CONTENTS PART A : ENTRY STRATEGIES INBOUND PART B : REGULATORY ISSUES IN FEMA & I.T. FOR LO, BO & PO 3
PART A: ENTRY STRATEGIES INBOUND 4
AS A FOREIGN COMPANY AS A LIMITED LIABILITY PARTNERSHIP AS AN INDIAN COMPANY LIAISON OFFICE BRANCH OFFICE PROJECT OFFICE WHOLLY OWNED SUBSIDIARY JOINT VENTURE 5
OVERVIEW Notification no FEMA 22/2000-RB dated 3rd May, 2000 governs & regulates Establishment in India of Branch/Liaison/Project Office and other place of Business. The regulations have come into force on 1 st June, 2000.
OVERVIEW According to section 2(v)(iii) of FEMA, Branch, Liaison Office or any other office in India owned /controlled by person resident outside India shall become person resident in India. Prior approval of RBI to set up Liaison Office (LO) & Branch Office (BO) followed by registration with Registrar of Companies (ROC) 7
OVERVIEW Foreign Insurance companies has to obtain prior approval from IRDA & Foreign Banks has to obtain prior approval from DBOD followed by registration with Registrar of Companies No approval from RBI to open Project Office (PO) in most cases, except intimation within 2 months 8
ESTABLISHMENT OF LO & BO IN INDIA RBI ROUTE GOVERNMENT ROUTE Principal business of foreign entity eligible for 100% FDI under automatic Route Principal business of foreign entity not eligible For 100% FDI under automatic route, Non-Government organization/ Non-Profit organization/ Government Departments. 9
ELIGIBILITY CRITERIA FOR ESTABLISHMENT OF LO & BO Criteria Track Record - Profit making track record of immediately preceding 3 F.Y. in home country for LO and 5 F.Y. in case of BO. Net Worth - BO - not less than USD 100,000 or equivalent LO - not less than USD 50,000 or equivalent 10
RESTRICTION ON ESTABLISHMENT OF OFFICE Restriction on persons/entities of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran China, Hong Kong(*) or Macau(*) to establish office. RBI refers to Department of Economic Affairs, New Delhi. Only body corporate, firm and association of individuals allowed to set-up LO/BO. *A. P. (DIR Series)Circular No.93 January 15,2014 11
ACTIVITIES PERMITTED FOR LIAISON OFFICE (LO) Representing parent company/group companies Promoting export & import Promoting technical / financial collaborations between parent / group companies & companies in India Acting as communication channel between parent company & Indian companies 12
DO S & DONT S OF LO Cannot undertake any commercial/business activity directly or indirectly Cannot earn any income in India All expenses to be met by Inward remittances Cannot have any signing/commitment powers on behalf of HO 13
DO S & DONT S OF LO Submit to DGIT,DGP and AD bank, annual activity certificate along with annexure,audited accounts by 30 th September Submit Form 49C to DGIT, New Delhi by 30 th May every year Submit Form FC-2 to ROC by 31 st December Approval by RBI granted for 3 years & renewed thru AD
ACTIVITIES PERMITTED FOR BRANCH OFFICE (BO) Export/Import of goods Rendering professional / consultancy services Research work, in which parent company is engaged Promoting technical / financial collaborations 15
ACTIVITIES PERMITTED FOR BRANCH OFFICE (BO) Acting as buying/selling agent Rendering services in IT & software Rendering technical support to products supplied by parent/group companies Foreign airline/shipping company 16
DO S & DONT S OF BO Permission required for new activities of trading, commercial or industrial nature All expenses from inward remittances or thru income from permitted activities Income earned from parties abroad to be repatriated to India 17
DO S & DONT S OF BO Submit to DGIT, DGP and AD bank, Annual Activity Certificate (AAC) along with Annexure, audited accounts by 30 th September Submit Form FC-2 to ROC by 31 st December Retail trading, manufacturing or processing activities not allowed 18
DOCUMENTS TO BE FILED FOR OPENING LO / BO Application by LO & BO (other than entities in insurance and banking) in Form FNC, with other documents to AD Category - I bank Application by foreign banks to DBOD, RBI Application by insurance companies to IRDA in Form IRDA FIC-1 Companies in telecom, finance sector require consent from Dept. of Economic Affairs, New Delhi
ADDITIONAL OFFICES & UNDERTAKING ADDITIONAL ACTIVITIES & EXTENSION Requests for additional BO/LO - submit to RBI in same manner in Form FNC One Office identified as Nodal Office to coordinate activities of all other Offices Remittances to come to Nodal office only 20
ADDITIONAL OFFICES & UNDERTAKING ADDITIONAL ACTIVITIES & EXTENSION Requests for additional activities for BO- submit thru AD Category-I bank to RBI with justification Extension for LO granted by AD bank subject to conditions. No extension for LO in NBFC / construction sector 21
ESTABLISHMENT OF BO / UNITS IN SEZ General permission to establish branch/unit in SEZ to undertake manufacturing & service activities provided such units: Function in sectors where 100% FDI permitted Comply with part XI of Companies Act Function on stand-alone basis Winding-up and for remittance of proceeds, file documents listed in Regulation 6(1)(iii) of FEMA 13/2000-RB dated 3 rd May, 2000 22
