05 April 2022
What Is a Liaison Office?
The Foreign Exchange Management Act (FEMA) defines Liaison Office (“LO”) as "a place of business to act as a channel of communication between the Principal place of business or Head Office by whatever name called and entities in India but which does not undertake any commercial / trading / industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel".
Permitted activities for a liaison office in India of a person resident outside India
Applications from foreign companies (a body corporate incorporated outside India, including a firm or other association of individuals) for establishing LO in India shall be considered by the AD Category-I bank as per the guidelines given by Reserve Bank of India (RBI).
An application from a person resident outside India for opening of a LO in India shall require prior approval of Reserve Bank of India and shall be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi - 110 001 who shall process the applications in consultation with the Government of India, in the following cases:
The non-resident entity applying for a LO in India should have a financially sound track record viz: a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.
An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) (Annex A) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.
The application for establishing LO in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category - I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the Letter of Consent (LOC), wherever applicable.
Before issuing the approval letter to the applicant, the AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each LO. After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing LO in India.
The validity period of an LO is generally for three years, 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.
An applicant that has received a permission for setting up of a LO shall inform the designated AD Category I bank as to the date on which the LO has been set up. The AD Category I bank in turn shall inform Reserve Bank accordingly.
Opening of bank account by LO
An LO may approach the designated AD Category I Bank in India to open an account to receive remittances from its Head Office outside India. It may be noted that an LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India.
The Annual Activity Certificate (AAC) as at the end of March 31 each year along with the required documents needs to be submitted: the LO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi.
Registration with police authorities
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening LO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.
Other points to be kept in mind
A LO is required to register with the Registrar of Companies (ROCs) once it establishes a place of business in India if such registration is required under the Companies Act, 2013. This shall be filed in Form FC-1.
The LOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the AACs.
Each LO are required to transact through one designated AD Category-I bank only who shall be responsible for the due diligence and KYC norms of the LO. LO, present in multiple locations, are required to transact through their designated AD.
Acquisition of property by BO/PO shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations. The BO /PO of a foreign entity, excluding an LO, are permitted to acquire property for their own use and to carry out permitted/incidental activities but not for leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Nepal, Bhutan, China, Hong Kong and Macau require prior approval of the Reserve Bank to acquire immovable property in India for a BO/PO. BOs/LOs/POs have general permission to carry out permitted/ incidental activities from leased property subject to lease period not exceeding five years.
Steps in brief
There are two routes available under the FEMA 1999 for setting up the LO in India:
Whether Liaison office can hire employees
Form FNC specifically asks for the number of expected employees in the proposed LO and at the time of closing of the office the payments of gratuity etc. has to be certified by the Auditor.
Approval of Chinese Company
Chinese Company’s will need the specific approval of RBI as per the website of Consulate General of Shanghai
“Setting up Liaison /Representative /Branch/Project Office
Liaison Office/Representative Office:
A Liaison Office could be established with the approval of Reserve Bank of India. The role of Liaison Office is limited to collection of information, promotion of exports/imports and facilitate technical/financial collaborations.
Liaison office cannot undertake any commercial activity directly or indirectly.”
1. What is a liaison office?
A liaison office is a communication channel established by a foreign company in India between the parent company and Indian companies. It represents the parent company / group companies in India.
2. What is the difference between a branch office and a liaison office in India?
A branch office can carry out commercial and industrial activities, while an LO cannot. LOs are merely a communication channel between the parent company and Indian companies.
3. Can a liaison office be converted to a branch office?
Yes, an LO can be converted to a branch office with RBI's approval.
4. What activities are permitted in an LO?
An LO is permitted to promote exports and imports, facilitate technical or financial collaborations, represent the parent company or group companies and act as a communication channel between the parent company and the Indian companies.
5. What are the liaison office compliances under the Companies Act 2013?
Under the Companies Act, 2013, an LO, if required, should register as a foreign company with the Registrar of Companies (ROCs) by filing Form FC-1.
6. What is the validity of an LO?
The validity period for an LO is three years, except in the case of Non-Banking Financial Companies (NBFCs) and construction and development sectors, for which it is two years.
7. How can I open a liaison office in India?
To open an LO, foreign companies must follow the guidelines set by RBI. The company must submit Form FNC along with the necessary documents to an AD Category-I bank and seek prior approval from RBI.
8. What is the difference between a project office and a liaison office?
A project office is a temporary office used for executing a specific project, while an LO is a communication channel between a foreign company and Indian entities. An LO cannot undertake any commercial activity, while a project office can be used for project-related commercial or financial activities.
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