Liaison Office Registration
A Liaison Office (LO) functions as a place in Bangalore that represents a foreign company, primarily to understand and explore the general business environment, conduct market research for the products of the parent company, and provide and seek information from potential customers or vendors. A liaison office can be set up for representing the parent company or group companies in Bangalore, promoting export or import from or to Bangalore, promoting technical or financial collaborations between parent or group companies and companies in Bangalore, and acting as a communication channel between the parent company and Bangalore companies. A liaison office of the foreign company cannot engage in any commercial activities, and the parent company shall meet all its expenses. However, if it generates any income by conducting activities that constitute a business connection with the parent company, such income will be taxed under the Income Tax Act of 1961. Since a liaison office is not considered a separate entity from its parent foreign company, the taxes imposed are the same as those on a foreign company. As of now, the tax on the profit of the foreign company is charged at a rate of 40% of the total income generated.
Introduction:
Bangalore, often referred to as the Silicon Valley of India, is a hub for businesses and corporations looking to establish a presence in the country. For foreign entities seeking to explore opportunities in Bangalore without directly engaging in commercial activities, setting up a Liaison Office is a strategic move. This article will provide a detailed guide on the registration process for a Liaison Office in Bangalore, outlining the steps, requirements, and key considerations.
Advantages of Establishing a Liaison Office:
Establishing a Liaison Office in a foreign country, such as Bangalore in India, can offer several advantages for a foreign company. Here are some key advantages:
1. Market Research and Analysis: A Liaison Office provides a platform for in-depth market research and analysis. Companies can gain insights into local market trends, consumer behavior, and competitor strategies, helping them make informed business decisions.
2. Promotion of Parent Company: The primary purpose of a Liaison Office is to promote and represent the interests of the foreign parent company. This includes marketing the parent company's products, services, and brand in the local market.
3. Building Relationships: A Liaison Office facilitates relationship-building with local clients, customers, and business partners. Establishing a physical presence fosters trust and credibility, crucial elements in international business.
4. Communication and Coordination: It serves as a communication bridge between the foreign parent company and local stakeholders. This ensures effective coordination, timely decision-making, and streamlined business operations.
5. Legal Compliance: Operating through a Liaison Office allows foreign companies to comply with local laws and regulations without engaging in commercial activities. This helps in avoiding legal complexities associated with full-fledged business operations.
6. Risk Mitigation: A Liaison Office can be a low-risk entry strategy for foreign companies testing the waters in a new market. It allows them to evaluate the market potential before committing to more significant investments.
7. Establishing Brand Presence: Creating a physical presence through a Liaison Office helps in establishing and enhancing the brand image of the foreign company. This presence can be critical for attracting local customers and partners.
8. Networking Opportunities: Being on the ground provides opportunities for networking with local businesses, industry associations, and government bodies. These connections can open doors to collaborations, partnerships, and potential business opportunities.
9. Easier Information Flow: A Liaison Office facilitates the flow of information between the parent company and the local market. This is crucial for adapting strategies, addressing challenges, and staying abreast of developments in the industry.
10. Flexibility in Operations: Operating through a Liaison Office offers flexibility in adjusting business strategies based on the evolving market conditions. It allows companies to adapt quickly to changes in the business environment.
11. Human Resource Management: For companies considering future expansion, a Liaison Office provides an initial platform for recruiting and managing local talent. This can be valuable when transitioning to larger-scale operations.
12. Understanding Regulatory Environment: A Liaison Office allows foreign companies to gain a deeper understanding of the local regulatory environment. This knowledge is crucial for ensuring compliance and avoiding legal issues.
To register a Liaison Office of a foreign company in Bangalore, the following minimum requirements have to be met. These requirements deal with the net worth and profitability of the concerned foreign company and the name, business activity, and taxability of its liaison office established in Bangalore.
1. Net Worth of the Foreign Company is $50,000: The foreign parent company must have a net worth of more than $50,000/- supported by duly audited financial statements.
2. Foreign Company has made consistent profit for the last 3 Financial Years: The Foreign company must have a track-record of profit-making for 3 years immediately preceding the date of application for RBI/ AD Bank approval.
3. Name of the Office must be same as Parent Company: The name of the branch office must be the same as that of the parent foreign company, and such name must be reserved before the branch office registration process begins. Also, for each new office of such a liaison office, a new approval is required from RBI with justification.
4. Liaison Office must not conduct any Income Generating Activity: The liaison office cannot generate any income in Bangalore, and the parent company must finance all its operations. An undertaking from the parent company is required in this regard. Moreover, the liaison office is permitted to undertake liaison activities only, which include acting as a communication channel between the foreign company and its stakeholders in Bangalore, promoting export and import activities, establishing financial and technical cooperation between the foreign company and its Bangalore counterparts, conducting market research and analysis for the future business prospects of the foreign company in Bangalore, and representing the concerned foreign company in Bangalore.
5. Liaison Office is taxed as a Foreign Company in Bangalore: Liaison Office would be liable to pay income tax under the Income Tax Act for the income it generates from activities which constitute a “business connection” with its parent company based in a foreign land. The tax rate applicable is akin to that of a foreign company i.e. 40% of the income, exclusive of surcharges.
Documentation is a vital component of the process of liaison office registration in Bangalore. The documents required throughout the process of liaison office registration can be categorized into documents submitted to the AD bank and documents submitted to the Registrar of Companies. For your reference, a comprehensive list has been provided in the table below. Make sure you have sufficient and correct documentation before the registration process starts because failing to submit any of the documents given in the list or submitting their incorrect and outdated forms can result in the rejection of your application by the concerned authority.
