Liaison Office, Project Office or Branch Office: Which One to Choose?

Thinking of starting a liaison office in India but you’re confused which to settle for between liaison office, a project office or a branch office? Let us help you understand how each of these offices functions and guide you in making the best choice for your business.

Liaison Office / Representative Office in India

The purpose of setting up this type of office is basically to explore and gain an understanding of India’s business and investment climate. Any foreign company that wants to establish a liaison office in India is required to first obtain prior approval from India’s apex bank, the RBI.

Processing such application may take between 2 – 4 weeks. Approval is usually given for three years, renewable on expiration. The prospective company is also required to register with the Registrar of Companies (ROC) and complete certain procedures as stated in the Company Act, 1956.

A Liaison Office can undertake the following activities:

- Represent the parent company in India

- Promote import/export to and from India

- Promoting financial/technical partnerships between the parent company and Indian based companies.

- Acting as a middleman for communication between the parent company and prospective or existing customers in India.

- Limitations of a Liaison Office

- It cannot undertake any business, or generate any income without prior approval from RBI.

- All its expenses must be met via internal remittances to the liaison office from its parent office via regular banking channels.

However, in the event of the closure of the Liaison Office, RBI would approve the repatriation of funds in its Indian bank account to its parent company.

Other key points to note:

- It is not subject to taxes in India. It would, however, be required to withhold taxes from some payments.

- It cannot lend money, borrow money or accept deposits.

- It cannot acquire, hold (unless by lease not exceeding five-year duration) transfer or dispose of any fixed property in India without prior approval from the RBI.

- It must file regular returns to the RBI. These returns must include Audited Annual Accounts and Annual Activity Certificate by a Chartered Accountant.

Advantages of a Liaison Office:

- It is easier to operate

- There are fewer formalities

- Simple closure formalities

- Usually, the transaction between a liaison office and the parent office are not subjected to Transfer Pricing (TP) regulations.

Setting Up A Project Office In India

A foreign company is permitted to set up a project office in India only if it has secured a contract to execute a project in India. Approval for establishing a project office is granted the particular project that is to be implemented in India, and the project office must close down on completion of the project.

Subject to RBI’s approval, the project office may repatriate out of India the surplus funds after the project has been completed.

The foreign company that intends to set up a project office in India would also be required to be registered with the Registrar of Companies (ROC) and comply with the procedures as stated in the Companies Act, 1956.

The following conditions must be satisfied by the prospective foreign company that intends to set up a project office in India before the Reserve Bank o f India (RBI) would approve:

- It has secured a contract from an India based company to execute the project in India and

- The project is funded by an internal remittance from a foreign based company or

- The project is going to be funded by a bilateral or multilateral International Finance Agency or

- The project has been approved by a relevant authority or

- An Indian based company or corporate entity that awarded the contract has granted a Term Loan by a Public Financial Institution or an Indian bank for the project.

Advantages of setting up a project office:

- It is easier to operate

- There are fewer formalities

-  Simple closure formalities

Usually, the transaction between a liaison office and the parent office are not subjected to Transfer Pricing (TP) regulations.

3. Setting Up A Branch Office In India

Permission to set up a branch office in India is granted by the RBI after prior registration. The prospective branch office must be duly registered under the Companies Act, 1956.  After its successful registration under the Company Act, 1956, the branch office is then permitted to carry out its business just the same way a domestic company would.

A duly approved and registered branch office can perform the following activities:

- Import/export goods

- Offer professional or consultancy services

- Carry out research work in the areas of interest of the parent body

- Represent the parent company in India and act as its selling/buying agent in India

- Rendering services in the Information Technology and software development in India

- Shipping/foreign airline

- Offering technical support

Advantages Of Setting Up A Setting Up A Branch Office:

- A branch office can generate revenues from sales in the local market and repatriate the profits made by its parent company. This is NOT so as a liaison and project office.

- Funding is via its parent company and business operations in India

- They can remit profits outside India, net of applicable Indian taxes and subject to RBI rules.

Limitations Of A Branch Office In India:

- It is not permitted to carry out any manufacturing activities. Construction activities are only be performed via a company that is incorporated in India.

- It is subjected to higher rates of corporate income tax than domestic companies.

- Usually, the transaction between a liaison office and the parent office are not subjected to Transfer Pricing (TP) regulations.

There you are! You now know the differences between a liaison office, project office and a branch office as well as what you need to put in place before starting a liaison office in India.