Foreign companies entering India typically have two simple choices to enter—Liaison office and branch office. Both types are regulated by the Reserve Bank of India (RBI) under the Foreign Exchange Management Act (FEMA), but for distinct purposes. It is necessary for foreign companies to understand the difference between the two in making a choice regarding which route to pursue.
This article contains a comprehensive liaison office vs branch office comparison of their functions, eligibility, compliance requirements, taxation, benefits, and restrictions.
What is Liaison Office?
A Liaison office is a link of communication between the foreign parent firm and Indian parties. Its activities are limited to non-commercial activities such as marketing, networking, and promoting business interests. A Liaison office is not allowed to generate revenues in India; instead, all the expenses are met by foreign remittances from the parent firm.
Some of the common activities of a Liaison office include:
- Representation of the parent firm on their behalf in India.
- Encouraging financial and technical tie-ups.
- Serves as a channel of communication between the Indian market and the overseas headquarters.
- Facilitating market research and industry intelligence gathering.
Thus, a Liaison office is most appropriate for foreign companies exploring Indian market potential without venturing into commercial operations.
Understanding Branch Office
A branch office, as compared to a liaison organization, has the ability to undertake business in India. Foreign companies that are evidenced to possess a positive bottom line and are financially suitable according to RBI are allowed to establish a branch office.
Permitted activities of a branch office are:
- Merchandise import and export.
- Professional and consultancy services.
- Acting as buying/selling agent of the parent company.
- Carrying out research work in areas where the parent business is interested.
- Representing the parent business as its agent in India.
Therefore, a branch office has greater operational freedom and is suitable for businesses which want to conduct business in India but do not want to create a subsidiary.
Primary Difference: Liaison Office vs Branch Office
The main difference is the activity nature. A Liaison office is subject to the restriction of non-commercial activities, while a branch office can carry out income-generating activities.
These are the major points of liaison office vs branch office difference:
- Income Generation: A Liaison office is not allowed to generate income, while a branch office can carry out commercial activities.
- Funding: A Liaison office is financed solely by foreign remittances, whereas a branch office can earn locally and send back profits.
- Purpose: A Liaison office is for networking and representation, whereas a branch office is for trade and execution.
- Taxability: A Liaison office is not generally charged income tax (since it cannot generate revenue), whereas a branch office is taxed as a permanent establishment (PE).
The above discussion clearly shows how and why companies must analyze their business goals prior to making a choice between the two.
Eligibility Criteria
Liaison Office Eligibility
For the opening of a Liaison office, the foreign company should:
- Possess a profit-making track record of the previous three financial years.
- Possess a minimum net worth of USD 50,000.
Branch Office Eligibility
For the opening of a branch office, the requirements are slightly more stringent:
- The foreign company should have a five-year profit history.
- There should be a minimum net worth of USD 100,000.
These stipulations highlight that the RBI is expecting stronger financial credentials from the companies in setting up a branch office, since it is a commercial entity.
Approval and Registration Process
Liaison office and branch office both require advance clearance by RBI in the form of an Authorized Dealer (AD) Category-I Bank. The procedure mainly includes:
- Filing of application form (Form FNC) with AD Bank.
- Submission of company incorporation documents, financials, and activity details.
- Verification of eligibility and financial records.
- Registration with Ministry of Corporate Affairs (MCA) through Registrar of Companies (RoC) upon sanction.
The procedure is FEMA and Companies Act compliant.
Compliance Requirements
For Liaison Office
A Liaison office must meet the below:
- Submission of Annual Activity Certificate (AAC) to RBI.
- Local revenues cannot be generated; everything is funded from abroad.
- Books of account and tax returns (if any) must be kept.
For Branch Office
A branch office must meet stricter compliance:
- Submission of income tax return since it earns revenue.
- Annual submission to MCA and filing of AAC with RBI.
- Transfer pricing compliance if it has dealings with related parties.
- Statutory audits according to Indian laws.
So, compliance requirements for a branch office are more detailed than a Liaison office.
Taxation Aspects
Taxation is the most important aspect in the liaison office vs branch office discourse.
- Liaison Office: Since it is not allowed to earn income, it cannot be taxed under Indian taxation regime. But the authorities can investigate if a Liaison office is indulging in more than what is permitted, leading to exposure for tax.
- Branch Office: A branch office is a permanent setup in India. Its profits are liable to tax at the rate applicable to foreign companies (approximately 40% plus surcharge and cess now). Transfer pricing rules may also apply.
Taxation obligations therefore render a branch office a controlled setup compared to a Liaison office.
Advantages and Limitations
Liaison Office
Advantages:
- Easy entry into India.
- Lower compliance and regulatory burden.
- Useful for market studies and initial networking.
Drawbacks:
- Lacks income-generating ability.
- Totally dependent on parent company funding.
- Limited scope of activities.
Branch Office
Advantages:
- Ability to undertake commercial activities.
- Convenience of repatriating overseas profits.
- Greater scope of business than a Liaison office.
Disadvantages:
- Higher compliance requirements.
- Transfer pricing and taxation compliance.
- Higher regulator focus.
Liaison Office vs. Branch Office
When the choice between a Liaison office and a branch office has to be made, foreign companies must consider:
- Business Objectives: If the reason is to study the Indian market and establish initial contacts, a Liaison office will suffice. If the aim is to engage in trade or service operations, a branch office is suitable.
- Capital Resources: A branch office requires higher net worth and profitability.
- Will to Obey: Companies willing to comply with complex taxation and reporting obligations can opt for a branch office.
The decision, therefore, in the Liaison office v/s branch office debate is a function of the parent company's strategy and available resources.
Real Life Insights
Foreign companies should notice some practical facts prior to deciding:
- Indian regulators are keen in Liaison office operations to ensure no revenue is generated.
- A branch office must use prudence in assigning profits to avoid controversy with tax officials.
- Both offices must comply with FEMA and Companies Act regulations.
- Professional guidance in advance allows registration and compliance easily.
By combining goals with regulatory requirements, foreign corporations may make an educated choice.
Conclusion
Both Liaison office and branch office are equally viable routes for foreign corporations to enter India. The choice depends upon the intention—whether market entry and representation or income-generating activities.
Summing up:
- A Liaison office is best suited for non-commercial purposes of representation and market exploration.
- A branch office is ideal for such enterprises willing to conduct business activities and assume related tax and compliance burdens.
The liaison office vs branch office comparison shows that there is no one-size-fits-all solution. Each foreign company must analyze its objectives, financial situation, and long-term plan before establishing the most appropriate option. With the right configuration, international companies are able to leverage the market potential of India rightly and according to regulations.