How to set up a branch office of a foreign company in India?
How to set up a branch office of a foreign company in India?
The Indian market has seen significant growth in the past few years and has turned out to be a lucrative workspace for companies in India as well as abroad. This has attracted foreign companies to start their branch office (BO) in India to boost profits. As India continues to grow at an unprecedented pace arousing the keen interest of foreign companies to tap the resources and opportunities, there are a set of regulations, rules, and compliances that they need to follow in order to set up their branch office.
If the company follows all the rules and meets all the requirements leading to the right establishment presence, it can make all the difference between wasted efforts and success in setting up the branch. One of the main challenges is the lack of a viable and good commercial space in major cities of India under their budget, therefore they can alternatively set up their branch offices in business centres to establish a strong physical presence. Therefore, to realize the dreams of foreign companies to set up a branch office in India to achieve their strategic growth, the Government of India is attempting to make it a comfortable place to set up a business. However, there are a set of rules and regulations set by the Reserve Bank of India (RBI) that are needed to be followed by the companies and below we have mentioned all the points you need to know to start your business in India.
Branch office of a foreign company in India
The main reason as to why foreign companies set up a branch office is to help them with easier management and carrying out activities in that particular area or country. It can be seen as an extension of the parent company, headquartered in a different country. The companies act, 2013, has all the provisions required for setting up a business in India. According to the companies act 2013, a foreign company is a company or body corporate incorporated outside India and which has a place of business, whether by itself or through an agent, in this country. The RBI under section 11 issues directions to the authorized person for conducting foreign exchange business, and this includes setting up a branch office as well. FEMA,1999 together with RBI, established the rules for the formation of a branch office.
Eligibility requirements for setting up of branch office by a foreign company in India
The foreign exchange management act (FEMA), 1999 governs the establishment of a branch office for a foreign company or corporation in India. There is a set of established regulations to which the foreign company must adhere to in order to start a branch office. One of the most fundamental factors to become eligible is that the business must use its assets only to perform the company’s activities and other associated operations. Also, the foreign company cannot acquire or purchase any piece of land for renting purposes and must strictly use it to carry out its business activities. Two more important qualifications are:
- The net worth of the company must be equal to or more than $100,000.
- The foreign company must have a continuous profitability record for 5 or more years.
Necessary registration requirements for setting up a branch office in India
The procedure of setting up a branch office of a foreign company in India can take up several weeks. Most of the time will be taken by RBI as it can take upto 4 weeks to approve and grant permission, given all the requirements are met and all the documents are handed over on time. The company needs to provide a detailed history of all the activities and objectives of the parent company. A list of proposed and intended activities that is going to be carried out at the branch office in India is also needed to be informed. The company also needs to inform the main reason as to why they chose India to set up its branch office. Finally, they need to fill a number of forms provided by RBI and make sure that the company functions under a sector that fully allows foreign direct investments (FDI). If the operations of the company do not fall under the required sector, then it should send the form to the foreign ministry. Once all the required and important information is disclosed and transparency is maintained, the process of registrations gets easier.
What are the important documents required for setting up a branch office?
- Certificate of incorporation or registration of the company
- Memorandum of association (MOA) and article of association (AOA)
- A detailed list of key executives or directors
- A detailed list of shareholders of the parent company <
- Certified public accountant (CPA) attested net worth certificate
- Audited financial statements of the last five preceding years of the parent company
- A banker's report by the banker of the parent company's host country
- 5 color photographs of director and copy of passport each
- Business visa copy with immigration stamp on arrival
- Latest address proof and a national identity card
What is the procedure for setting up a branch office of a foreign company in India?
Once all the above-mentioned eligibility requirements, documents requirements, and other compliances are met, the company can submit the application of Form FNC along with the mentioned documents. The official exercises due diligence with respect to the background of the applicant. If all the requirements are met satisfactorily by the applicant’s company, the branch office can be set up in India. However, before receiving the approval letter, a copy of the FNC form is forwarded to the Reserve Bank of India (RBI) and a Unique Identification Number (UIN) is allotted to the branch office. Only after receiving the UIN, the approval letter is given to the branch office.
The registration of the branch office can take upto 45 days and renewal of the registration is not required for upto 2 to 3 years. Once the approval is given, the branch office needs to set up the office within 6 months and in case the office is not set up within 6 months, the approval lapses. The branch offices are also allowed to shift their office from one city to another inside the territory of India without any special approval.
Compliances under the companies act, 2013
Under the Companies Act, 2013 if any foreign company establishes a branch office in India or any other place of business, it shall be treated as a foreign company under section 2(42). This Act defines a foreign company as “a company or body corporate incorporated outside India having a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.”
The foreign companies are governed under the Chapter XXII of the Companies Act, 2013 and Companies (Registration of Foreign Companies) Rules, 2014. Every foreign company is required to file an e-Form FC-1 to MCA or Ministry of Corporate Affairs within 1 month of establishment of a branch office in India. In case there needs to be an alteration in the documents submitted, the company needs to submit the detailed list of alterations as prescribed by the format by Registrar of Companies in e-FORM FC-2 within 1 month of alteration.
Important conditions for setting up of branch office in India
Taxation in India
Income tax is applicable on the profits earned by the branch office of foreign company in India at the rate of 40% and additional surcharges as applicable. Goods and services tax (GST) is also applicable on the supply of goods and services by the company.
Net worth requirement
The parent company or the foreign mother company must have a profitable past record for at least 5 continuous years. The company must be able to show a net worth of more than or equal to $100,000 which must be supported by the financial statements.
Permission for-profit remittances
What are the basic rights granted to branch offices in India?
Right to acquire a property
The branch office of a foreign company is allowed to acquire immovable property like buildings or plots of land for the purpose of setting up factories, offices, or any other infrastructure. But if the company originates from Pakistan, Bangladesh, Sri Lanka, Iran, Bhutan, China or Afghanistan, it is not allowed to acquire or buy land in India. However, they are only allowed to carry out permitted activities supplemented to operation of the parent company. One can also lease the property but the lease period must not exceed a period of 5 years.
INR current accounts for carrying out business transactions
Remittance of profit
The branch offices can remit profits to their parent company abroad after it is subjected to taxes and after the documents are provided to authorized dealers. They shall be taxed as per Income tax act, 1995.
Term deposit account
Funding of branch office by a foreign company
Debentures and borrowings
These are redeemable and can be either convertible or non-convertible. Companies can issue bonds, debt securities or debentures and when these get converted into equity shares, they are treated as foreign direct investments.
Share capital
It can either be equity share capital, which is the most common way in which Indian companies usually finance. Other share capital is called preferred share capital which are convertible shares and such shares are regarded as FDI.