Why a Liaison Office is a popular choice among global companies in India

A Liaison Office (LO) is the representation of a foreign company in India. The Indian central bank describes such an establishment as “an office that may only undertake connecting activities”. This includes:

• gathering information about the market and potential Indian consumers;
• advertising, promotion and other marketing-related activities;
• stimulating exports to or imports from India;
• setting up technical and financial collaborations between the head office and Indian companies;
• forming a communication channel between the head office and local partners.

A LO may not generate turnover in India and therefore may not produce goods or provide services. The costs of a Liaison Office 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 want to bring their products or services directly to the Indian market, but for example want to outsource work to India.

How do you set up a Liaison Office?

To set up a LO in India, various registration and approval procedures must be completed with various Indian government agencies. The following seven steps are involved:

• Apply for approval from an Indian bank to open a bank account for the liaison office. This bank will then automatically become the ‘Authorized Dealer Bank’ for the new office.
• Submit a request, with all the necessary documents, to the Reserve Bank of India (RBI) via the Authorized Dealer Bank.
• Once the RBI has given its approval, a ‘Certificate of Establishment of Place of Business in India’ must be applied for from the Indian
• Chamber of Commerce: the Registrars of Companies (ROC).
• A Tax Deduction Account Number (TAN) and a Permanent Account Number (PAN) must then be applied for from the Indian tax authorities: the Income Tax Authority.
• Once these have been received, the LO’s bank account with the authorized bank can be officially opened.
• The liaison office must be registered with the state where the office is located under the Shop and Establishment Act and under the Professional Tax.
• 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 which documentation should and should not be submitted, it also takes 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

When all steps have been completed and the LO has been registered, you are not quite done yet. In India, a lot still has to be reported back to the various government agencies under which the LO is registered. Six months after the Central Bank of India (RBI) has given its approval for the new office, the official address, the PAN and the ‘Certificate of Establishment of Business Place in India’ from the Indian Chamber of Commerce (ROC) must be submitted to the RBI. Since a LO is not allowed to engage in commercial activities, several documents must be submitted each 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 practicing 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 must submit an FC-3 form to the ROC annually with a detailed list of all places of business of the foreign company and the annual accounts.
• FC-4 form – Foreign companies must file their annual returns with the ROC using this form.
• 49-C form – Is an income tax form that must be filed specifically by foreign companies with a LO in India. This form must also be verified by a Chartered Accountant and must be submitted to 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 a LO must indeed remain compliant with local (tax) regulations. Failure to do so can have serious consequences. For example, you may be classified as a permanent establishment, which could mean the end of your activities in India.