Doing Business in India - Options for foreign Companies
India is an attractive investment destination for multinational companies. Every year, Billions of dollars are received in India in the form of Foreign Direct Investments. Further, thousands of new companies are incorporated in India from across the globe.
In this write-up, we would try to analyze various options available to foreign companies for business set up in India.
Various Options for foreign Company Registration in India
Any multinational company desirous of company registration in India can do in form of incorporated entities or unincorporated entities.
There are 2 options for foreign company registration in India namely.
- INCORPORATED ENTITIES
Foreign companies can do business in India in form of incorporated entities. Here, foreign company has following options of company incorporation in India, namely:
- Private Limited Company Registration
- Public Limited Company Registration
- Limited Liability Partnership Registration
- Joint Venture Registration
In case a foreign company acquires 100% shares of Indian Private Limited or Public Limited Company, the Indian company becomes wholly owned subsidiary of such a foreign company.
It may be noted that subsidiary company registration in India is the most popular form of business entity registration by foreign companies.
Foreign companies which have long-term intention to do business operations in India and want to use the brand name of a foreign company in India normally opt for any one of the above options of company formation in India.
- UNINCORPORATED ENTITIES
Foreign Companies which are not much sure about Indian market and want to test the market before launching full-fledged business operations in India normally opts for Unincorporated entities. Here, foreign company has following options of setting up business in India, namely
- Liaison office Registration in India
- Branch Office Registration in India
- Project office Registration in India
LIAISON OFFICE REGISTRATION IN INDIA
A foreign company can open a Liaison office (LO) in case it wants to do water testing in India. It cannot do any business activities in India.
Permissible Activities for LO in India
- LO can only act as communication channel between parent company and Indian customers, it can do liaising in India without any authority to conclude contracts.
- Normally, LO’s are set up when foreign entity intends to mark its presence in India, explore the market & spread awareness about its products & services among Indian customers.
- Promoting technical / financial collaborations between parent / group companies & companies in India
Conditions required for setting up LO
- Foreign company must be having a profit making track record during immediately preceding 3 financial years in home country.
- Net worth of foreign company should not be less than USD 50,000 or its equivalent.
- Initially, approval of LO is given for 3 years which can be renewed later on by AD Banker. In case of NBFCs and companies involved in construction development, approval is given for only 2 years after which they need to be converted into JV or WOS.
- RBI permission for setting up LO is given under 2 routes i.e automatic route and government approval route depending upon whether the principal business of the foreign entity falls under sectors where 100% FDI is permissible under the automatic route or under the approval route.
Legal Status of LO
It represents foreign company in India and considered as Non Resident or Foreign Company.
Approvals Required for Liaison office Registration in India
For registration of Liaison Office, Prior approval of Reserve Bank of India and AD Banker is required. Also, after incorporation, ROC needs to be intimated.
Tax Applicability on LO
Not subject to tax since cannot do any business activities in India.
Repatriation of profits by LO
Not permitted to take profits out of India since it is not allowed to do any business operations in India.
Exit from India by LO
For exist out of India, prior approval of RBI and ROC required. Easy to exit.
BRANCH OFFICE REGISTRATION IN INDIA
Permissible activities for Branch Office in India
- Branch office is allowed to do permissible business activities prescribed by RBI.
- Normally, BO’s are open by foreign company in India when it is already engaged in business of manufacturing or trading in home country and want to undertake such business activities in India as well.
- BOs are allowed to do following activities by RBI.
- Rendering professional or consultancy services.
- Representing parent company in India & acting as buying / selling agent in India
- Export/ Import of goods ( only on wholesale basis)
- Carrying out research work in areas in which the parent company is engaged
- Rendering technical support to the products supplied by parent/group companies
- Rendering services in Information Technology and Development of software in India
- Representing a foreign shipping company and Airline.
What activities cannot be done by BO?
BOs cannot do following activities in India:
- Construction Development activities.
