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Setting up Foreign Entities in India

India is one of the faster growing economies in the World clubbed with highest working population and largest consumer of goods and services. Every business house is eyeing to participate in India’s growth story. They are looking for appropriate entry plan into India to start businesses in India. We shall be discussing some of the important entry strategies for Setting up Foreign Entities in India.

Depending upon the needs, the foreign corporations may adopt any route to enter into India.

As Foreign Entity:

  • Liaison office or Representative office
  • Branch Office
  • Project office

Any of the above forms may be chosen by foreign corporation to explore possibilities of business in India to start with. Establishment of above is a very easy exercise with very little formalities and post establishment compliances.

Unlike Liaison office, branch office can do trading or commercial activity as regular business. It can’t carry out manufacturing or processing activities EXCEPT in Special Economic Zones (SEZs). The project office is set up to take up any project work in India by foreign corporations.

Activities permitted by Liaison, branch and project office by Reserve Bank of India, nodal agency to regulate:

A) Liaison office:

  • Representing parent/group company in India
  • Promoting export and import from/to India.
  • Promoting technical/financial collaboration between groups companies and Indian companies.
  • Acting a communication channel between parent company and Indian companies.

B) Branch Office:

  • Export or Import of goods
  • Rendering consulting services in India
  • Carry out research work in India for the benefit of parent company.
  • Acting as buying selling agent in India.
  • Rendering services in ITES and Development of computer software
  • Rendering technical support to the products supplied by parent or group companies.

C) Project Office:

  • Execution of a contract/project in India and activities related thereto.
  • Rendering after execution services.

Taxability under Indian Income tax Act:

Liaison office is not allowed to do any commercial activities in India and considered as Non-resident for tax purposes unlike branch or project office.  These entities need to pass the test as stated in Section-9 of the Income tax Act i.e. activities test and business connection test. Accordingly, they need to discharge its tax obligations in India.

Important to mention here that almost all the tax treaties has provided specific activities related exemption to Permanent establishment which are ‘preparatory or auxiliary’ in nature under Article 5 of tax treaties. This relief is provided as these activities though contribute to business of the enterprises but too remote to contribute any profit to the enterprise.

Closure of Liaison, branch and project office from India.

Closure formalities are quite simple and quick with regard to liaison, branch and project office from India. The banker of these entities shall work as an agent to assist in all closure formalities.

As Indian Entity:

The foreign corporations may also form a wholly owned subsidiary (WOS) companies in India if they wish to go alone or else they can go for Joint venture with Indian entities as private limited company or Limited Liability Partnership as per the foreign direct investment policy of Government of India.

Concluding remarks:

The comprehensive automation of the regulatory framework in India and clear and transparent policies of the government of India is really make it extremely convenient for Setting up Foreign Entities in India.

 

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