28 Dec Options For Foreign Companies to set up Business in India
There are majorly three options for foreign companies entering into India:
- Establish a Liaison office (LO)
- Establishing a Branch office (BO);
- Establishing a Wholly owned subsidiary (WOS) / Joint Ventures (JV).
For your convenience, a brief comparison of 3 entities as modes of investment in India is given hereunder:
Liaison Office (LO), Branch Office (BO) and Wholly Owned Subsidiary (WOS) Company
| Basis | Liaison Office | Branch Office (BO) | Wholly owned subsidiary (WOS) / Joint Ventures (JV) |
|---|---|---|---|
| Meaning | 1. Liaison Office acts as representative office and acts as a channel of communication between the parent company (Head Office) and parties in India.2. Itis not allowed to undertake any commercial activity – directly or indirectly and cannot thus earn/accrue income in India. 3. Itis an extension of Head- 4. A simple form of structure |
1. Companies incorporated outside India engaged in manufacturing or trading activities can setup a BO in India with specific approval of Reserve Bank of India (RBI).2. It is an extension of Head- office with a right to accrue income. 3. A simple form of structure 4. BO are generally engaged |
An incorporated entity formed and registered under Companies Act, 2013. It is generally a private limited company for a closely held shareholding.It is distinct and legal entity apart from its shareholders. |
| Permitted Activities | 1. Representing parent company / group companies in India. 2. Promoting export! import from / to India. 3. Promoting technical/ financial collaborations between parent group companies and companies in India. 4. Acting as a communication channel between the parent company and Indian companies. |
1. ExporVimport of goods. 2. Rendering professional or consultancy services. 3. Carrying out research work. in areas in which the parent company is engaged. 4. Promoting technical or financial collaborations between parent / group companies and companies in India. 5. Representing the parent company in India and acting as buying/ selling agent in India. 6. Rendering services in Information Technology and development of software in India. 7. Rendering technical support to the products supplied by parent/group companies. 8. Foreign airline/shipping company. |
Any activities as stipulated in the ‘Object Clause of the Memorandum of Association of the Indian Company subject to Indian laws and regulations. |
| Time Limit for setup | It generally takes 3-4 months to setup a BO. as permissions from RBI take time. | It generally takes 3-4 months to setup a BO. as permissions from RBI take time. | Around 1-2 months. |
| Criteria for set-up | 1. Parent Company should have a profit making track record during the immediately preceding three financial years in the home country. 2. Net Worth of the Parent Company not less than USD 50.000 or its equivalent. 3. An authorized Indian person to represent before RBI and ROC. | 1. Parent Company should have a profit making track record during the immediately preceding five financial years in the home country. 2. Net Worth of the Parent Company not less than USD 100.000 or its equivalent. 3. An authorized Indian person to represent before RBI and ROC. | 1. A private limited company to be incorporated requires minimum 2 shareholders and 2 directors. The minimum capital requirement has been done away with. No requirement of track record of parent company. 2. The company at the time of incorporation and during the entire tenure of its existence has to compulsorily have an Indian executive director on board. |
| Time Limit of approval | Normally 3 years from the date of approval. On completion of the time period, application for extension can be made. | Normally 3 years from the date of approval. On completion of the time period, application for extension can be made. | At will – till the company decides to shut down its operations. |
| Liabilities of the entity | The liability of LO is unlimited. The assets of parent company are at risk of attachment for the expenses incurred by the LO. | The liability of the Branch is unlimited. The assets of the parent company are at risk of attachment in case the liabilities of the branch exceeds its assets. | The liability of the Parent company is limited to the extent of its shareholding in the WOS/JV. The assets of the parent company are not subject to any attachments |
| Registrations required: | The following registrations (post formation) will be required: (a) PAN / TAN; (b) Shops & Establishment; (c) Import Export Code; (d) Registrar of Company (ROC) registration; (e) Profession Tax | The following registrations (post formation) will be required: (a) PAN / TAN; (b) GST; (c) Shops & Establishment; (d) Import Export Code; (e) Registrar of Company (RO(C) registration; (f) Profession Tax | The following registrations (post incorporation) will be required: (a) PAN / TAN; (b) GST; (c) Shops & Establishment; (d) Import Export Code; (e) Professional Tax |
