Foreign corporations can open a liaison office in India before starting a full-fledged business venture in the country. Such offices allow overseas investors to conduct research about the local market and identify potential business partners for setting up a company in India. It is an efficient way of gaining entry into the local business environment without too many financial and legal liabilities. Overseas businesses can also use a liaison office to provide information about their products or services to prospective customers. In short, this strategy of entering the country allows investors to get a comprehensive understanding of the local commercial ecosystem before creating a business set-up. However, there are specific conditions for opening and maintaining such offices. In this article, we are presenting all necessary information related to setting up a liaison office.
What Are The Permissible Activities For A Liasion Office?
A liaison office is not allowed to undertake commercial or trade activities in the country. It can be used for only the following purposes:
1. Promoting Export Or Import
The setup can be used for promoting import or export between India and other foreign nations.
2. Representing The Parent Organization
The primary aim of establishing a liaison office is to represent the parent organization in the country. The setup is used to disseminate information about the foreign company to interested parties.
3. Promoting Technical Or Financial Collaborations
The establishment can be used for promoting technical or financial collaboration between the parent corporation or its associated entities with local commercial organizations.
4. Acting As A Channel For Communication
The office can act as a channel of communication between the foreign organization and local companies. This will be useful in identifying potential business partners and creating a roadmap for the future.
What Are The Conditions For Opening A Liaison Office?
The following conditions need to be fulfilled before a foreign entity can begin the operations of a liaison office in the country:
1. Profit-making Track Record Of The Parent Company
Only profit-making foreign entities are allowed to open the office in the country. An important eligibility criterion is that the overseas organization must have earned profits in the preceding three fiscal years.
2. Net Worth In Excess Of $ 50,000
The net worth of the applicant must not be below $ 50,000 or its equivalent amount. The applicant must provide the latest audited balance sheet or an account statement prepared by a certified public accountant or any other similar registered professional.
3. Applications By Businesses Located In Sectors Under 100% FDI
When the business of a foreign company falls in a sector where 100% Foreign Direct Investment (FDI) is allowed under the automatic route, then it can submit the application for starting the office with an Authorized Dealer (AD) category bank 1. These banks have been allowed by the Reserve Bank of India (RBI) under the Foreign Exchange to process the applications according to specified guidelines.
4. Applications Requiring Prior Approval By The RBI
There are some cases which require prior approval by the RBI in order to open a liaison office in India. Let’s take a look at such scenarios:
i. Companies located in business sectors where 100% FDI is not allowed under the automatic route by the government must apply to the central bank.
ii. When the parent organization is located in telecom, information & broadcasting, defense or private security industry, then the application must be made to RBI.
iii. Non-government organizations (NGOs) or departments of foreign governments have to also adopt this route for applying.
iv. Pakistani nationals or entities must also use this method for setting up a liaison office.
v. businesses registered in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau looking to open an office in Jammu and Kashmir, North-eastern states or Andaman & Nicobar Islands also must approach the RBI.
5. Must Not Earn Any Income In The Country
Such offices are not allowed to earn any income in the country and are dependent on receiving funds from the foreign head office for meeting their expenses.
6. Registration With State Police Departments
Commercial organizations with parent location in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau have to register with the police department of the state where the office is located. Entities belonging to other countries do not need to fulfill this condition.
What Are The Important Documents Required For Registering A Liaison Office?
The following documents must be provided by applicants:
- Copies of the Memorandum & Articles of Association along with the registration certificate of the parent company. These documents must be in English and have to be attested by the Indian embassy or a notary public.
- The latest audited balance sheet and the annual accounts of previous three years.
- A list of all the directors of the company along with proofs of their identity and address.
- The identity and address proof of the organization’s local representative and a Letter of authority from the parent company in his/her favor.
- Address of the proposed liaison office.
What Are The Compliance Requirements Of A Liaison Office?
Liaison offices have to submit an Annual Activity Certificate (AAC) prepared by a chartered accountant to the RBI. This document helps verify that the office’s activities during the year were within the permissible limits. The AAC must also be filed with the Income Tax department.
The decision to open a liaison office in India is sensible as the strategy helps a foreign investor gain a proper understanding of the market conditions without needing to fulfill too many legal requirements. However, they must engage professional agencies to get assistance in the process.