For a foreign company three modes of setting up business in India are available, these are:
This kind of office is setup wherein only liaison / Marketing work is undertaken by the entity in India and all transactions whether related to Sale/ Purchase/ Provision of any services and even receipts and payment of money is undertaken directly by the parent company. Liaison office is not authorized to undertake any type of commercial activity accept liaison.
This kind of office setup is one step ahead of Liaison Office. In this type of setup trading transactions i.e. sale / purchase of goods and provision of services is allowed directly by the Foreign Branch Office itself but there are restrictions with regard to manufacturing and providing training.
This type of setup is allowed to undertake all kinds of commercial transaction. After deciding on the mode for setting up business in India as mentioned above necessary permission of either the Reserve Bank of India (RBI) or Foreign Investment Promotion Board (FIPB) is required. In most of the activities 100% foreign equity participation is allowed on automatic route, in such cases there is no requirement for permission. For others permission is required from either FIPB or RBI before registration.
After obtaining permission of Reserve Bank of India (RBI) or Foreign Investment Promotion Board (FIPB) company / branch office / liaison office is required to be registered with the Registrar of Companies under the Companies Act also. This finishes the process of incorporation of an organisation in India.
Foreign Branch Office as well as Wholly Owned Subsidiary are allowed to work subject to general or specific restrictions imposed by the Reserve Bank of India (RBI) or Foreign Inward Promotion Board (FIPB). They are required to file necessary returns with various taxation and legal authorities as a separate entity from its parent.
A wholly owned subsidiary is easier to setup than a liaison / branch office and does not require RBI approval. Whereas, A Liaison / Branch Office requires prior approval of RBI and it takes around 1-6 months for formation.
Setting up a wholly owned subsidiary costs less than setting up a branch / liaison office in India.
Income Tax liability of Branch Office is higher than that of a wholly owned subsidiary. A Liaison Office is not chargeable to tax. The rates of income tax for branch office are
Education [email protected]% of Income tax and surcharge (if any).
Further, in case of wholly owned subsidiary Dividend Distribution Tax @15% is applicable in case of remittance/repatriation of profits as dividend.
Liaison / Branch office is easier to close as compared to wholly owned subsidiary. A wholly owned company has to undertake liquidation proceedings as described under the Companies Act or has to be closed under the Fast Track Closure Scheme.
Liaison Office, Branch office and WOS (wholly owned subsidiary) are required to comply with various other legal compliance for working in India. A brief details of the same are given below