| Permitted Incomes / Receipts | 1. Entire expenses of LO will be met from the funds received from head office through normal banking channels. 2. No Income accrual in India 3. No Borrowings in India. | 1. Entire expenses of BO will be met either from income generated in India or from the funds received from head office through normal banking channels. 2. No Borrowings in India. | 1. All Incomes arising out of business in India. 2. Borrowings allowed from financial institutions in India. 3. External Commercial Borrowings (ECB) are subject to RBI approval. |
| Annual Compliance | (a) Statutory Audit by Chartered Accountant; (b) Annual filings of audited accounts of LO, Global accounts with ROC; (c) Annual submission of Activity Certificate with RBI and AD Bank; (d) Filing of quarterly TDS Returns; (e) Filing of audited accounts with Directorate of Income Tax, New Delhi. (f) Filing of Form 49C with the Income Tax department (no IT Return as there is no income). | (a) Statutory Audit by Chartered Accountant; (b) Tax Audit in case turnover exceeds INR 1 cr; (c) Annual filings of audited accounts of BO, Global accounts with ROC; (d) Annual submission of Activity Certificate with RBI and AD Bank; (e) Filing of quarterly TDS Returns; (f) Filing of monthly, quarterly and annual GST Returns and GST Audit. (g) Filing of Annual Income Tax Return. | (a) Statutory Audit by Chartered Accountant; (b) Tax Audit in case turnover exceeds INR 1 cr; (c) Annual filing of accounts and Annual Return with ROC; (d) Annual compliance with RBI in case of shares allotted to foreign persons; (e) Filing of quarterly TDS Returns; (f) Filing of monthly, quarterly and annual GST Returns and GST Audit. (g) Filing of Annual Income Tax Return. (h) Conducting of Board meetings — atleast 1 meeting per quarter. 1 Board meeting with atleast 2 directors physically present together for approval of accounts. (i) Minimum 1 shareholder meeting annually for approval of accounts and appointment of auditor. |
| Taxability | No Income tax as there is no Income. | BO is treated as a foreign company and taxed as under:Pls Ref to Notes | The rate of corporate tax in India for domestic corporations:Pls Ref to Notes |
| Dividend to Parent Company | No Dividend as there is no income. | Pls Ref to Notes | Pls Ref to Notes |
| Repatriation of Funds to Parent Company | Only on closure of LO. | Profits can be freely repatriated to Parent company subject to payment of applicable taxes in India | 1. By way of Dividend on payment of DDT: 2. By way of Royalty / Fees for Technical fees; 3. By way of Management fee; 4. Related party transactions (point 2 & 3 or any other transactions) are subject to Transfer Pricing Regulations. |
| Closure of Entity | LO need not go through winding up process for closure. II only needs to file Closure application with the RBI | A BO need not go through winding up process for closure. It only needs to file Closure application with the RBI | Winding up process for a WOS/JV can be quite lengthy with minimum from 6-8 months and more depending on complexity and type of assets it owns. However, for a redundant WOS/JV (not having any assets / liabilities and not operating business since 2 years) can be simply dosed down by filing a Strike-off application. |
| Advantages | 1. Not a separate legal entity hence cost of compliance is less. 2. Ideal if no income accrual in India. 3. Easy to shut down. | 1. Not a separate legal entity hence cost of compliance is less. 2. Easy repatriation of funds. 3. No Tax on dividends; 4. Easy to shut down. | 1. Separate legal entity for Indian operations; 2. Limited Liability; 3. Lower tax rate; 4. Can freely borrow funds from Indian financial institutions. External Commercial Borrowings are subject to RBI approval. 5. Future collaboration with Indian investor / partner is possible only for Indian operations. 6. Freely expand its activities by altering its Memorandum of Association. |
| Disadvantages | 1. Unlimited liability; 2. Requires reporting of Global accounts before Indian authorities; 3. Indian Income tax authorities also try to hold Indian LO as “PE” of foreign company. | 1. Unlimited liability; 2. Requires reporting of Global accounts before Indian authorities; 3. May lead to being treated as “PE”. 4. Higher tax rate; 5. Future collaboration with Indian investor / partner is not possible. 6. Cannot borrow funds from Indian financial institutions. | 1. Attracts DDT on payment of Dividend 2. Cost of compliance is high as it is a separate legal entity and reporting is required before various authorities. |
