In the present globalized scenario, where majority of businesses are operating internationally, it is inevitable for global players to set up place of business in various countries across the globe. In India setting up of place of business by foreign entity is governed by the provisions of FEMA. 1999. In this article, we will discuss the key provisions pertaining to establishment of place of business in India by foreign entity. A Branch Office ("BO") is one of the models for a foreign company to enter India and understand the Indian market with a very strict control by the Reserve Bank of India (RBI), as it does allow the foreign companies to test and do business in India; subject to certain conditions. Applications from foreign companies (a body corporate incorporated outside India, including a firm or other association of individuals) for establishing Branch Office/ Liason Office/ Project Office, hereinafter referred to as BO/PO/LO, in India shall be considered by the AD Category-I bank as per the guidelines given by Reserve Bank of India (RBI).
NEED FOR SETTING UP OF BRANCH OFFICE OUTSIDE PARENT COUNTRY:
Foreign companies are allowed to set up Branch Offices in India mainly for the following purposes:
• Representing the parent company in India and acting as buying/selling agents in India.
• Rendering services in Information Technology and development of software in India.
• Rendering technical support to the products supplied by the parent/ group companies.
• Export/Import of goods
• Rendering professional or consultancy services
• Carrying out research work, in which the parent company is engaged.
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• Foreign airline/shipping company
• Foreign Banks
PRIOR APPROVAL IN CERTAIN CASES:
An application from a person resident outside India for opening of a BO/LO/PO in India shall require prior approval of Reserve Bank of India in the following cases:
1. The applicant is a citizen of or is registered/incorporated in Pakistan;
2. The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
3. The principal business of the applicant falls in the four sectors namely Defense, Telecom, Private Security and Information and Broadcasting. In the case of proposal for opening a PO relating to defense sector, no separate reference or approval of Government of India shall be required if the said non-resident applicant has been awarded a contract by/ entered into an agreement with Ministry of Defense or Service Headquarters or Defense Public Sector Undertakings. No separate approval is required from Reserve Bank of India for such cases only.
4. The applicant is a Non-Government Organization (NGO), Non-Profit Organization, Body/ Agency/ Department of a foreign government. Such applications may be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi - 110 001 who shall process the applications in consultation with the Government of India.
TRACK RECORD REQUIREMENT:
The non-resident entity applying for a BO/LO in India should have a financially sound track record. The requirement of track record is as under:
|1||For Branch Office
||a profit making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.
|2||For Liaison Office
||a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.
An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) (Annex A) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.
PROCEDURE FOR APPLYING:
• The application for establishing BO / LO/ PO in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category - I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the LOC.
• The AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each BO/LO.
• On receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO/LO in India.
• An applicant that has received a permission for setting up of a BO/LO/PO shall inform the designated AD Category I bank as to the date on which the BO/LO/PO has been set up.
• The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO/LO/PO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse.
• The validity period of an LO is generally for three years, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only.
• The validity period of the project office is for the tenure of the project.
• There is a general permission to non-resident companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India.
GENERAL PERMISSION FOR SETTING UP BO IN SEZ:
There is a general permission to non-resident companies for establishing BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions that:
• such BOs are functioning in those sectors where 100% FDI is permitted;
• such BOs comply with Chapter XXII of the Companies Act, 2013; and
• such BOs function on a stand-alone basis.
DOCUMENTS REQUIRED FOR BRANCH OFFICE SETUP:
• Form FNC – Three copies
• Letter from the principal officer of the Parent company to RBI.
* • Letter of authority from the parent company in favor of Local Representative.
• Letter of authority/ Resolution from parent company for setting up BRANCH office in India.
• Comfort letter from the parent company intending to support the operation in India.
• Two copies of the English version of the Certificate of Incorporation, Memorandum & Articles of association (Charter Document) of the parent company duly attested by the Indian embassy or notary public in the country of registration.
• Certification of Incorporation – Translated & Duly Notarized and Certified by Indian Consulate
• The Latest audited Balance sheet and annual accounts of parent company duly Translated notarized for past Three years. & Certified by Indian Consulate & Directors
• Name, Address, email ID and telephone number of the authorized person in Home Country.
• Details of Bankers of the Organization the Country of Origin along with the bank account number.
