POSSIBLE ENTRY OPTIONS FOR SETTING UP AN ENTITY AND DOING BUSINESS IN INDIA
VARIOUS POSSIBLE ENTRY OPTIONS FOR SETTING UP AN ENTITY AND DOING BUSINESS IN
INDIA
A foreign company has the following
entry options for doing business in India:
· As
an incorporated entity i.e. wholly owned subsidiaries and joint venture
companies and limited liability companies; and
·
As
an unincorporated entity i.e. liaison, project and branch offices.
These entry options are discussed
below:
AS AN INCORPORATED ENTITY
The incorporated entities may be in the form of:
(i) Wholly Owned
Subsidiaries (“WOS”); or
(ii) Joint Ventures (“JV”)
(iii) Limited Liability
Partnerships (“LLP’s”)
WOS
OR JV COMPANY
The
WOS or JV may be set up either as a private limited company or a public limited
company under the Companies Act, 1956 (“Act” or “CA”). For registration and incorporation of private or public
company, an application has to be filed with the Registrar of Companies of the
relevant state in which the company is to be incorporated (“ROC”). Once
a company has been registered and incorporated as an Indian company, it is
subject to Indian laws and regulations as applicable to other domestic Indian
companies.
The
main characteristics of a private company and a public company are as follows:
I.
A private limited company is a company which
- Has
a minimum paid up share capital of INR 100,000 or a higher paid-up capital
as may be prescribed by its articles of association
- Restricts the right to transfer shares by its
articles of association.
- Prohibits
any invitation to the public to subscribe for any shares in the company.
- Prohibits
any acceptance of deposits from persons other than members, directors or
their relatives.
- Can
be formed with a minimum of two members and two directors.
- Limits the number of its members (shareholders)
to fifty.
II. A public company
is a company which:
- Is not a private limited company
- Has minimum paid up capital of INR
5,000,000
- Is a private company, which is subsidiary
of a company, which is not a private company.
Setting
up of a private limited company in India is preferred as opposed to a public
limited company for the following reasons:
- Private
companies are exempt from various compliances under the Act.
- In
case, it is decided to form a joint venture with a domestic partner, a
private company would be best suited. Also in case the Indian entity is
not proposing to raise funds from the public, a private limited company
would be more suitable.
- Further, it is possible
to impose restrictions on transferability of shares of a private company.
A private
company can be formed with a minimum of two members and two directors. For a
foreign company to set up a Wholly Owned Subsidiary (WOS) as a private company,
the entire share capital of WOS should be held by minimum two foreign
companies. It may be noted that the second foreign company may hold the shares
(holding of one share would be sufficient) as a nominee of the parent foreign
company.
The
first step is to apply to the Registrar of Companies (RoC) in Form 1-A to make
the proposed company’s name available. The minimum number of the shareholders
for a Private Limited Company is two (2) and the maximum fifty (50). In a
Public Limited Liability Company, the minimum number of shareholders is seven
(7) and there is no upper limit for the maximum number of shareholders.
In
the Form 1-A, the names of prospective directors or promoters, authorised
capital and choice of three names of the proposed company in the order of
preference, are required to be stated. The RoC usually takes a decision with
regard to the availability of the name within two weeks of receiving a complete
application. In the event, the Indian company shall be using the name of the
parent company as part of the Indian company's corporate name, a "No
Objection Letter" from the parent company will be required.
Once
the name is made available, the Memorandum and Articles of Association of the
Company need to be filed for registration with the RoC. The minimum authorised
share capital required for incorporating a private limited company in India is
Rupees One (1) Lakh. The fees payable to the RoC vary based upon the authorized
share capital of the company. Upon registration of the Articles of Association,
the Certificate of Incorporation is issued and from that date, the company
comes into existence and can commence business and execute contracts in its own
name.
The
minimum authorized share capital required for incorporating a private limited
company in India is Rs. 1,00,000/- (Rupees One Lakh only). .
Taxation
Tax structure on
Companies is as follows:
Tax on Profits: 30%
Education cess: 3 % on income-tax
(inclusive of surcharge, if any)
Note:
1.
Surcharge
is applicable @ 7.5 percent if total income is in excess of INR 10,000,000.
Marginal relief may be available.
Minimum Alternative Tax
MAT is levied @
18.5 percent of the adjusted book profits in the case of those companies where
income-tax payable on the taxable income according to the normal provisions of
the Income-tax Act, 1961 (the Act), is less than 18.5 percent of the adjusted
book profit.
Further surcharge
is applicable @ 7.5 percent in the case of domestic companies if the adjusted
book profits are in excess of INR 10,000,000. Marginal relief may be available.