- Manufacturing and Processing. However, it can do contract manufacturing.
- Retail Trading.
Conditions required for Branch office registration in India
- Foreign company must be having a profit making track record during immediately preceding 5 financial years in home country.
- Net worth of foreign company should not be less than USD 100,000 or its equivalent.
- In case foreign banks want to open BO in India, prior approval of DBOD, RBI is required.
- BO can also be established by foreign companies in SEZ to undertake manufacturing & service activities. RBI provides general permission subject to the following conditions:-
- Such units function on a stand-alone basis.
- Such branches / units function in those sectors where 100% FDI is permitted;
- Such units comply with the Companies Act as applicable to the companies incorporated outside India;
Legal status of BO in India
BOs are extended arm of the parent company. Therefore, legal status is a foreign company in India.
Approvals Required for Branch Office Registration in India
For registration of BO, Prior approval of Reserve Bank of India and AD Banker is required. Also, after incorporation, ROC needs to be intimated.
Tax Applicability on BO
Tax rate applicable on income earned in India @ 40% plus surcharge and education cess.
Repatriation of profits by BO
BO are permitted to take accumulated profits outside India subject to payment of taxes and filing of form 15CA and 15CB and some other conditions.
Exit from India by BO
For exit out of India, prior approval of RBI and ROC is required. Easy to exit.
PROJECT OFFICE REGISTRATION IN INDIA
Permissible activities for Project Office in India
- A Project office (PO) is established for a particular purpose and also for limited time period till that project continues. Normally, when a foreign company secures a project from an Indian company, then in order to carry out such project, it may register a Project Office in India. It is similar to Branch office registration but for specific project.
- A PO cannot carry out any other activity other than those which are incidental to or related to the project.
Legal Status of Project Office in India
POs are extended arm of parent company. Therefore, legal status is foreign company in India.
Approvals Required for registering a Project office
- For setting up PO, Prior approval of Reserve Bank of India and AD Banker is required. Also, after incorporation, ROC needs to be intimated.
- However, in case following conditions are fulfilled, no prior approval of RBI is required for establishing PO in India.
- Condition1– Foreign entity has secured a project from an Indian company; AND
- Condition 2– The project has been cleared by an appropriate authority; AND
- Condition 3– The project is funded directly by inward remittance from abroad; OR
The project is funded by a bilateral or multilateral International Financing Agency; OR
A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
In case the above criteria are not met, the foreign entity has to approach the RBI for approval.
3. In case PO needs to be set up by foreign Non-Government Organizations/ Non-Profit Organizations/ Foreign Government Bodies/ Departments, then such approval will fall under the government approval route and such POs are required to apply to the Reserve Bank for prior permission to establish an office in India,
Tax Applicability on PO
Tax rate applicable on income earned in India @ 40% plus surcharge and education cess.
Repatriation of profits by PO
POs are permitted to take accumulated profits outside India subject to payment of taxes, filing of form 15CA and 15CB and some other conditions.
Exit from India by PO
For exit out of India, prior approval of RBI and ROC required. Easy to exit.
SOME OTHER POINTS RELEVANT FOR LO/BO/PO
Registration with police authorities
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of registration of BO/LO/PO in India shall have to register with the state police authorities.
Prior approval of RBI and Central Government required in some cases
Prior approval of RBI and Central Government is required for setting up LO/BO/PO in following cases:
- In case applicant is Pakistani Citizen or company incorporated in Pakistan
- In case 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;
- The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting. However, prior approval of Reserve Bank of India shall not be required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted.
- The applicant is a Non-Government Organization (NGO), Non-Profit Organization, Body/ Agency/ Department of a foreign government. However, if such entity is engaged, partly or wholly, in any of the activities covered under Foreign Contribution (Regulation) Act, 2010 (FCRA), they shall obtain a certificate of registration under the said Act and shall not seek permission under FEMA