Recently, India has become a global business hub with the ability to attract companies from various sectors. With the ease of doing business in India, many international brands are eagerly entering the Indian market. A branch office allows foreign companies to extend their business operations in India without having to establish a subsidiary or joint venture. Setting up a branch office comes with its own set of compliance requirements that every company has to follow. In this blog, we will walk you through the meaning of a branch office, the key compliance requirements for branch offices in India, and much more.
What is a Branch Office?
A branch office is an extension of a foreign company that operates in another country but does not constitute a separate legal entity. The branch office in India is a representative of the parent company that conducts business activities within the scope defined by the Reserve Bank of India (RBI) and other regulatory authorities. The important feature of a branch office is that it has to be in line with the functions of the parent company, as its profits and liabilities are directly linked to the parent company.
Who Can Set Up a Branch Office in India?
Not all foreign companies are eligible to set up a branch office in India. The companies that can establish a branch office in India mostly include:
- Companies involved in manufacturing or trading: Foreign businesses involved in manufacturing or trading goods and services are eligible.
- Service-based foreign companies: Foreign companies offering services like IT consulting, engineering, finance, etc., can also establish branch offices.
- Foreign banks or financial institutions: Financial institutions and banks can open branch offices in India that offer banking or financial services.
- Non-profit organizations: NGOS are allowed to set up bra nIn some cases, non-profit entities can establish a branch office in India with prior approval from the relevant authorities.
Permitted Activities for Branch Offices of Foreign Companies
Branch offices of foreign companies are permitted to do the following activities:
- Professional or Consultancy Services (check prohibited activities)
- Carry on research work for areas of the parent company
- Import and Export
- Marketing and Promotion
- Commission based earnings
- Project-based work
- Technical services
- Trading activities
- Agent activities
- Training and educational services
- Investment in Indian securities
- To act as an authorized representative of a foreign company
Who Regulates Branch Offices of Foreign Companies in India?
The operation of branch offices of foreign companies in India is regulated by the following:
- Foreign Exchange Management Act, (FEMA) 1999
- Reserve Bank of India (RBI)
- Ministry of Corporate Affairs (MCA)
The process to Establish a Branch Office in India
If a foreign company has to follow a branch office in India, follow the step-wise guide to set up a branch office in India.
- Obtain Approval from the RBI: The first step to set up a branch office in India is to obtain approval from the RBI. The company has to apply to RBI via Authorized Dealer (AD) Category-I bank in India. The authorized dealer bank serves as an intermediary between the applicant and RBI.
- Documents Required for Approval: The application is accompanied by the following documents, including:
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- A copy of the certificate of incorporation of the parent company
- Board resolution from the parent company that approves the establishment of the branch office.
- Details about the activities which are expected to be carried out by the parent company.
- A copy of the audited financial statements for the last three years of the parent company
- A business plan that outlines the proposed activities of the branch office in India.
- KYC from the banker of the parent company: The parent company is required to submit KYC details of the branch office to the RBI. It includes letter of recommendation and financial information about the company.
- Submission to the Ministry of Commerce: After RBI approval, the application is forwarded to the Ministry of Commerce and Industry for final approval. Once the Ministry of Commerce and Industry approves the application, the company needs to be registered with the Registrar of Companies (RoC) by submitting the appropriate fees and relevant documents.
Key Compliance Requirements for Branch Offices
Once the branch office is established, there are several compliance requirements that foreign companies have to follow in order to ensure that the operation of the business stays in compliance with Indian laws.
1. Registration with the Registrar of Companies (RoC)
Branch offices in India have to register with the Registrar of Companies (RoC), just like all Indian companies.
2. Tax Registration and Filing Compliance
Branch offices are subject to Indian tax laws and have to comply with the following in order to operate its business:
- Permanent Account Number (PAN): The branch office has to obtain a PAN from the Income Tax Department.
- Goods and Services Tax (GST) Registration: If the branch office engages in the sale of goods or services, it has register under the Goods and Services Tax (GST) Act depending on the amount of turnover of the business.
- Tax Deducted at Source (TDS): The branch office is required to deduct tax at source (TDS) on payments made to employees and contractors, as per Indian tax laws.
- Income Tax: Indian tax laws are not joke. It comes with its own compliance and all the branch office have to comply with Indian Income Tax Act along with other regulations.
3. Foreign Exchange Management Act (FEMA) Compliance
The act was enacted in 1999 to ensure that foreign exchange transactions are conducted legally. All the branch offices of the foreign company have to mandatorily comply with the rules and regulations set by this act. Some of them are:
a. Repatriation of Profits:
- Remittance of Profits to Parent Company:
Branch offices in India are allowed to remit the profits they earn in India back to their parent company. However, this is subjected to payment of Indian taxes. This means that you only have to pay taxes in India, and then the remaining profits can be sent to the parent company. - Tax Deduction at Source (TDS):
Before repatriating the profits, branch offices have to ensure they have paid taxes on their income (TDS).
b. Capital Movement:
- Initial Capital Investment:
The foreign parent company may need to bring in capital to establish the branch office. The capital has to comply with FEMA guidelines with prior approval from RBI. - Working Capital:
Any additional funds brought into the branch office to support its day-to-day operations are also governed by FEMA. - Reporting of Capital Inflow:
When foreign funds are brought into India for setting up the branch office, they need to be reported to the RBI.
c. Foreign Exchange Transactions:
All transactions involving foreign currencies need to be processed through authorized dealers (banks) authorized by the RBI.
4. Auditing and Financial Reporting
Branch offices in India have to maintain proper accounting records and comply with Indian accounting standards. Additionally, they should have their financial statements audited by a certified Indian auditor. These statements have to be filed annually with the Registrar of Companies (RoC).
- The audited financial statements should include the balance sheet, income statement, and cash flow statement.
- These statements must be submitted within six months of the end of the financial year.
5. Labor and Employment Law Compliance
Branch offices have to comply with Indian labour laws, some of which include:
6. Local Permits and Licenses
Branch offices are required to comply with local regulations. The branch office may need specific permits or licenses like Shops and Establishment Act and Environment clearance from the local authorities depending on the nature of the business.
7. Other Operational Compliance
Branch offices have to keep in mind that they have operate within the operational scope as authorized by the RBI. They are not authorized to engage in any kind of activity which is outside the scope of approved business activities by RBI.
Conclusion
India is an amazing market to operate the business, and setting up a branch office by a foreign company allows the business to reach a wider range of audience. As branch offices are controlled by the parent company, prior approvals from RBI, MCA, and other regulatory authorities are essential to run operations smoothly. As simple as the process looks, documentation and compliances post setting up is quite technical. Therefore, it is important to get deeper insights into the requirements and procedures in order to establish a name in the Indian market.
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FAQs
1. Can a foreign company set up a branch office in India?
Yes, it can, but with prior approval from the RBI and the Ministry of Commerce.
2. What are the main compliance requirements for branch offices in India?
Key compliance requirements include registration with the Registrar of Companies, tax registration, FEMA compliance, auditing, and adherence to local labour laws.
3. Do branch offices need to register for GST?
Yes, if the branch office is engaged in the supply of goods or services, it must register under GST.
4. How does a branch office in India close?
To close a branch office, a foreign company have to file for closure with the RBI, settle outstanding liabilities, and submit final accounts.
5. What is FEMA compliance for a branch office?
FEMA compliance ensures that all foreign exchange transactions, including capital movement and profit