Further education
cess is applicable @ 3 percent on income-tax (inclusive of surcharge, if any)
Dividend Distribution Tax (DDT)
The Indian Company
is liable to pay Dividend Distribution Tax (DDT) @ 16.609 percent (i.e.
inclusive of surcharge and education cess) on dividends declared.
LIMITED
LIABILITY PARTNERSHIP’S
Government of
India has allowed FDI in LLP’s however LLPs with FDI will not be allowed to
operate in agricultural/plantation activity, print media or real estate
business. FDI in LLP is allowed with the previous approval of the Government.
Further it is allowed with the Government’s approval only in those sectors in
which 100% FDI is allowed under automatic route under the FDI policy. Thus
those sectors which are not available under automatic route is not available
for FDI in LLP. The followings are some conditions with respect to FDI in
LLP’s.
v LLPs with FDI will not be
eligible to make any downstream investments.
v Foreign Capital participation in
LLPs will be allowed only by way of cash consideration.
v Investment in LLPs by Foreign
Institutional Investors (FIls) and Foreign Venture Capital Investors (FVCIs)
will not be permitted.
v LLP’s are not allowed to raise
ECB (external commercial borrowings)
Taxation on LLP’s
Tax structure on
LLP’s is as follows:
Tax on Profits: 30%
Education cess: 3 % on income-tax
(inclusive of surcharge, if any)
Minimum Alternative Tax
MAT is levied @
18.5 percent of the adjusted book profits in the case of those LLP’s where
income-tax payable on the taxable income according to the normal provisions of
the Income-tax Act, 1961 (the Act), is less than 18.5 percent of the adjusted
book profit.
Further education
cess is applicable @ 3 percent on income-tax (inclusive of surcharge, if any)
Note:
1.
No
surcharge is applicable
2.
No
tax is applicable on distribution of profits amongst the partners. However the
salary and remuneration as paid by the LLP to the partners is taxable in the
hands of partners.
UNINCORPORATED
ENTITIES
The unincorporated entities, as detailed hereunder, are formed for
specific purposes and are regulated by the Foreign Exchange Management Act,
1999 as well as the Companies Act, 1956.
- Branch Office
- Liaison Office/ Representative Office
- Project/ Site Office
Such offices can
undertake activities permitted under the Foreign Exchange Management
(Establishment in India of branch or office or other Place of Business)
Regulations, 2000.
BRANCH OFFICE
Foreign entities are
allowed to set up branch offices in India for the following purposes:
i.
Export/Import of goods.
ii.
Rendering professional or
consultancy services.
iii.
Carrying out research work, in
which the parent company is engaged.
iv.
Promoting technical or financial
collaboration between Indian companies and parent or overseas group company.
v.
Representing the parent company in
India and acting as buying/selling agent in India.
vi.
Rendering services in Information
Technology and development of software in India.
vii.
Rendering technical support to the
products supplied by the parent/group companies foreign airline/shipping Company.
It is clarified that a
branch office does not have a separate legal identity from its parent and any
liability of the branch would be the liability of the parent foreign entity. A
branch office may remit outside India the profit of the branch net of
applicable Indian taxes and subject to the Reserve Bank of India (“RBI”)
guidelines. Grant of permission for setting up branch offices is to be obtained
from the RBI.
Taxation on Branch Offices:
Tax on Profits: 40%
Education cess: 3 % on income-tax (inclusive of
surcharge, if any)
Surcharge: 2.5%
LIAISON
OFFICE/REPRESENTATIVE OFFICE
The liaison office
represents a point of contact between Indian customers and the foreign company.
The role of the liaison office is limited to collecting information about
possible market opportunities and providing information about the company and
its products to prospective Indian customers. It can promote export from India
and import to India and also facilitate technical/financial collaboration
between the parent company and companies in India. The liaison office merely
acts as a communication channel between the parent company and the Indian
companies.
A liaison office is not
permitted to engage in any trading or to undertake any commercial activity
directly or indirectly and cannot, therefore, earn any income in India. Grant
of approval for the establishment of a liaison office in India is also to be
obtained from the RBI.
Since liaison offices are
not allowed to carry out any commercial activity they are not liable to pay
taxes as there is no income.
Project/Site Office
Foreign companies
planning to execute specific projects in India can set up temporary
project/site offices in India. These offices cannot undertake activities other
than those, which are incidental to the execution of the project. Upon
completion of the project, project offices may remit the surplus of the
project, net of applicable taxes, outside India.
