Presented by:- Presented by:- Cherry BansalCherry Bansal
Managing PartnerManaging PartnerD.K. Bansal & Co., Chartered D.K. Bansal & Co., Chartered
AccountantsAccountants
Foreign Entities – Setting up of office in India
D.K. Bansal & Co., Chartered Accountants
UNCTAD survey projected India as the second most important FDI destination (after China) during 2010-2012.
Sectors attracting higher inflows services telecommunication, construction activities and computer software and hardware.
Leading sources of FDI Mauritius, Singapore, US and UK. This presentation is about understanding the way Foreign
Companies can set up their offices in India so as to mine the existent business potential.
D.K. Bansal & Co., Chartered Accountants
FDI in India
D.K. Bansal & Co., Chartered Accountants
FEMA,1999/RBI RegulationsSection 6(6) of Foreign Exchange Management Act,1999 read with Notification No.22/2000 dated May3, 2000 as amended from time to time
Master Circular No. 03/2011-12 dated 01 July,2011
Companies Act,1956Section 591-602 of the Companies Act,1956 related to Companies Incorporated outside India
D.K. Bansal & Co., Chartered Accountants
Body incorporated outside India are allowed to set up a L.O.
Mere communication channel between Head office and parties in India
Commercial/ income generating activities are strictly not permitted
Expenses to be met by foreign parent company.
Required to be registered with the Registrar of Companies (ROC).
An extension of parent company in India, is also known as Representative Office.
Required to get its annual accounts audited and submit annual activity report to the RBI .
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
PermissiblePromoting export from and import to India
Representing the parent company/ group
companies in India
Promoting technical/ financial
collaborations between foreign parent and
Indian companies
Acting as a communication channel
between the parent company and Indian
companies
Prohibited
Cannotundertake any activity of trading,
commercial or industrial nature
enter into business contracts in its own
name
render any consultancy or any other
service with or without any consideration
charge any commission/ fee or earn any
income for services rendered
have any signing or commitment powers
borrow, lend money or acquire, transfer or
dispose off any movable property without
prior permission of the RBI
acquire immovable property in India
Body incorporated outside India and engaged in manufacturing or trading activities are allowed to set up with specific approval of RBI.
It is an extension/permanent establishment of the parent company in India. Required to be registered with the (ROC). Foreign companies have general permission to establish branch/unit in SEZ
(Special Economic Zones) to undertake manufacturing or service activities, subject to certain rules.
Foreign Banks do not require FEMA approval, they have obtained necessary RBI approval under the Banking Regulation Act, 1949.
Profits earned by branches can be freely remitted, subject to payment of applicable taxes.
Funding is possible from parent company and from Indian operations. Required to submit annual activity report to the RBI.
Branch Office on Stand Alone Basis in SEZ:- Such Branch Offices are restricted to Special Economic Zone (SEZ) alone
and no business activity/ transaction is allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
Permitted Representing the parent company in India
and acting as buying/ selling agents in
India
Export/ import of goods
Rendering professional or consultancy
services
Carrying out research work in areas in
which the parent company is engaged
Promoting technical or financial
collaborations between Indian companies
and parent or overseas group company
Rendering services in Information
Technology and development of software
in India
Rendering technical support to the
products supplied by the parent/ group
companies, foreign airline/shipping
company
Prohibited
Not allowed to carry out any manufacturing or retail
trading activity of any nature
undertake domestic trading (i.e. domestic
procurement and sale of goods)
Entities from Pakistan, Bangladesh, Sri Lanka,
Afghanistan, Iran and China are not allowed
to acquire immoveable property in India
even for a Branch Office. These entities
are allowed to take such property on lease
for a period not exceeding 5 years
A foreign entity may open PO to execute a contract awarded by the Indian Government or any Indian Company.
RBI has granted general permission to foreign Companies for setting up PO
Project office is treated as an extension/permanent establishment of parent company.
Required to be registered with the Registrar of Companies.
Profits earned can be freely remitted from India (Subject to payment of taxes).
Funding is possible from project operations and receipts from parent company. Can also be funded by Multilateral financial agency/Cleared by an appropriate authority like DRDO,IRDA etc
Required to submit annual activity report to the Reserve Bank of India by 30th April of every year
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
Permitted Execute projected related activities
Provide support services to parent
company to whom the project has
been granted
Perform activities incidental to
execution of project in India
Prohibited
To undertake or carry on any activity
other than relating and incidental to
execution of the project
Joint Venture Foreign entities can set up JV with Indian party where FDI is permitted
under FDI Policy
Unlike LO/BO/PO,JV has more flexibility with regard to the nature of operations and both can leverage their area of expertise.
