India is one of the fastest-growing economies in the world, and many foreign companies are interested in establishing their presence here. For those who want to explore the Indian market without engaging in direct business operations, setting up a Liaison Office (LO) is a popular option.
A Liaison Office allows foreign companies to build connections, understand the market, and promote their business. However, once the office is registered, it must follow strict post-registration compliance rules as laid down by the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs (MCA).
In this blog, we will explain the key compliance rules that Liaison Offices in India must follow.
1. Understanding the Role of a Liaison Office
Before discussing compliance, it is important to understand the function of a Liaison Office.
- A Liaison Office cannot earn income in India.
- It can only act as a communication channel between the parent company abroad and business partners or stakeholders in India.
- It can engage in activities such as:
- Promoting products and services of the parent company
- Collecting information about potential markets
- Acting as a representative for the foreign company
- Building relationships with government authorities and businesses
Since it does not generate income in India, all its expenses must be funded through inward remittances from the parent company.
2. Compliance with RBI and FEMA Guidelines
The Reserve Bank of India (RBI) and the Foreign Exchange Management Act (FEMA) regulate Liaison Offices in India.
After registration, a Liaison Office must:
- File Annual Activity Certificate (AAC) with RBI through an authorized dealer bank.
- Submit details of activities carried out and confirm that they are within the permitted scope.
- Ensure that all expenses are met through foreign remittances and no local earnings are made.
This ensures transparency and prevents misuse of the office structure.
3. Registration with the Registrar of Companies (RoC)
A Liaison Office also needs to register with the Registrar of Companies (RoC) under the Companies Act, 2013.
The office must file:
- Form FC-1 within 30 days of establishment.
- Form FC-3 annually, which provides details about the place of business and financial statements.
- Form FC-4 every year, which is the annual return of foreign companies.
Failure to comply with these filings can lead to penalties.
4. Maintenance of Proper Accounts and Records
Even though a Liaison Office cannot earn profits in India, it must maintain:
- Proper books of accounts for all expenditures.
- Records of foreign remittances received from the parent company.
- Supporting documents for every financial transaction.
These accounts should be audited by a Chartered Accountant (CA) in India, and an audit report must be filed annually.
5. Filing of Annual Activity Certificate (AAC)
The Annual Activity Certificate (AAC) is a critical compliance requirement. It must be submitted:
- To the Authorized Dealer Bank (the bank through which foreign remittances are routed).
- To the Director General of Income Tax (International Taxation).
The AAC confirms that the Liaison Office has carried out only the permitted activities and that its expenses were met through foreign remittances.
6. Income Tax Compliance
Since Liaison Offices cannot earn income, they are generally not liable for income tax. However, they must:
- File an Income Tax Return (ITR-6) every year to declare their financial status.
- Deduct and deposit TDS (Tax Deducted at Source) on applicable payments, such as salaries, professional fees, or rent.
- Obtain a Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) for tax purposes.
7. GST and Other Indirect Taxes
Most Liaison Offices do not need to register under GST because they are not involved in the supply of goods or services. However, if the office procures services that require GST registration, it must comply with the rules.
It is advisable to consult a tax expert to check whether GST registration applies in specific cases.
8. Employment and Labour Law Compliance
If a Liaison Office hires staff in India, it must follow all applicable labour laws, such as:
- Provident Fund (PF)
- Employee State Insurance (ESI)
- Professional Tax (if applicable in that state)
- Shops and Establishments Act
This ensures legal protection for employees and avoids penalties for non-compliance.
9. Renewal of RBI Approval
The approval given by RBI to establish a Liaison Office is usually valid for three years. After this period, the office must apply for renewal before the expiry date.
Failure to renew on time can lead to closure of the office.
10. Closure of Liaison Office
If the parent company decides to close the Liaison Office in India, it must follow proper closure procedures, including:
- Filing closure application with RBI.
- Submitting final accounts and audit report.
- Intimating the RoC and Income Tax Department.
- Settling all outstanding liabilities.
Only after completing these steps can the office be officially closed.
11. Penalties for Non-Compliance
Non-compliance with RBI, RoC, or Income Tax rules can lead to:
- Monetary fines
- Cancellation of RBI approval
- Legal proceedings against the foreign company
Therefore, timely compliance is very important for smooth operations.
Conclusion
Setting up a Liaison Office Registration in India is a smart way for foreign companies to explore business opportunities without taking direct commercial risks. However, registration is only the first step. The post-registration compliance rules are equally important and must be followed carefully.
By maintaining proper records, filing annual returns, complying with RBI and Income Tax rules, and renewing approvals on time, a Liaison Office can operate smoothly in India.
For professional guidance and stress-free compliance support, companies can trust experts like Groom Tax, who specialize in business registration and regulatory services.
