India’s status as a fast-growing economy continues to attract foreign businesses. For international companies looking to test the waters, explore opportunities, or build local relationships without diving straight into full-scale commercial operations, a Liaison Office (LO) serves as the ideal beachhead.
Often referred to as a representative office, an LO acts as a communication channel between the foreign parent company and Indian entities. However, setting one up requires navigating a specific regulatory framework governed by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA), 1999 .
In this guide, we will walk you through the concept, eligibility, step-by-step registration process, and ongoing compliance requirements for establishing a Liaison Office in India.
What is a Liaison Office (LO)?
A Liaison Office is a base location in India that functions as a hub for information exchange and market exploration. It is an extension of the foreign company but is strictly prohibited from engaging in any commercial, trading, or industrial activities . Think of it as the “eyes and ears” of the parent company in India.
Since an LO cannot generate income in India, all its operational expenses must be funded entirely through inward remittances from the parent company abroad .
Permitted Activities for a Liaison Office
The scope of an LO is limited to the following non-commercial activities :
- Representation: Acting as a representative of the parent company in India.
- Market Research: Conducting market surveys and researching business opportunities.
- Promotion: Promoting export/import between India and the parent company.
- Collaboration: Facilitating technical and financial collaborations between Indian companies and the parent company.
- Communication: Acting as a communication channel between the head office and Indian parties.
Eligibility Criteria for Foreign Companies
Before applying, the foreign parent company must meet specific financial benchmarks set by the RBI. These ensure that only financially sound entities establish a presence in India .
- Profit-making Track Record: The applicant must have a profit-making track record during the immediately preceding three financial years in the home country.
- Net Worth: The parent company must have a minimum net worth of USD 50,000 or its equivalent . (Note: Some sources cite USD 100,000 depending on the sector, but USD 50,000 is the widely referenced minimum; verification with an Authorized Dealer bank is recommended).
- Letter of Comfort (LOC): If the applicant is a subsidiary and does not meet the financial criteria, a parent company that meets the criteria can issue a Letter of Comfort taking responsibility for the LO’s liabilities .
Step-by-Step Registration Process
Setting up a Liaison Office involves a dual approval process: first from the RBI and subsequently from the Registrar of Companies (RoC). Here is the detailed roadmap.
Step 1: Application to the Authorized Dealer (AD) Bank
The process begins with the foreign entity submitting an application in Form FNC to a designated Authorized Dealer (AD) Category-I bank in India .
- Role of the AD Bank: The bank conducts due diligence on the applicant, verifying antecedents, sources of funds, and the nature of activities.
- Forwarding to RBI: Once satisfied, the AD bank forwards the application along with its recommendation to the RBI’s CO Cell in New Delhi.
Step 2: RBI Approval and UIN Allocation
Upon scrutinizing the application, the RBI grants the initial approval to establish the LO. The RBI assigns a distinct identification number to the office. This number is crucial for all future correspondence and compliance .
Step 3: Registration with Registrar of Companies (RoC)
Within 30 days of receiving the RBI’s approval, the foreign company must register the LO with the RoC under the Companies Act, 2013. This is done by filing Form FC-1 (Information to be filed by a foreign company) with the Ministry of Corporate Affairs (MCA) .
Required Documents for Form FC-1:
- A certified true copy of the charter, Memorandum and Articles of Association (or equivalent incorporation document) of the parent company .
- List of directors and the secretary of the foreign company.
- Power of Attorney or Board Resolution in favor of the authorized representative in India.
- The original RBI approval letter.
- Address of the registered office in India.
Step 4: Obtaining Permanent Account Number (PAN)
Just like domestic companies, an LO must obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) from the Income Tax Department. This is essential for filing tax returns and complying with withholding tax obligations .
Post-Registration Compliance Requirements
Once operational, an LO must adhere to strict annual compliance to maintain its validity. Non-compliance can lead to penalties or closure of the office.
Annual Activity Certificate (AAC)
This is the most critical compliance for an LO. The AAC must be submitted to the designated AD bank and the Directorate General of Income Tax (International Taxation), New Delhi .
- Content: It certifies that the LO has undertaken only permitted activities and has not generated any income in India.
- Due Date: By September 30th of every year, along with audited financial statements for the year ended March 31st .
ROC Filings
- Form FC-3: Filing of annual accounts (Balance Sheet and Profit & Loss account) of the LO in India within six months of the close of the financial year .
- Form FC-4: Filing of the annual return within 60 days of the close of the financial year .
Other Key Compliances
- FLA Return: Filing of the Foreign Liabilities and Assets return annually by July 15th .
- Bank Account: An LO can usually maintain only one bank account in India. Any additional accounts require prior RBI permission . The account can only be credited by inward remittances from the Head Office (for expenses) or refunds of security deposits/taxes .
Validity and Extension of the Liaison Office
The initial validity of an LO is typically three years .
How to apply for an Extension
To extend the tenure, an application must be submitted to the AD bank before the current validity expires. The AD bank can grant an extension for up to three years, provided:
- All Annual Activity Certificates (AACs) for previous years have been submitted .
- The bank account has been operated in compliance with the terms of the approval letter.
Note: There are exceptions for specific sectors. For instance, LOs of Non-Banking Finance Companies (NBFCs) or entities engaged in construction and development projects are usually granted a validity of only two years, and generally, no further extensions are permitted. They must either shut down or convert into a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) .
Converting a Liaison Office into a Branch Office or Subsidiary
If a foreign company decides to start commercial operations in India, the LO can be upgraded.
- To Branch Office: An LO can apply to the RBI through the AD bank to convert into a Branch Office if the parent company intends to start permissible business activities. The same bank account can often be re-designated from an LO account to a BO account .
- To Wholly Owned Subsidiary (WOS): A foreign company can also incorporate a subsidiary company under the Companies Act, which is a separate legal entity and allows for full-scale commercial operations .
Conclusion
Setting up a Liaison Office is a strategic move for foreign companies seeking a low-risk entry into the Indian market. It allows businesses to establish a brand presence, conduct market research, and build networks without the complexities of running a full-fledged commercial entity.
However, the process requires meticulous documentation and strict adherence to FEMA regulations. It is highly advisable to engage with a reputable AD bank and professional legal or company secretarial advisors to ensure a smooth registration process and maintain ongoing compliance.