Wholly owned subsidiaries Foreign companies can set up WOS in sectors where FDI is permitted
Unlike LO/BO/PO/JV, WOS has significantly higher flexibility with regard to nature of operations. (Subject to Sectoral limits, if any, under FDI Policy)
Acquiring an existing Company Acquiring an existing Indian company (wholly or partly)- a popular way of
entering into India. Legal, financial and technical due diligence suggested to avoid any
unforeseen liability to either party is of critical importance.
D.K. Bansal & Co., Chartered Accountants
A recently introduced legal entity. Partners have limited liability. It is expected that LLPs may soon become a popular
vehicle for FDI. Other ordinary partnerships have unlimited liability -
therefore not considered as a vehicle for foreign investment.
Investment in LLPs,- prior approval of the RBI/Government
D.K. Bansal & Co., Chartered Accountants
A foreign non-profit organization setting up an office in India needs:-
i) to be registered as a trust/society/company (Section 25),
ii) permission from the Reserve Bank of India and also
iii) a No Objection Certificate from the Ministry of External Affairs.
Example:-A place of work in a restricted area (like a tribal or a border area requires a special permit– usually issues either by the Ministry of Home Affairs or by the relevant local authority (i.e., district magistrate).
D.K. Bansal & Co., Chartered Accountants
Opening of LO/BO
File application in form FNC 1 for RBI Permission
Application will be considered under two routes Automatic route where 100% FDI is allowed In consultation with MOF where 100% is not allowed
Additional Criteria considered by RBI:
Track record:
For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
For Liaison Office — a profit making foreign Company track record during the immediately preceding three financial years in the home country.
D.K. Bansal & Co., Chartered Accountants
Net worthFor Branch Office — not less than USD 100,000For Liaison Office — not less than USD 50,000(Net Worth = Paid up Capital+ Free Reserve – Intangible Assets )
Documents to be filed:English version of the Certificate of Incorporation and Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration. Latest Audited Balance Sheet of the applicant entity.
LO of Insurance/ Banking Companies Insurance Companies- Approval of IRDA Banking Companies- Approval of Department of Banking
Operations and Development (DBOD), Reserve Bank of India.
D.K. Bansal & Co., Chartered Accountants
Branch Office in Special Economic Zones (SEZs)
General permission to foreign companies for establishing branch SEZ to undertake manufacturing and service activities, subject to:-
their functioning in 100 % FDI sectors;
Complying with Companies Act,1956 (Section 592 to 602);
Function on a stand-alone basis. RBI Notification No.FEMA/102/2003-RB dated 03-10-2003 and circular No.58 dated 16-01-2004 as amended from time to time.
Branches of Foreign Banks
Foreign banks do not require separate approval under FEMA, for opening branch office in India. However, approval from RBI is required under Banking Regulation Act, 1949.
D.K. Bansal & Co., Chartered Accountants
Project office
RBI has granted general permission to establish Project Offices, provided foreign Companies have secured a contract from an Indian company to execute a project in India, and the project is funded directly by inward remittance from
abroad; or is funded by a International Financing Agency; or the project has been cleared by an appropriate authority; or Entity in India awarding the contract has been granted Term
Loan by a Public Financial Institution or a bank.
However, if the all the above criteria are not met, the foreign entity has to approach the RBI, Central Office, for approval.
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Validity
LO/BO- Initial approval for 3 years and further extended by Authorised Dealer Bank and RBI respectively
PO- Till the period of project
Validity extension exceptions
No extension to the LO’s of following entities: NBFC Construction and development sectors (excluding
infrastructure development companies)
Upon expiry of the validity period, these entities have to either close down or be converted into a JV /WOS by forming a Company, in conformity with the extant FDI policy
D.K. Bansal & Co., Chartered Accountants
Remittance of profit-BO
Can repatriate profit (net of taxes), on production of the following documents to AD : Audited B/S and P&L account for the relevant year Chartered Accountant’s certificate certifying
manner of arriving at the remittable profit entire remittable profit has been earned from
permitted activities
(Profit should not include any profit on revaluation of the assets of the branch)
D.K. Bansal & Co., Chartered Accountants
CLOSURE OF LO/BO
Authorised Dealer Bank Category - I bank with the following documents:
Copy of the RBI permission/ approval from the sectoral regulator's such as IRDA,SEBI etc
Auditor’s certificate- i) indicating the manner of remittable amount has been arrived
at/statement of assets and liabilities, indicating the manner of disposal of assets;
ii) confirming that all liabilities (gratuity and other benefits to employees, etc.), have been met/ provided for; and
iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
No-objection / Tax Clearance Certificate. Confirmation from the applicant/parent company that no legal
proceedings in any Court in India are pending and there is no legal impediment to the remittance.