1. Duly Filled Form FNC-1
2. Letter of Principal Officer from Parent Company
3. Letter of Comfort from Parent Company intending to support the operations of its Liaison Office in Bangalore.
4. Legalized Certificate of Incorporation, MOA, and AOA of the parent company.
5. Audited Balance Sheet of the immediately preceding 3 financial years
6. Banker’s Report from the Banker of the Parent Company in its country of origin
7. Company’s Resolution for opening a Bank Account in Bangalore
8. Declaration from the Liaison Office on FDI eligibility and source of funds
9. Proof of Authorization of the Authorized Indian Representative (Board Resolution / Letter of Authorization)
1. RBI’s/ AD Bank’s Approval Certificate
2. Legalized Certificate of Incorporation, MOA, and AOA
3. Proof of Authorization of the Authorized Indian Representative (Board Resolution / Letter of Authorization)
4. A complete list of company’s directors, duly notarized
5. KYC details of all shareholders holding more than 10% shares in the Company
6. Proof of Registered Address of Branch Office (Utility bills / Rent Agreement / Lease Agreement / Property Tax Receipt)
Process for Liaison Office Registration in Bangalore
The process of Liaison Office registration begins with application for Digital Signature Certificate. A digital signature is the equivalent of physical signature under the Information Technology Act. As per new guidelines, all applications to the Registrar of Companies are filed in digital format and are therefore required to be authenticated using a digital signature of the authorized signatory. To obtain a Digital Signature, the concerned signatory will have to file an application to a Certified Agency, with the prescribed documents and application fees.
After the authorized representative or signatory has obtained a Digital Signature Certificate, the next step is to seek approval for opening a liaison office. For opening a liaison office, approval can be sought from the AD Category-I Bank itself if 100% FDI is allowed in the sector to which it belongs. For this, the concerned foreign company will have to submit Form-FNC to the AD Category-I Bank (AD).
After the FNC Form is filed with the AD Bank, it sends a request for verification of documents filed with the form to the banker of the foreign company in its country of origin. This process is also known as swift-based verification. Only after the documents are verified by the banker, the AD bank will be able to grant approval for setting up a liaison office.
As mentioned before, liaison offices can be set up in Bangalore, usually with the approval of AD Bank itself if 100% FDI is allowed in the sector. However, approval from RBI will be required if 100% FDI is not allowed in the sector, if the applicant is involved in sectors like telecom, defense, private security, or information and broadcasting, if the applicant entity is an NGO/NPO, or if the applicant entity belongs to countries like Pakistan, Afghanistan, Iran, China, Bangladesh, Sri Lanka, Hong Kong, or Macau, or any foreign entity which wants to open a branch in the North-east Indian States, Jammu and Kashmir, or Andaman & Nicobar islands. In such circumstances, the AD bank will further the FNC application to the RBI after the documents have been verified by the foreign banker. It usually takes a week for the RBI to process the application and grant approval.
After the approval of the RBI or the AD Bank, whichever applicable, has been obtained, the concerned foreign company can set up its liaison office in Bangalore. However, such an established office will have to get registered by the Registrar of Companies. For this, an application is filed in form FC-1 within 30 days from the date on which the approval was received. The filing can be done online on the official website of the Ministry of Corporate Affairs. Once the application reaches the ROC, it is examined carefully, and if found to be correctly filed, is approved by the ROC, after which the ROC will finally register the liaison office of the foreign company.
Upon successful registration by the ROC, the liaison office of the foreign company will receive a Certificate of Incorporation from the ROC, a PAN and a TAN from the Income Tax Department to comply with the tax and TDS related provisions of the Income Tax Act of 1961. With the allotment of PAN, the liaison office can also open a bank account in the AD Bank. However, the LO cannot open more than 1 bank account without obtaining prior permission from the RBI.
Finally, the liaison office needs to register itself with the state police (in the office of the superintendent of Police). The application must be accompanied by the document showing RBI approval and KYC of all authorized persons in Bangalore and the foreign company. Registration with State Police is not mandatory but is needed only if the foreign company is based in countries like Pakistan, Afghanistan, Iran, China, Bangladesh, Sri Lanka, Hong Kong, or Macau.
Post registration, liaison offices will also have to undertake several local and state-level registrations applicable to it. These are the same as the registrations applicable for any other company incorporated in Bangalore. A few of these include Shops and Establishment Registration, GST Registration, Professional Tax Registration, EPF Registration, ESI Registration, and IEC Registration.
Validity of a Liaison Office?
A Liaison Office is established and registered for 3 years at a time, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only. Requests for extension of validity for LOs may be submitted before the expiry of the validity of the approval, to the concerned AD Category-I bank under whose jurisdiction the LO falls. The AD bank may extend the validity period of LO for a period of 3 years from the date of expiry of the original approval or the previous extension granted, only if the applicant has complied with the following conditions and the application has been filed accurately:
1. The LO should have submitted the Annual Activity Certificates for the previous years, and
2. The account of the LO maintained with the concerned AD Category – I bank is being operated in accordance with the terms and conditions mentioned in the approval letter.
Such extension has to be granted, as expeditiously as possible and in any case not later than one month from the receipt of the request of extension.
Further, entities engaged in construction and development sectors and Non-Banking Finance Companies are permitted to open a liaison office for two years only. No further extension would be considered for liaison offices of entities which are Non-Banking Finance Companies and those engaged in construction and development sectors (excluding infrastructure development companies). Upon expiry of the validity period, the offices shall have to either close down or be converted into a Joint Venture / Wholly Owned Subsidiary of the foreign company.
Created & Posted by Sony Garg
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