POST FORMATION FORMALITIES 23
POST FORMATION FORMALITIES Open Bank Account ROC Formalities : Register documents with ROC in Form FC -1 within 30 days of establishment. Apply For Digital Signature Certificate (DSC) : Chief representative/authorised signatory of Liaison/Branch Office is advised to obtain Digital Signature 24
ROC REGN PAN TAN * Applicable to BO *VAT/*CST/PT *Service Tax *Import Export Code Provident fund & other labour laws FRRO Regn. for Expats 25
OPENING OF PROJECT OFFICE
GENERAL PERMISSION CONDITIONS PO has secured from Indian company a contract in India AND Project funded by inward remittances from abroad OR Project funded by bilateral or multilateral International Finance Agency PRIOR PERMISSION FROM RBI IF CONDITIONS NOT SATISFIED OR Project cleared by appropriate authority OR Company in India been granted Term Loan by PFI or bank for the project 27
ACTIVITIES PERMITTED FOR PROJECT OFFICE (PO) Execute a contract/ project in India & activities relating to execution of project Render service during warranty period and after sale service as per Contract terms 28
DO S & DONT S OF PO Cannot lend any money to any person in India Cannot undertake any activity other than execution of project Cannot transfer funds inter-se projects without RBI permission Submit to DGP and AD bank, annual activity certificate along with annexure 29
DO S & DONT S OF PO Each project to have separate Bank account and site office No Equity Participation required for PO PO can open term deposit for period not exceeding 6 months out of temporary surplus funds 30
POST FORMATION FORMALITIES 31
POST FORMATION Open Bank Account FORMALITIES RBI Formalities : Furnish report to RBI thru AD bank within 2 months of establishment of PO ROC Formalities : Register documents with ROC in Form FC-1 within 30 days of establishment of PO 32
POST FORMATION FORMALITIES Tax Order From Income Tax U/S 197 : For low rate of withholding TDS from owner Low WCT Order From VAT Department : For low rate of withholding WCT from owner Apply For Digital Signature Certificate (DSC) : POA holders of Project Office is advised to obtain Digital Signature 33
ROC REGN PAN TAN VAT/CST/PT Service Tax Import Export Code Provident fund & other labour laws FRRO Regn. for Expats 34
INTERMITTENT REMITTANCES Banks to remit funds pending winding up, if satisfied with bonafide of the transaction and submission of the following: CA Certificate that sufficient provisions made to meet the liabilities in India including Income-Tax, etc. File Form 15CB Certificate from CA and 15CA to bank Undertaking that remittance will not affect completion of Project & any shortfall of funds to be met by inward remittance 35
WINDING UP LO/BO Application for closure of BO/LO with remittance of winding up proceeds along with necessary documents to be submitted to AD Category I bank Application for closure for liaison office set up by insurance co. in Form IRDA/FIC-2 with copy of IRDA s permission for establishing LO & supported by necessary documents 36
DOCUMENTS ON WINDING UP OF BO/LO Reserve Bank s approval for establishing BO / LO Auditor s certificate for: i. calculation of remittable amount & of disposal of assets ii. confirmation for all liabilities in India have been fully met iii. confirmation that no income accruing outside India has remain unrepatriated to India 37
DOCUMENTS ON WINDING UP OF BO/LO NOC/Income Tax Clearance on remittance of final net surplus Confirmation for no legal proceedings are pending in any Court in India Report from ROC regarding compliance with provisions for winding up of BO / LO 38
WINDING UP PO Remit outside India profit/surplus of the Project on its completion, net of applicable Indian taxes and submission of documents to AD 39
DOCUMENTS ON WINDING UP OF PO Certified copy of audited project accounts CA certificate certifying manner of arriving at remittable surplus Proof of payment of Income-Tax & other taxes or a CA certificate stating that sufficient funds set aside for meeting all Indian tax liabilities and that no statutory liabilities are outstanding NOC or Income Tax Clearance Certificate on remittance of final net surplus 40
BRIEF ANALYSIS LIAISON OFFICE, BRANCH OFFICE, AND PROJECT OFFICE 41
Particulars No. Liaison Office Branch Office Project Office 1. Setting- up requirements Prior Approval of RBI followed by registration with ROC Prior Approval of RBI followed by registration with ROC No Prior approval of RBI subject to certain conditions, except intimation followed by registration with ROC 2. Permitted activities Only information collection etc. permitted. Activities permitted by RBI for BO. PO can only execute projects No commercial activities can be undertaken. Local manufacturing and retail trading not permitted. 42