Report from the ROC regarding compliance with the provisions of the Companies Act.
Any other document/s, specified by the Reserve Bank while granting approval.
D.K. Bansal & Co., Chartered Accountants
RBI-A.P.(DIR) Circular No.2 dated 15th July 2011
The RBI, vide above circular has now decided that all foreign entities, including NGOs/ N.P.O.s/ Government bodies and news agencies, operating in India through B.O.s/ L.O.s, who are continuing to function in India without obtaining any approval from RBI after the Foreign Exchange Management Act (FEMA), 1999 came into force from 1 June 2000, should approach RBI within 90 days from the date of issue of this circular for regularization of establishment of such offices in India, in terms of extant FEMA provisions
D.K. Bansal & Co., Chartered Accountants
Section 592- Foreign Companies within 30 days of the establishment shall file e-form 44
for registration with-
A certified copy of the charter/MOA of the Company. Address of principal office List of directors/secretary Name of the Indian authorize representative Full address of the office in India
Section 593-Foreign company shall file e-Form-49 : In case an alteration is made in MOA of a foreign company/Registered
office/directors or secretary of a foreign company, on or before the 31st January, of the year following the year in which the alteration was made.
In case of alteration is made in name or address of the authorised person/principle place of business, within one month from the date on which the alteration was made.
D.K. Bansal & Co., Chartered Accountants
Section 594-
Every foreign company shall, in every calendar year-
Make out a balance sheet and Profit & Loss account and file in e-form-52 with ROC within nine months of the close of the financial year of the foreign company (Rule 18A of Companies General Rules & Forms, 1956) along with the list of all place of business in India.
Section 597(3)
In case of cessation of place of business in India, file e-form 52 with in 30 days
Section 598-
In case of default- Every officer shall be punishable with fine up to INR 10,000/- and up to INR 1,000/- for every additional day
D.K. Bansal & Co., Chartered Accountants
A. Direct Taxes
Liaison Office:- Not liable to pay income tax as they are barred from making any
profit.
Transfer Pricing Rules:- Transactions between liaison office and parent/associated entities-
not subject to Transfer Pricing (TP) Regulations
Branch Office:- Liable to pay income tax in India on the profits attributable to it at
the rates applicable to foreign companies.
Transfer Pricing Rules The transactions between Branch and parent/associated entities
are subject to Transfer Pricing (TP) Regulations.
D.K. Bansal & Co., Chartered Accountants
Project Office:-Liable to pay income tax in India on its profits at the rates applicable
to foreign companies.
Transfer Pricing RulesTransactions between project office and associated entities are
subject to Transfer Pricing (TP) Regulations.
JV/WOS:-Liable to pay income tax in India on its profits at the specified rates
Transfer Pricing Rules The transactions between Indian Subsidiary/JV and
parent/associated entities are subject to Transfer Pricing (TP) Regulations.
B. Indirect Taxes:- All the above entities except L.O are subject to applicable indirect taxes. D.K. Bansal & Co., Chartered
Accountants
Liaison office
Suggested for a foreign company that does not have existing business in India but wishes to understand and explore the Indian market.
For collection of market information, interaction with Indian customers and providing information about parent company and its products to prospective Indian customers.
To promote technical and financial collaborations between parent/group companies and Indian companies where services are to be provided from off-shore.
Branch office
Where the foreign entity has understood the Indian market and wishes to provide services from India on a regular basis.
It can undertake most of the activities, as mentioned above and enjoys greater operational freedom in comparison to Liaison and Project offices.
Project office When a foreign entity has been awarded a contract in India.
