A Liaison Office (LO) is an easy and therefore popular way to enter the Indian market, as it offers European companies the flexibility to get to know India and the sector in which they are active, without being immediately burdened with heavy financial, legal or administrative obligations. What opportunities does an LO in India offer? And is it really the best choice for your company?
A Liaison Office (LO) is the representation of a foreign company in India. The Indian Central Bank defines such an office as "an office that is allowed to undertake only linking activities". These include:
Gathering information about the market and potential Indian consumers;
advertise, promote and carry out other marketing related activities;
boost exports to or imports from India;
Establish technical and financial cooperation between the head office and Indian companies;
Provide a communication channel between headquarters and local partners.
An LO is not allowed to generate turnover in India and therefore cannot produce goods or provide services. The costs of an LO must therefore be paid in full by the parent company outside India. A liaison office is not only useful for companies that want to explore the Indian market, it is also an interesting legal form for international investors who do not directly want to bring their products or services to the Indian market, but want to outsource work to India, for example.
Do you want to start selling, manufacturing or other commercial activities right away? Then there are several legal forms to choose from. We have listed them all for you to help you understand which form best suits your sector and activities in India:
How to set up a Liaison Office?
In order to set up an LO in India, various registration and approval procedures have to be gone through with different Indian government agencies. These are the following seven steps:
Get approval from an Indian bank to open a bank account for the liaison office. This bank will then automatically become theAuthorized Dealer Bankfor the new office.
Submit an application, with all necessary documents, to the Reserve Bank of India (RBI) through the Authorised Dealer Bank.
Once the RBI has given its approval, a 'Certificate of Establishment of Place of Business in India' needs to be obtained from the Indian Chamber of Commerce: the Registrars of Companies (ROC).
Subsequently, a Tax Deduction Account Number (TAN) and a Permanent Account Number (PAN) must be obtained from the Indian tax authorities: the Income Tax Authority.
Once these are received, the LO bank account can be officially opened at the authorised bank.
The liaison office must be registered under the Shop and Establishment Act and under the Professional Tax in the state where the office is located.
If samples are imported to the LO, the office must also be registered under the Import Export Code.
To ensure that this does not become an endlessly frustrating process, it is advisable to go through these steps with a consultant. Not only can it be very confusing what documentation should and should not be submitted, but it will also take at least 3 to 6 months to complete this list. The approval of the Indian Central Bank alone takes an average of 2 to 3 months. So it is smart to choose a partner who can speed up this process.
Mandatory compliance requirements
Once all the steps are completed and the LO is registered, you are not quite done. In India, there is still a lot of reporting to be done back to the various government agencies under which the LO is registered.
Six months after the Central Bank of India (RBI) gives its approval for the new office, the official address, PAN and 'Certificate of Establishment of Business Place in India' from the Indian Chamber of Commerce (ROC) must be declared to the RBI.
As an LO is not allowed to undertake commercial activities, several documents have to be submitted every year to prove that the LO is compliant with the regulations:
Annual Activity Certificate (AAC) - This document proves that the LO has only carried out activities that are permitted. The AAC must be prepared by a Chartered Accountant. This is a full-time practising accountant who is officially registered with the Institute of Chartered Accountants of India (ICAI). This certificate must then be sent to the RBI and the Director General of Income Tax (DGIT).
FC-3 form - All foreign companies are required to submit an annual FC-3 form to the ROC with a detailed list of all the foreign company's places of business and financial statements.
FC-4 form - Through this form, foreign companies submit their annual returns to the ROC.
49-C form - Is an income tax form specifically required to be filed by foreign companies with an LO in India. This form also needs to be verified by a Chartered Accountant and must be filed with the DGIT.
Because the activities of the liaison office often focus on research and communication between the head office and local parties, companies sometimes seem to forget that an LO must remain compliant with local (tax) regulations. Failure to do so can have serious consequences. For example, you may be classified as a permanent establishmentThis could mean the end of your activities in India.
Therefore, make sure that you introduce annual checks to ensure that you are fully compliant. For example, engage local consultants who can conduct a health check of your company and HR policies to alert you to the potential risks you face.
Duration of a Liaison Office in India
The liaison office is initially approved for a period of three years, after which it can be extended for another three years. For this purpose, an application must be submitted by the Authorised Dealer Bank to the RBI one month before the expiry of the initial approval.
The purpose of an LO is to flexibly introduce your company to the Indian market and prepare it for the next step. In principle, in three years, you should be able to gain enough insights to draw up a strategy for your actual entry into the Indian market. But if you need more time, an extension is a good option.
There are a number of things you should focus on if you want to explore the market with your LO and formulate a sound strategy:
Set up a good system in which you collect and analyse the information from your market surveys.
Carry out feasibility studies to ensure that your product or service fits the Indian market.
Based on your research, adjust your product or the price of the product or service to suit the needs of the Indian consumer.
If you are going to sell, take the time to get to know different distributors and find the right match for your product.
Less bureaucracy
The Indian government has already shown in recent years that it wants to make doing business in the country easier. In 2020, we will see a further simplification of the tax system and an improvement in the handling of disputes between entrepreneurs and local authorities. Despite the fact that all these new rules should only make things easier, it is still a lot of paperwork to set up your first office in India. Help is therefore no luxury. IndiaConnected has a team of local experts ready for you to your market entry run as smoothly as possible.