Sometimes, foreign companies which want to start a business in India, first wants to do water testing before starting operations on full-fledged manner. This enables them to have fee of Indian business environment and potential of Indian market. One of the modes of entering India or planning to do business in India is to go for Liaison office registration. Liaison office are only for channel of communication between foreign company and Indian clients. It cannot do any commercial activities India.
Therefore, by the very nature of establishment of Liaison office and the kind of activities which are permissible for them, it may be inferred that taxation of LO will not be very complicated.
However, in practical, almost 90% LOs in India are facing either scrutiny assessment or litigation. This is due to the reason that kind of activities which these LOs are involved are sometimes of such nature that they create permanent establishment or business connection for its parent company in India.
This leads to an exposure to the foreign company that its profit attributable to activities in India becomes taxable in India. It means that although it has not earned any income in India, even though due to deemed profit attribution in India, there is exposure for foreign company to comply with Indian tax laws and file tax return in India.
In India, courts have often given contradictory decisions on whether a particular activity constitutes permanent establishment of foreign company in India or not.
Therefore, it is very essential that before registration of Liaison office in India, everything between parent company and LO should be well documented. Some do’s and don’ts’s for LO in order to avoid the exposure of being considered as permanent establishment of parent company are as under:
- LO should not indulge in any price negotiation or sales promotion on behalf of parent company
- LO should not maintain any stock of goods or merchandise on behalf of parent company
- LO should refrain from signing any contract/ agreement on behalf of parent company or representing them in any manner.
- While providing assistance in relation to billing or logistics issues, LO should not perform any settlement of claims and also should not receive any money from customers on behalf of parent company.
- All documentation generated while rendering services should indicate that the role of LO is restricted to performance of certain support services.
Therefore, with proper care, guidance and robust documentation, taxability of parent company by making LO as their permanent establishment can be avoided.
We at EzyBiz India provides complete hand holding in relation to registration of Liaison office in India. This includes collation of documents, filing of application and getting approval from RBI and ROC for LO registration in India. We also provide post registration, periodical and day to day compliance service.