HOW TO SET UP A LIAISON OFFICE IN INDIA: A STEP-BY-STEP GUIDE
Expanding into a new market can be an exciting yet complex venture. Setting up a Liaison Office is a popular and effective way to establish a presence without the complexities of direct commercial operations. This blog explores how foreign companies can set up Liaison Offices in India, providing valuable insights on the process, requirements, and advantages.
WHY CHOOSE A LIAISON OFFICE?
A Liaison Office serves as a communication hub between a foreign parent company and its potential clients or business partners in India. Unlike other business structures, it does not engage in commercial or revenue-generating activities within India. Instead, its purpose is to facilitate market research, establish relationships, and promote the interests of the parent company.
The primary benefits of setting up a Liaison Office in India are:
- Low Entry Barriers: It is easier and quicker to set up than a branch office or subsidiary.
- Cost-Effective: Since the office does not engage in revenue-generating activities, operational costs are typically lower.
- Market Exploration: Ideal for companies looking to gather market intelligence and build networks without making immediate large investments.
THE REGULATORY FRAMEWORK: WHAT YOU NEED TO KNOW
To operate a Liaison Office in India, approval from the Reserve Bank of India (“RBI”) is mandatory. The process is governed by regulations under the Foreign Exchange Management Act (FEMA), which ensures that foreign entities operate in line with India’s economic policies.
KEY FEATURES OF A LIAISON OFFICE
- No Commercial Activity: A Liaison Office cannot directly engage in trade or earn income in India. Its primary functions are limited to non-commercial activities such as:
- Representing the parent company;
- Promoting export/import activities;
- Facilitating technical/financial collaborations;
- Acting as a bridge between the parent company and Indian entities.
- Financial Flow: The expenses of a Liaison Office must be funded entirely through inward remittances from the parent company abroad.
- Taxation: While a Liaison Office is not subject to Indian income tax, it must comply with certain tax withholding obligations related to payments like rent, salaries, etc.
SETTING UP A LIAISON OFFICE IN INDIA: STEP-BY-STEP PROCESS
- Seek RBI Approval
The first step in setting up a Liaison Office is to obtain approval from the RBI. This can be done through the designated bank in India. The bank will review the application and forward it to the RBI for consideration. This process typically takes 6 to 8 weeks. The RBI usually grants permission for a period of 1 to 3 years, with the possibility of renewal.
- Choose an Appropriate Location
Once approval is granted, you will need to select a location for your office. The office should be in an area conducive to communication with potential Indian business partners or clients, depending on the industry you represent.
- Appoint an Authorized Representative
Liaison Office in India will need a local authorized representative to manage the operations and liaise with Indian authorities. This representative will be responsible for ensuring compliance with the RBI guidelines and other regulatory requirements.
- Submit Required Documentation
To apply for a Liaison Office, you must submit the following documents to your bank:
- Application Forms: Complete the required forms as per RBI’s guidelines.
- Letter of Comfort: If applicable, submit a letter from the parent company stating their commitment to the office.
- Certificate of Incorporation: A notarized copy of the certificate of incorporation or registration of the parent company.
- Audited Financial Statements: Submit the company’s latest audited financials or an account statement certified by a registered accountant.
- KYC Documents: Bankers’ reports and Know Your Customer (KYC) documentation from the parent company’s bank.
- Registration and Compliance
Once the RBI approval is received, you must complete several registrations to legally operate the Liaison Office:
- Permanent Account Number (PAN) for tax purposes;
- Tax Deduction Account Number (TAN) if necessary;
- House of Companies Registration with the Ministry of Corporate Affairs;
- Unique Identification Number (UIN) from RBI.
In some cases, an Import Export Code (IEC) may be required, though this is not mandatory for all businesses.
ELIGIBILITY CRITERIA FOR A LIAISON OFFICE
ELIGIBILITY CRITERIA FOR A LIAISON OFFICE
Not all foreign companies are eligible to set up a Liaison Office in India. The eligibility criteria vary depending on whether the foreign company operates in a sector that permits 100% Foreign Direct Investment (FDI) under the automatic route.
Automatic Route:
- If a company operates in a sector that allows 100% FDI, it can apply for approval through the automatic route.
Government Route:
- For sectors with restrictions on FDI, approval must be sought from the Indian government, in consultation with the RBI.
Other criteria include:
- Track Record: The foreign entity must have a profit-making track record for the last three years.
- Net Worth: The company should have a minimum net worth of USD 50,000 or its equivalent.
RESTRICTIONS TO KEEP IN MIND
While a Liaison Office is a relatively simple way to establish a footprint in India, it comes with several operational restrictions:
- No Income Generation: A Liaison Office cannot conduct any business activity or generate revenue in India.
- Limited Financial Activities: It cannot engage in borrowing or lending money.
- Funding via Remittances: All operational expenses must be met through inward remittances from the parent company.
MANAGING YOUR LIAISON OFFICE: ONGOING COMPLIANCE
Once a Liaison Office is operational, it is crucial to ensure that you comply with annual reporting requirements. These include:
- Audited Financial Statements: Submit annual accounts that are audited and verified by a certified public accountant.
- Activity Reports: Provide regular reports to the RBI detailing the activities of the Liaison Office.
THE BENEFITS OF A LIAISON OFFICE
Setting up a Liaison Office in India provides several advantages, particularly for companies looking to:
- Test the Market: It offers a low-risk method of understanding the Indian market without committing to full-scale operations.
- Establish Business Contacts: A Liaison Office can facilitate connections with local distributors, suppliers, or potential clients.
- Maintain Communication: It provides an ongoing channel for communication between the foreign parent company and Indian businesses.
CONCLUSION: IS A LIAISON OFFICE RIGHT FOR YOU?
A Liaison Office in India is an ideal entry point for foreign companies looking to explore the Indian market without engaging in direct commercial activities. By adhering to the guidelines provided by the RBI and ensuring compliance with local regulations, foreign companies can establish a valuable presence in India while testing the waters for future expansion.
By following these guidelines and ensuring full compliance with RBI regulations, a company can smoothly set up a Liaison Office in India and begin building valuable business relationships in one of the world’s fastest-growing markets.
While considering setting up a Liaison Office in India, it is important to consult with experienced professionals who can guide through the regulatory process. At Chandrawat & Partners, we specialize in helping foreign companies navigate the complexities of setting up Liaison Offices in India.
For more information or queries, please email us at
[email protected]