Entity incorporated in India e.g. JV, LLP, wholly or partly owned company
Wide range of business activities envisaged;
Having long term perspective of mining Business potential in India
D.K. Bansal & Co., Chartered Accountants
“I've never believed protectionism of that kind will lead us anywhere. I think you can have certain specific rules for engaging with India.. for example, not allowing mineral resources to be taken out of the country.. but there is not a shred of doubt in my mind that when you open an economy you should do it in totality. Foreign investment adds a sense of competition; we should see this as a wake-up call to modernize and upgrade. Companies that do not will undoubtedly die.”
– Ratan Tata
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
Key Parameters
Liaison Office
Project Office
Branch Office
Joint Venture Wholly Owned
Subsidiary
LLP
Procedure for set up
• Approval of RBI
• Registration with ROC
• Intimation to RBI
• Registration with ROC
•Approval of RBI
•Registration with ROC
•Registration with ROC
•No Government approval where 100 % FDI permitted under automatic route
•Registration with ROC
•No Government approval up to sectoral limit permitted under automatic route of FDI policy
•Registration with Registrar of LLP
•Government approval only for LLP’s operating under Service /activities where 100% FDI is allowed
Set up time
3 to 4 weeks
3 to 4 weeks 3 to 4 weeks
5 to 6 weeks, generally due finalization of JV agreement
2 to 3 weeks
2 to 3 weeks
COMPARATIVE ANALYSISOperational requirements
Key Paramet
ers
Liaison Office
Project Office
Branch Office
Joint Venture Wholly Owned Subsidiary
LLP
Flexibility of operations
Very restrictive
Commercial income generating activities are not permitted
Set up only for execution of a particular project
As compared to LO, wider scope of activities can be undertaken
Cannot undertake manufacturing and retail trading however , it can render professional/ consultancy services
Post set up, expanding scope of operations may involve regulatory approvals
Expanding scope of operations is subject to internal approvals and procedural filings and does not require approval from regulatory authorities such as RBI/FIPB etc
Foreign companies can set up JV with Indian Party in permitted sectors (subject to sectoral limits, if any, under the FDI policy)
Significantly higher flexibility in nature of operations
Expanding scope of operations is subject to internal approvals and procedural filings and does not require approval from regulatory authorities such as RBI/FIPB etc
Foreign companies can set up WOS in permitted sectors (subject to sectoral limits, if any, under the FDI policy)
High flexibility in nature of operations due to less reporting to Registrar of LLP, audit etc
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
Key Paramete
rs
Liaison Office
Project Office
Branch Office
Joint Venture Wholly Owned Subsidiary
LLP
Financing Indian operations
Only by means of inward remittances from head office
Project is funded by Inward remittance from aboard/by multilateral financing agency such as World Bank, ADB etc
From following two sources:•Inward remittances from head offices; or•Income generated by BO in India by undertaking permitted activities
•Operations can be financed through instruments (such as equity shares, preference Shares , hybrid instrument) or local/foreign debt.
• Foreign debt funding is allowed only for certain specified sectors, subject to ECB guidelines.
• Income generated in India by undertaking permitted activities
•Operations can be financed through instruments (such as equity shares, preference Shares , hybrid instrument) or local/foreign debt.
• Foreign debt funding is allowed only for certain specified sectors, subject to ECB guidelines
• Income generated in India by undertaking permitted activities
•Capital/Contributions from partners
• Income generated in India by undertaking permitted activities
•ECB not Permitted
COMPARATIVE ANALYSIS
Key Paramet
ers
Liaison Office
Project Office
Branch Office
Joint Venture
Wholly Owned
Subsidiary
LLP
Validity
Transfer of Asset
Permission for 3 years, this may be extended from time to time by an AD Category I bank.
Can transfer movable asset with specific approval of RBI
For the time period of specified project.
With specific approval of RBI
Permission for 3 years, this may be extended from by RBI not by AD
With specific approval of RBI
Perpetual Succession
No such restriction
Perpetual Succession
No such restriction
Perpetual Succession
With specific approval of RBI
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
Key Paramet
ers
Liaison Office Project Office
Branch Office
Joint Venture
Wholly Owned Subsidiary
LLP
Reporting
• File Annual Activity Certificate from a CA, as at 31st March with-in 30 days to the AD Bank.
• Need to file Balance Sheet as at 31st March and global accounts (as at last financial year) with ROC
• Intimate ROC, If there are any changes in charter, directorship or Authorised signatory
• Need to file Balance Sheet as at 31st March and global accounts (as at last financial year) with ROC
• Intimate ROC, If there are any changes in charter, directorship or Authorised signatory
• File Annual Activity Certificate from CA , as at 31st March with in 30 days to the AD Bank.