SETTING UP OF BRANCH
OFFICE/ LIAISON OFFICE IN INDIA
In
accordance with the provisions of the Foreign Exchange Management Act and rules
and guidelines issued there under, the applications from foreign companies (a
body corporate incorporated outside India, or a firm or other association of
individuals) (foreign entities) for establishing Branch Offices (BO) / Liaison Office (LO) in India are considered by the
Reserve Bank under two routes:
Ø Reserve
Bank Route — Principal business of the foreign entity
falls under sectors where 100 per cent foreign direct investment (FDI) is
permissible under the automatic route.
Ø Government
Route — Principal business of the foreign entity falls
under the sectors where 100 per cent FDI is not permissible under the automatic
route. Applications from entities falling under this category and Non -
Government Organisations / Non - Profit Organisations / Government Bodies /
Departments are considered by the Reserve Bank in consultation with the
Government of India, Ministry of Finance.
The
application for establishing BO / LO in India may be forwarded by the foreign
entity in Form FNC through 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) to the Reserve Bank of India, along with the prescribed
documents. The AD Category Bank shall forward the application together with
their comments/ recommendations to the Reserve Bank.
Approval
of the Reserve Bank is not required to establish a branch/unit in Special Economic
Zones for undertaking manufacturing and service activities, subject to
compliance with the conditions specified in this regard.
The
Reserve Bank or the Government of India, as the case may be, reserves the right
to reject an application for non-fulfillment of any other condition/s not
specifically referred, fulfillment of which, in the opinion of the Reserve Bank
/ the Government of India, is necessary for grant of such permission or in the
public interest. The Reserve Bank or the Government of India, as the case may
be, also reserves the right to verify / examine the activities of the BO / LO
of the foreign entities established in India and to withdraw the permission
already granted, after due notice, if the circumstances so warrant or due to changes
in the policy.
The
BO / LO 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
Annual Activity Certificate.
ELIGIBILITY CRITERIA FOR ESTABLISHMENT OF
BRANCH / LIAISON OFFICE IN INDIA
(i) Eligibility Criteria
An application from a foreign
entity to establish Branch / Liaison Office in India is considered on the basis
of two criteria viz: basic and additional:
Basic criteria
Ø
Reserve Bank Route — Principal business of the foreign entity falls under sectors where
100 per cent foreign direct investment (FDI) is permissible under the automatic
route.
Ø
Government Route — Principal business of the foreign entity falls under the sectors
where 100 per cent FDI is not permissible under the automatic route.
Applications from entities falling under this category are considered by the
Reserve Bank, in consultation with the Government of India, Ministry of
Finance.
Additional criteria
Ø
Track Record
v
For Branch Office — a profit
making track record during the immediately preceding five financial years in
the home country.
v For Liaison Office — a profit making track record during the
immediately preceding three financial years in the home country.
Ø Net Worth [total of paid-up capital and free
reserves, less intangible assets as per the latest Audited Balance Sheet or
Account Statement certified by a Certified Public Accountant or any Registered
Accounts Practitioner by whatever name].
v
For Branch Office — not less than
USD 100,000 or its equivalent.
v
For Liaison Office — not less than
USD 50,000 or its equivalent.
Applicants that do not satisfy the eligibility criteria
and are subsidiaries of other companies may submit a Letter of Comfort from
their parent company, subject to the condition that the parent company
satisfies the eligibility criteria as prescribed.
(ii) Application Form and Documentation
Applications in Form FNC duly completed in all respects
and signed by the authorized signatory of the foreign entity in the home
country may be submitted along with the Letter of Comfort, wherever applicable,
to the designated AD Category - I bank for onward transmission to the Reserve
Bank, along with their comments and recommendations and the prescribed documents.
SCOPE OF
ACTIVITIES PERMITTED REGARDING FUNCTIONING OF A BRANCH OFFICE / LIAISON OFFICE
IN INDIA
Permitted activities
Permitted activities for a Branch / Liaison Office in India would
be as under:
Branch Office
Ø Export/import of goods.
Ø Rendering professional or consultancy services.
Ø Carrying out research work, in which the parent company is
engaged.
Ø Promoting technical or financial collaborations between Indian
companies and parent or overseas group company.
Ø Representing the parent company in India and acting as buying/
selling agent in India.
Ø Rendering services in Information Technology and development of
software in India.
Ø Rendering technical support to the products supplied by
parent/group companies.
Ø Foreign airline/shipping company.
Normally, the Branch Office should
be engaged in the activity in which the parent company is engaged.
Liaison Office
Ø Representing the parent company / group companies in India.
Ø Promoting export / import from / to India.
Ø Promoting technical/ financial collaborations between parent /
group companies and companies in India.
Ø Acting as a communication channel between the parent company and
Indian companies.
