Note on Liaison Office (LO)
A Liaison Office is in the nature of a representative office set up
primarily to explore and understand the business and investment climate. A
Liaison Office is not permitted to undertake any commercial / trading /
industrial activity, directly or indirectly, and is required to maintain itself
out of inward remittances received from parent company through normal banking
channels.
Any foreign company intending to
open a Liaison Office in India is required to obtain prior approval from the
RBI, the apex bank in India. Approval is usually granted for one to three years
and can be renewed on expiry thereof. The
details on the Exchange Control Regulation and tax implications of an Laison
Office is annexed herewith.
(I) Exchange Control Regulations
For establishing a LO, an
approval is required to be obtained from Reserve Bank of India (“RBI”). A LO is
defined under Foreign Exchange Management (“FEMA”) Regulations as follows.
“Liaison Office means a place of business to
act as a channel of communication between the Principal place of business or
Head Office by whatever name called and entities in India but which does not
undertake any commercial /trading/ industrial activity, directly or indirectly,
and maintains itself out of inward remittances received from abroad through
normal banking channel”
LO is permitted to carry out only
the following activities in India:
·
Representing in India the
parent company/group companies.
·
Promoting export / import
from / to India.
·
Promoting technical /
financial collaborations between parent/group companies and companies in India.
·
Acting as a communication
channel between the parent company and Indian companies
For setting up of LO, there
should be profit making track record during immediately preceding 3 financial
years in the home country. Further, the net worth[1]
should not be less than USD 50,000 or its equivalent.
Applicant not satisfying
eligibility and which are subsidiaries of other companies may furnish a letter
of comfort from parent company that satisfies eligible criteria.
The powers relating to approval
of LO are delegated to an Authorized dealer.
As per the regulations, LO is not
permitted to carry on any business activity which leads to generation of
income.
An approval to LO is usually
granted by RBI for one to three years and can be renewed on expiry thereof.
Obtaining LO approval generally requires 6-8 weeks time. Similarly, for closing
LO permission of RBI is required which also takes a period of 6-8 weeks.
Further, the No Objection Certificate may be required to be obtained from income-tax
authorities in India.
The cost of setting up /
operational cost of LO is lower compared to Branch Office or Subsidiary Company.
LO will also be required to
comply with Indian Company law provisions viz. registration with Registrar of
Companies (ROC) is required by filing an application alongwith prescribed
documents within 30 days of the opening of the liaison office.
With effect from 1 February 2010,
LO / BO shall furnish two copies of Annual Activity Certificate (AAC) on or
before 30 September every year for the year ended 31 March to the AD bank and
to DGIT (International Taxation).
In case the year end is different
than 31 March, the AAC can be submitted within 6 months from the due date of
balance sheet. The combined AAC can be filed in case of multiple LO / BO.
Further, PAN is required to be quoted in AAC
The expenses of liaison office
are to be met only out of funds repatriated from abroad. LO is not permitted to
enter into contracts in its own name.
Repatriation of capital invested
in a liaison office requires RBI approval.
(II)
Income-tax implications
LO should generally not be
subject to tax under the Income-tax Act, 1961 as there is no profit generated
from liaison activities. However, it is necessary to examine in detail the
actual activities performed by LO for analysing India tax implications. India has
entered into Tax Treaty with France and hence, the tax implication from the
activities carried out in India will required to be determined under the India-France
Tax Treaty as well.
In terms of section 285 of the
Income-tax Act, 1961, a LO is required to file report in Form No. 49C within 60
days from the end of financial year with the income-tax authorities in India.
Further an LO will be required to
withhold tax in certain cases for which a TAN may be required to be obtained.
[1] Net
worth: Paid up share capital + free reserves – intangibles assets (computed as
per latest audited balance sheet or account statement certified by public
accountant or registered accounts practitioner
No comments:
Post a Comment