Note: There are following changes which will apply on taxation from the financial year 2020-21. A brief note on the same is given hereinbelow:
Corporate Tax Rates In India
1. Domestic Companies
The rate of corporate tax in India varies from one type of company to another i.e. domestic corporations and foreign corporations pay tax at different rates. Additionally, depending on the type of corporate entity and the different revenues earned by each of them, the corporation tax rate differs based on a slab rate system. Presently for the assessment year 2019-2020, the corporation tax rates in India are as follows:
| Type of Company | Corporate Tax Rate | Surcharge on Net Income Less than Rs. 1 crore | Surcharge on Net Income greater than Rs. 1 Crore and less than Rs. 10 Crore | Surcharge on Net Income greater than Rs. 10 Crore |
|---|---|---|---|---|
| Domestic with annual turnover upto Rs 250 Crore | 25% | Nil | 7% | 12% |
| Domestic Company with turnover more than Rs 250 Crore | 30% | Nil | 7% | 12% |
| Foreign Companies | 40% | Nil | 2% | 5% |
2. Foreign Companies
A foreign corporate is defined as a company that is not of Indian origin. Its management and control takes place outside of India. These corporations are not registered under the Companies Act 2013. The rules pertaining to the taxation process for a foreign company is completely different from that of a domestic corporate. It all depends on the taxation agreement made between India and other foreign countries. Like for example, the corporate tax rate for foreign corporation based out of the US will depend on the taxation agreement that India has with the United States.
| Nature of Income | Tax Rate |
|---|---|
| Royalty received or fees for technical services received by a foreign corporation from the government or any Indian concern under an agreement made before April 1, 1976 and approved by the central government | 50% |
| Any other Income from Indian Operations | 40% |
Branches of foreign companies are taxed on income that is received in India, or which accrues or arises in India, at the rates applicable to foreign companies. There is no withholding tax (WHT) on remittance of profits by the branch to its head office.
Tax on Dividend Income:
Dividend income received by a domestic company with effect from 1 April 2020 shall be taxable in hands of resident shareholders at the rates applicable to them. Further, in case of non-resident shareholders, dividends received post 1 April 2020 may be taxed at the rate of 20% under the Income-tax Act or tax treaty rate, whichever is beneficial.
WHT obligations shall arise in the hands of a company distributing dividends to non-resident shareholders in such case. A corresponding deduction on account of interest would be allowed to the extent of 20% of such dividend income. This change is brought considering that DDT has been abolished with effect from 1 April 2020.
Dividend income received from a foreign company or business trust will be considered, in addition to dividend income received from a domestic company, for removal of the cascading effect of tax on dividend income, if any.
Stock dividends (bonus shares) distributed are not taxed at the time of receipt in the hands of the recipient shareholders, but capital gains provisions are applicable to the sale of these stock dividends.
Tax on Royalty Income
The domestic tax law defines the term ‘royalty’ to include consideration from the transfer of all or any rights (including the granting of a licence), imparting of any information, or use or right to use of any right in respect of a patent, invention, model, design, secret formula or process, trademark, or similar property. The definition also includes imparting of any information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill; use or right to use any industrial, commercial, or scientific equipment; the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic, or scientific work, including films or video tapes for use in connection with television, or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution, or exhibition of cinematographic films; or rendering of any services in connection thereto. Further, the Finance Act, 2020 has brought an amendment to include consideration for sale or distribution or exhibition from cinematographic films in ambit of definition of royalty.
Royalty income received by a non-resident taxpayer is taxed at 10%, 15%, or 20% (subject to treaty benefits and furnishing of prescribed documentation). Surcharge and health and education cess, as applicable, will be levied in addition to the basic tax rates mentioned above. However, surcharge and health and education cess would not apply on the tax rate specified in the tax treaties. The issue is litigative, and there are divergent views on this.
