A branch office is a suitable business model for foreign companies looking to establish a temporary presence in India. The branch office serves as an extension of the head office business and carries on the same business and activity as that of its parent company.
Most businesses use this mode to learn more about the Indian market without having to make a long-term commitment. Accordingly, businesses that are looking to expand into Asia or diversify their Asia presence should consider whether a branch office meets their market entry requirements.
Conditions for setting up a branch office
Businesses that would like to set up a branch office in India need to meet the following conditions:
- The applicant company must be a body corporate incorporated outside India;
- The name of the Indian branch office must be the same as the parent company (if the branch office does not have revenue from India operations, its expenses must be met by the head office);
- The net worth of the branch office must not be less than US $100,000; and
- The parent company should have a profit making record in the immediately preceding five financial years in the home country.
In cases where the applicant foreign entity does not meet the financial criteria, the parent company may issue a Letter of Comfort (LoC), given the company satisfies the prescribed criteria for net worth and profit.
In India, a branch office cannot directly carry out manufacturing activities unless such manufacturing activity is done in a special economic zone (SEZ) with the purpose of exporting products out of India. It may also sub-contract such activity to an Indian manufacturer.
Furthermore, a foreign company must me engaged in trading and manufacturing activities in its home country in order to set up a branch office in India for engaging in the following activities:
- export or import of goods;
- rendering professional or consultancy services;
- research work;
- representing and acting as buying or selling agent for the parent company.
How to register a branch office in India
To open a branch office in India a foreign company must apply for approval from the Reserve Bank of India (RBI) under provisions of the Foreign Exchange Management Act (FEMA), 1999.
Foreign entities whose principal business falls under sectors where 100 per cent foreign direct investment (FDI) is permissible under the automatic route must complete the form FNC and submit it to the RBI, along with the associated documents.
For other sectors, the form must be submitted to the Ministry of Finance. In this case, the application for establishing branch office must be forwarded by the foreign entity through a designated AD Category – I bank to the RBI.
If the foreign entity wishes to establish a branch office in more than one location in India, it must register the branch, or seek approval from the RBI for each of the location separately. The RBI approval is also necessary for each activity the branch office intends to undertake in India.
The procedures for registration requires a foreign company to deposit the following set of forms:
- FNC form duly signed by AR;
- Information about the parent company along with its certificate of incorporation attested by a Notary Public or the Indian Embassy in the country of registration;
- The incorporation documents of the branch office to be established in India;
- Proof of registered office;
- Note on location or proposed activity;
- The latest audited balance sheet of the applicant entity;
- Board resolution to open a branch office;
- KYC of the authorized signatory; and
- Information about the local representatives of the parent company in the branch office.
A branch office does not have a separate legal entity and is subject to the law governing its parent office. As a result, in India, a branch office is taxed as a foreign company and is liable to pay tax at the rate of 40 percent plus applicable surcharge and cess.
A branch office in India may remit outside India the profit (net of applicable Indian taxes) of the branch.
However, it must produce the following documents and establish the net profit or surplus to the authorized dealer through whom the remittance is affected:
- A certified copy of the audited balance sheet and profit and loss account for the relevant year; and
- A chartered accountant's certificate certifying the manner of arriving at the remittable profit, that the entire remittable profit has been earned by undertaking the permitted activities, and that the profit does not include any profit on revaluation of the assets of the branch.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.