• Need to file Balance Sheet as 31st March and global accounts (as at last financial year) with ROC
• Intimate ROC, If there are any changes in charter, directorship or Authorised signatory
• Intimate RBI on receipt of funds with in 30 days.
• File Form FC-GPR Part A with in 30 days of allotment of equity/CCP/CCD
• Statement of Asset and liabilities as at 31st March by 15th July of each year
• Every other reporting as applicable to an Indian Company as per applicable Acts.
• Intimate RBI on receipt of funds with in 30 days.
• File Form FC-GPR Part A with in 30 days of allotment of equity/CCP/CCD
• Statement of Asset and liabilities as at 31st March by 15th July of each year
• Every other reporting as applicable to an Indian Company as per applicable Acts.
As per government directions
COMPARATIVE ANALYSIS
Key Key ParametersParameters Liaison OfficeLiaison Office Branch Office/ Project OfficeBranch Office/ Project Office
Indian Incorporated Entities(J.V., Indian Incorporated Entities(J.V., WOSWOS
LLP etc)LLP etc)
Income Tax Income Tax
a) Statusa) Status
• Foreign companyForeign company • Foreign companyForeign company • Indian company Indian company
b) Tax on b) Tax on IncomeIncome
• Liaison offices are not liable to pay income tax in India as they are prohibited to make any profit under the rules
• -Transfer Pricing Rules:
• Transactions between liaison office and parent/associated entities are not subject to Transfer Pricing (TP) Regulations
• Branch and Project office is liable to pay income tax in India on the profits attributable to it at the rates applicable to foreign companies
• Transfer Pricing Rules• The transactions between
Branch and parent/associated entities are subject to Transfer Pricing (TP) Regulations.
• Subject to tax Subject to tax As per applicable rules & regulationsAs per applicable rules & regulations
• Transfer Pricing Rules• The transactions between Indian
Subsidiary/JV and parent/associated entities are subject to Transfer Pricing (TP) Regulations.
c) Tax on c) Tax on remittancremittance of e of profits profits
• Not applicable – since no Not applicable – since no profits are earnedprofits are earned
• Intermittent repatriations of Intermittent repatriations of profits is allowed subject to profits is allowed subject to BO/PO having discharged its tax BO/PO having discharged its tax obligation as aboveobligation as above
• No additional taxes to be paid No additional taxes to be paid on repatriationon repatriation
• Profits can be remitted by way of Profits can be remitted by way of dividend dividend
• Dividend distribution is subject to tax Dividend distribution is subject to tax @ 16.60875% on the amount of @ 16.60875% on the amount of dividend to be discharged by the dividend to be discharged by the company over & above aforesaid taxcompany over & above aforesaid tax
d) Tax on d) Tax on capital capital repatriatirepatriationon
• Upon closure, surplus cash Upon closure, surplus cash if any to be repatriated if any to be repatriated without any tax obligationwithout any tax obligation
• Upon closure, surplus cash if any Upon closure, surplus cash if any to be repatriated subject to to be repatriated subject to BO/PO having discharged its tax BO/PO having discharged its tax obligation in Indiaobligation in India
• Repatriation of share capital Repatriation of share capital permitted. Taxable as capital gains in permitted. Taxable as capital gains in case of buy-backcase of buy-back
Tax requirements
D.K. Bansal & Co., Chartered Accountants
D.K. Bansal & Co., Chartered Accountants
COMPARATIVE ANALYSIS
Key Parameter
s
Liaison Office
Project office
Branch Office
Joint Venture
Wholly Owned
Subsidiary
LLP
Service tax Compliance
Not required - LO cannot render taxable services
May be required to obtain registration depending upon nature of operations or kind of services
May be required to obtain registration depending upon nature of operations or kind of services
May be required to obtain registration depending upon nature of operations
May be required to obtain registration depending upon nature of operations
May be required to obtain registration depending upon nature of operations
Closure of business – Exit
5 to 6 months (subject to tenure and level of operations)
5 to 6 months (subject to tenure and level of operations)
5 to 6 months (subject to tenure and level of operations)
18 to 24 months (subject to tenure and level of operations)
18 to 24 months (subject to tenure and level of operations)
5 to 6 months (subject to tenure and level of operations)
D.K. Bansal & Co., Chartered Accountants
Queries, if any, are welcome
D.K. Bansal & Co., Chartered Accountants