Further, income arising to a non-resident/foreign company by way of royalty/FTS rendered in/outside India to a national technical research organization shall be exempted.
Tax on Partnership/LLP
A partnership firm and an LLP are taxed as separate legal entities. The share of income of partners from a partnership firm or an LLP is exempt from tax. Partnerships and LLPs are taxed at 31.2% (inclusive of surcharge and health and education cess) if the income is less than INR 10 million and 34.944% (inclusive of surcharge and health and education cess) if the income exceeds INR 10 million. Alternate minimum tax at the rate of 18.5% applies to a partnership/LLP.
The interest payment to partners on capital or current account is allowed as tax-deductible expenditure. However, the maximum interest rate allowable for tax purposes is 12% per annum. A working partner can be paid salary, bonus, commission, or remuneration. The maximum permissible deduction in respect of remuneration payable collectively to all working partners is based on the book profit of the firm, at slab rates for different levels of book profit.
Directors duties and liabilities under the Companies Act, 2013
Director under the Companies Act 2013
The Companies Act, 2013 (“ Act ”) has spearheaded a new era of corporate governance, by increasing the role s and responsibilities of the board of directors (“Board ”), protecting shareholders’ interests, bringing in a disclosure based regime and built in deterrence through self – regulation. The Act has introduced several measures which have the effect of considerably enhancing the duties and liabilities of directors and imposition of stringent penal provisions in case of breach of any statutory provisions. With the enactment of the Act, the duties of a director have been codified. The Act introduces terms such as, ‘reasonable care’, ‘independent judgment’ and ‘reasonable and due care’. The term “director” has been defined under Section 2(34) of the Act to mean a director appointed to the Board of directors of a company. The Act provides for different categories of directors including, whole time directors, managing directors, independent directors, nominee directors, alternate directors and women directors. The Act for the first time recognizes the concept of an independent director. The term ‘independent director’ means a director other than a managing director or a whole time director or a nominee director and who fulfills certain other criteria (such as relevant expertise, experience, integrity etc.). Also, there is a new requirement under the Act to mandatorily appoint at least one woman director for certain companies meeting the prescribed thresholds.
Duties and liabilities of a director of a company
The following duties and liabilities have been imposed on the directors of companies under section 166 of the Act:
- A director of a company shall act in accordance with the Articles of Association (AOA) of the company which govern the internal functioning of the company and include matters such as procedure for transfer of shares, convening the general meetings, payment of dividend.
- A director of the company shall act in good faith, in order to promote the objects of the company, for
the benefits of the company as a whole, and in the best interests of the shareholders, the community and for the protection of environment. - A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
- A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
- A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company. Therefore, in case any contract is being entered between the company and (i) the director; or (ii) any other body corporate where the director has an interest, directly or indirectly (through relatives), the director should disclose the nature of his interest in the board meeting.
- A director of a company shall not assign his office and any assignment so made shall be void.
The duties set out above are not exhaustive. Apart from the duties set out in section 166 of the Act, a director, amongst other obligations, is responsible for the following fiduciary obligations:
- The Board needs to lay the financial statements for approval and adoption at the annual general meeting of the shareholders.
- The directors are responsible for devising proper systems to ensure compliance with the provisions of all applicable laws and to ensure that such systems are adequate and are operating effectively.
- The director should ensure that the company, in which he is a director, files the financial statement and the annual return every year with the Ministry of Corporate Affairs (“MCA”). If default is made by any company (in which a person is a director) in filing the financial statement and annual return for a period of continuous 3 (three) financial years, the concerned director cannot act as a director of other companies for a period of 5 (five) years from the date of default. Further, his existing directorships in other companies will automatically cease on account of the default.
- The director should ensure that the company where he is a director repays all the deposits, redeem the debentures, pay the interest thereon, wherever applicable and pay the dividend within a period of one (1) year once they become due.
- The director shall not disclose any price sensitive information, unless such disclosure is expressly approved by the board or required by law. Further, a director shall not take undue advantage from the price sensitive information of which he is aware by virtue of being a director.
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