Liaison office is setup by a foreign company in India to carry out the liaison activity for its business. Foreign companies can open a liaison office in India to facilitate and promote the parent company’s business activities, and act as a communications channel between the foreign parent company and Indian companies. The company cannot have any revenue for the Indian Liaison office; It has to meet all its expenses of Indian office through remittances from the Head office. The Liaison office is not allowed to earn any income in the India.
A Liaison Office or a Representative Office can undertake only liaison activities, which means that it can act as a channel of communication between the Head Office (out of India) and parties in India. Unable to engage in commercial, trading, or industrial activities, liaison offices must be sustained by private, inward remittances received from their foreign parent company. A liaison office is permitted to engage in the following activities:-
The Foreign Exchange Management Act (FEMA) governs the application and approval process for the establishment of a liaison or branch office. Under the Act, foreign enterprises must receive specific approval from the RBI to operate a liaison office in the country. Applications are to be submitted through Form FNC .
The applications from such entities in Form FNC will be considered by the Reserve Bank under two routes:-
The approval process generally takes 20 to 24 weeks and permission to operate a liaison office is granted for a three-year period, which can be extended at a later date. An enterprise must also meet the following conditions before qualifying for the establishment of a liaison office:-
If a company does not meet these requirements, but a subsidiary of a company that does, the parent company may submit a Letter of Comfort on the subsidiary’s behalf. A company must submit a Certificate of Incorporation or Memorandum & Articles of Association, and a copy of the parent company’s latest audited balance sheet. The liaison office must also obtain a Permanent Account Number (PAN) from the Income Tax Authorities.
Within 30 days of establishment, the liaison office must register with the Registrar of Companies (RoC) by filing FC-1 through the Ministry of Corporate Affair’s online portal. The following documents must also be provided:-
Each year, the liaison office must file an Annual Activity Certificate (AAC), prepared by a chartered accountant, to the RBI verifying the office’s activities are within its charter. An AAC should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year.
Taxation rules applicable on Liaison Office
Where the liaison office creates a PE or establishes a business connection, the foreign company would become liable to pay tax on the profits, which can be attributed to the liaison office. But if liaison office doesn’t create any of the aforesaid relationship, liaison office will not attract any income tax in India.
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