in India with long term business objective mostly choose to incorporate a wholly owned subsidiary (WOS). A WOS is a Company incorporated under Indian laws and its domicile is resident by nature. Thus, a WOS is taxable at par with any other Indian Company.
A Foreign Company can establish WOS in India by making 100% FDI through the automatic route. Opting for a WOS provides maximum control over operations and decision making, thus making it an ideal choice for businesses seeking autonomy. A WOS can have extensive operations in India in comparison to LO, BO and PO. It provides a stronger legal foundation to do business in India.
All foreign investments are repatriable except in cases where investments are made on a non-repatriable basis. Repatriation through Dividend and Buyback of shares or secondary sale of shares are some of the most used methods for repatriation. To Know more about Market Entry Options in India or Consult on a Go to Strategy for India Market Entry for your specific requirements, feel free to connect with us at info@ideateconsultancy.com