Entity Options for doing business in India

A Foreign company desirous of venturing into the Indian markets can evaluate several entity options available under law. It can opt to operate either as an incorporated or an unincorporated entity. Th e key options being:

Incorporated Entity

(a) Company (both Private Limited and Public Limited)

(b) Limited Liability Partnership (LLP)

(c) Joint Ventures

Unincorporated Entity

(d) Liaison Office

(e) Branch Office

(f) Project Office

Typically, the key factors which influence the choice are the nature of work proposed in India, duration of work, compliance costs (both in terms of time and money), ease of setting up and closure and tax considerations. The foreign exchange regulations, specifically, the regulations governing Foreign Direct Investment (FDI) also play an important role. In India, most aspects of foreign currency transactions are governed by Foreign Exchange Management Act, 1999 (FEMA) and the delegated legislations thereunder. In this article, we would look at the options of setting up a place of doing business in India, as an unincorporated entity, provided under FEMA i.e. Liaison Office, Branch Office and Project Office.

1. Liaison Office

LO also known as representative office, is often a preferred choice of foreign companies who wish to initially understand business opportunities or study the Indian markets before making major investment. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the foreign company and its products to the prospective Indian customers. LO is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of the LO are met entirely through inward remittances from the head office outside India. LO is set up with specific approval of the Reserve Bank of India (RBI). The application is considered by RBI, under two routes:

RBI Route: Where principal business of the foreign company falls under sectors where 100 per cent FDI is permissible under the automatic route; the approval is granted by RBI itself.

Government Route: Where principal business of the foreign company falls under the sectors where 100 per cent FDI is not permissible under the automatic route; concurrence of the government is also obtained while granting approval.

2. Branch Office (BO)

BO is set up as an extension of foreign company in India, with specific approval of RBI to undertake permitted commercial activities and earn profits in India. Normally, the BO should be engaged in the activity of the foreign parent company. Just as in case of LO, the application for setting up BO is fi led with the AD and approval is given by RBI. The approval could be under the RBI route or Government route, as the case may be.

The significant aspects examined by RBI while granting approval are:

1.    A profit-making track record during the immediately preceding five financial years in the home country.

2.    Net worth of more than USD 100,000 or its equivalent.

In case these parameters are not met, a comfort letter from foreign parent is required.

3. Project Office (PO)

PO is often a suitable entity choice for foreign companies who have to execute specific projects in India e.g. projects related to oil exploration, construction, dams etc. POs operate for a specific period of time and shut down after completion of the project. Th e RBI has granted general permission to foreign companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India, and

a. the project is funded directly by inward remittance from abroad; or

b. the project is funded by a bilateral or multilateral International Financing Agency; or

c. the project has been cleared by an appropriate authority; or

d. a company or entity in India awarding the contract has been granted term loan by a Public Financial Institution or a bank in India for the project.

However, if the above criteria are not met, the foreign company has to approach the RBI, for approval through its AD. Just like a BO or LO, a PO must also get itself registered with the ROC and its details must be reported to the jurisdictional DGP. There are annual compliances with RBI, Income-tax department, ROC and DGP.

From taxation perspective PO is also considered as PE of the foreign company and income attributable to the PE is taxed @ 40% (plus applicable surcharge and education cess). MAT is also applicable in case of PO. PO is required to comply with the Indian TP regulations. Th ere is no further taxation on remittance of tax paid surplus to the foreign parent.

One may note that a private or a public limited company incorporated in Indian is liable to tax on global income @ 30% (plus applicable surcharge and education cess). Further, Dividend Distribution Tax @ 17.647% (plus applicable surcharge and cess) is payable on distribution of dividend. Dividend, however, is exempt in the hands of the shareholders. It may also be worthwhile to note that compliances are relatively less in case of a LO, BO or PO as compared to a private or a public limited company incorporated in India.

To conclude, a foreign company must carefully consider the pros and cons of each entity type in terms of the tax and regulatory considerations, before deciding how it attain its business objectives in India with minimal compliance burden.