Particulars No. Liaison Office Branch Office Project Office 3. Funding for local operations Local expenses can be met only out of inward remittances. Local expenses can be met through inward remittances or from local earnings Expenses can be met through inward remittances or from local earnings 4. Permanent Establishment (PE) Not regarded as a PE in India under DTAA and Domestic tax/ laws subject to liaison activities only Regarded as PE in India of the Foreign Company Regarded as PE in India of the Foreign Company 5.Operating Time limit LO shall be opened for the period of three years and further renewal can be obtained through AD BO does not have any time limit for carrying on business PO has time limit as per Contract agreement 43
Particulars No. Liaison Office Branch Office Project Office 6. Issuance of invoice LO can not issue invoice nor collect payment BO can issue invoice and collect the payments PO can issue invoice as per contract agreement 7. Compliance Required to file Required to file Required to file Requirements under Income Tax Act return of income. Not liable for Income Tax as no income or revenue earned return of income in respect of BO operations. Effective tax rate 43.26% on profits. No further tax on repatriation. return of income in respect of PO operations. Effective tax rate 43.26% on profits. No further tax on repatriation. 44
Particulars No. Liaison Office Branch Office Project Office 8. Compliance Requirements under FEMA ROC and Required to file activity report, Certificate from CA every year with Form FC-2 Required to file activity report, profit and loss account and balance sheet every year with Form FC-2 Required to file activity report, profit and loss account and balance sheet every year with Form FC-2 9. Acquisition of Immovable Property Can acquire immovable property only on lease not exceeding 5 years Can acquire immovable property on ownership / lease Can invest in immovable property without prior approval, subject to certain conditions 45
PART B: REGULATORY ISSUES IN FEMA & I.T. FOR LO, BO & PO
REGULATORY ISSUES IN FEMA & I.T. FOR LO, BO & PO Reporting requirement with DGP List of foreigners who visited Indian Office for activities of the company with details such as purpose of visit, date of visit, place of stay in India. Projects/Contracts/Collaborations worked upon or initiated during the year along with details such as approximate value of project/ work, place /area of project /work, period of project /work, Approx number of foreign work force required in India. 47
REGULATORY ISSUES IN FEMA & I.T. FOR LO, BO & PO Details of contact with Government Departments / PSUs Civil Society Bodies / Trusts / Non-Government Organisation including names of officials. Details of places / states visited along with dates, accommodation used. Due date of filing uncertain. 48
REGULATORY ISSUES IN FEMA & I.T. FOR LO & BO Reporting requirement with DGIT, New Delhi (Form 49C) India specific financial details for the financial year i.e. receipts, income and expenses of the non-resident person from or in India (not only of the L.O.) Details of all purchases, sales of material, and services from/to Indian parties during the year by the non-resident person (not limited to transactions made by L.O.) 49
REGULATORY ISSUES IN FEMA & I.T. FOR LO & BO Names & addresses of the top five parties in India with whom the L.O. has been doing the liaisoning. Details of Group entities present in India as Branch Office/ Companies/LLPs etc., incorporated in India and nature their business activities. Mode of filing uncertain. 50
OTHER REGULATORY ISSUES APPLICABLE TO LO, BO & PO 51
REGULATORY ISSUES Whether restriction and prohibition to open office only applicable to citizens of restricted countries or also to entities/companies of such countries. Due date for submission of annual activity certificate alongwith annexure specifically provided to LO/BO (i.e. 30 th September) but not to PO (i.e. annual basis)
REGULATORY ISSUES Restriction on Inter-project funds transfer. Leads to practical difficulties during start-up as PO has to approach local bank or Head office for funds leading to exchange differences. Whether idle assets of PO after completion of project allowed to be rented or transferred to some other project. 53
CLOSURE OF LO LO Application to RBI through AD NOC NOC Income Tax ROC This process will take minimum 6 months to 2 year 54
REGISTRATION FOREIGN NATIONALS Foreign nationals to comply with certain registrations Visa & Permits Required for all expatriate employees visiting India FRRO Registration Visa > 6 months Within 14 days of 1 st arrival Employment of Foreign Nationals No special permission to hire foreign nationals & no restriction on period of employment 55
DOCUMENTS REQUIRED - Registration Form Original Passport & Visa 2 Passport copies Undertaking Letter Request letter FRRO Copy of employment contract Residential proof Copy of intimation submitted with local police
Social Security Agreement Sr. No. Country Effective Date 1. Belgium 1 st September, 09 2. Germany 1 st October, 2009 3. Switzerland 29 th January, 2011 4. Luxembourg 1 st June, 2011 5. France 1 st July, 2011 6. Netherland 1 st December, 2011 7. Korea 1 st November, 2011 8. Denmark 1 st May, 2011 9. Hungary 1 st April,201 57
Social Security Agreement Sr. No. Country Effective Date 1.. land 1 st, 201 1 st, 201. 1 st ber, 20. 1 st, 20. 1 st July, 2015 15. Canada 1 st, 201. 1 st, 201. 1 st Octoberb, 2016 57