• Commitment from the Organization to the effect that it will be open to report / opinion sought from its banker by the Government of India / Reserve Bank of India
• Expected funding level for operations in India.
• Details Relating to address of the proposed local office, number of persons likely to be employed, number of Foreigners among such employees and address of the head of the Local office, if decided
• Details of Activity carried out in Home Country by the applicant organization in brief about the product and services of company in Brief.
• Bankers Certificate
• Latest Proof of identity of all the Directors – Certified by Consulate and Banker in Home Country
• Latest Proof of address all of Directors – Certified by Consulate and Banker in Home Country
• Details of the Individuals / Company holding more 10% of Equity
• Structure of the Organization w.r.t Shareholding pattern
• Complete KYC of Shareholders holding more than 10% Equity in the Applicant Company
• Resolution for Opening up Bank Account with the Banker
• Duly Signed Bank Account Opening Form for Indian Bank
NOTE – THE ABOVE LIST IS NOT EXHAUSTIVE AND MAY DIFFER DEPENDING UPON THE REQUIREMENT FROM THE AUTHORISED DEALER. ACQUIRING PROPERTY IN INDIA:
• Branch Offices of a foreign entity are permitted to acquire property for their own use and to carry out permitted/incidental activities but not allowed to buy for the purpose of renting it out.
• Entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years.
REQUIREMENT UNDER COMPANIES ACT: PROCEDURE AFTER GETTING THE RBI APPROVAL:
Every BRANCH office registered with RBI shall get itself registered with the Ministry of Corporate Affairs; it is a registration by the BRANCH office as an establishment of foreign company in India. On such registration a CIN i.e. Corporate Identity Number is allotted by the Registrar of Companies.
THE FOLLOWING DOCUMENTS SHALL BE FILLED WITH THE REGISTRAR OF COMPANIES:
• Form FC-1
• Charter, statutes or memorandum and articles of association or other Instrument constituting or defining the constitution of the company
• If the above documents are not in English then the translated version of the documents.
• Director(s) details – individuals
• Director(s) details – bodies corporate
• Reserve bank of India approval letter
• Secretary(s) details
• Power of attorney or board resolution in favor of the authorized representative(s).
• Companies have to file annually and periodically documents as mention above.
REGISTRATION WITH POLICE AUTHORITIES:
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO/LO/PO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.
• A branch office has to do minimal annual compliances as compared to Wholly Owned Subsidiary in India.
• As an annual compliance, an annual activity certificate issued by a authorized professional at the end of March 31, need to be submitted to the Authorized Dealer Category-1 Bank, Directorate General of Income Tax (International Taxation), concerned Registrar of Companies and Director General of Police, on or before 30th September of each financial year (In India the Financial Year is April to March) along with the audited accounts
TAXATION RULES APPLICABLE ON BRANCH OFFICE
• Branch office will be liable to pay 40% (plus surcharges as applicable) of profits as income tax in the status of Foreign Company in India.
• As per the functioning of branch office in India, it shall be liable to different indirect taxes as well, for example, if the Branch is providing technical services it shall be liable to pay service tax and if it is selling the goods in India then it shall be liable to pay Value added Tax (VAT) and/or Central Sales Tax (CST) at the rates prescribed for the dealt product.
• Profits earned by the branch offices are freely remittable from India, subject to payment of applicable taxes.
PERIODIC COMPLIANCE REQUIREMENT:
• Intimating any change in constitution of Foreign Company to RBI & ROC
• Intimating any change in Directors of Foreign Company to RBI & ROC
• Intimating each and every change in the BRANCH office to RBI & ROC
• No additional place of business can be started unless approval is taken from RBI.
• No addition activity can be started unless approval is taken from RBI.
OTHER BUSINESS LICENSES APPLICABLE TO BRANCH OFFICE
• Permanent account number – pan number
• Tax deduction number – tan number
• Shop & establishment Registration
• Service Tax Registration – if the Branch provides any services in India
• VAT & CST Registration – If the Branch carries out trading activities in India
OPENING OF BANK ACCOUNT BY BO/LO/PO:
An BO/LO may approach the designated AD Category I Bank in India to open an account to receive remittances from its Head Office outside India. It may be noted that an BO/LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India.
CLOSURE OF BRANCH OFFICE: In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the requisite documents as specified by the RBI.
CS Prem Pyara Tiwari