It is essential that while choosing an entity structure, foreign companies pick the one that caters best to their need. The right entity structure will not only help the foreign company emerge as a strong player in the Indian market, but also help them reap financial gains.
A foreign investor may set up as an unincorporated entity or incorporated entity in India. Unincorporated entities permit a foreign company to do business in India by establishing a liaison office, branch office, project office, or a trust. An incorporated entity, like a limited liability partnership or a wholly owned subsidiary is considered a separate legal entity, and has a more structured set up.
Here is information about the various entity structures in India available to foreign companies in India.
To facilitate and promote the parent company’s business activities in India, a foreign company can open a liaison office. Also known as a representative office, it can only act as a communicator between the foreign parent company and Indian company as it is not allowed to conduct any business activity in India. Since it cannot engage in commercial, trading, or industrial activities, their operating cost must be sustained by private inward remittances received from their foreign parent company. Foreign companies often use the liaison office to create awareness about their services and products, promote their business activities, network, and explore market potential.
Liaison offices are permitted to undertake the following activities:
- Represent the foreign parent company;
- Promote export and import between the countries;
- Establish technical and financial cooperation between the foreign and Indian companies; and
- Facilitate communication between the parent and Indian companies.
The liaison office must obtain a Permanent Account Number (PAN) from the income tax authority. The liaison office must also submit a copy of the Certificate of Incorporation or Memorandum and Articles of Association (MOA and AOA), along with the parent company’s audited balance sheet for the last five years.
The liaison office must register with the Registrar of Companies (RoC) by filing e-form FC-1 on the Ministry of Corporate Affairs’website within 30 days of establishment. The following documents must also be provided:
- A notarized copy of the liaison office charter or Memorandum and Articles of Association in English;
- Full address of the enterprise’s principal place of operation outside of India;
- Name and address of the liaison office in India;
- List of directors; and
- Name and address of the company’s official representative based in India.
Prior approval of the RBI will be required if applicants or companies from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau want to open a liaison office in Jammu and Kashmir, the northeast region and Andaman and Nicobar Islands.
The Foreign Exchange Management Act (FEMA) administered through the RBI is responsible for the application and approval for setting up a liaison or branch office in India. However, if foreign entities have received government clearance to conduct business in the following sectors – defense, telecom, private security, and information and broadcasting – then no prior approval of the RBI will be required. Applications to the RBI are submitted through Form FNC.
The registration process generally takes two to three weeks. The permission to set up a liaison office is granted for three years, which can be extended before the validity of the approval expires. However, for a few sectors the validity is for two years, and no extension is granted.
Once the validity period expires, the liaison office has to either close down or be transferred into a joint venture/wholly owned subsidiary in conformity with the FDI policy.
Additionally, the foreign company must meet these requirements before qualifying for the establishment of a liaison office:
- The company should be profitable during the immediately preceding three financial years in the home country; and
- The minimum net worth of the company should be US$50,000 - verified by the latest audited balance sheet or account statement.
The above criteria shall be fulfilled by the company or its ultimate parent company.
If foreign companies want to carry out business activities in India, they can establish branch offices. A branch office is an extension of the foreign company and can conduct the same business activities as that of its parent company. Retail trading activities are not allowed for a branch office in India.
The branch office is not permitted to engage in manufacturing activities on their own – these may be subcontracted to an Indian manufacturer. However, if a branch office is operating in a Special Economic Zone (SEZ), then it is permitted to undertake manufacturing and service activities in sectors with 100 percent FDI approval.
Branch offices are permitted to undertake activities such as export or import of goods, rendering professional or consultancy services, and representing the parent company.
The branch office must apply for approval from the RBI under the provisions of FEMA. It must submit a copy of the Certificate of Incorporation or the MOA and AOA, along with the parent company’s audited balance sheet for the last three years. It must also obtain a PAN and register with the RoC through the Ministry of Corporate Affairs’ website.
The following documents must also be provided:
- FNC form duly signed by the authorized official;
- Information about the parent company along with its certification of incorporation attested by a notary public or the Indian Embassy in the country of registration;
- The incorporation documents of the branch office to be established in India;
- Proof of registered office;
- Note on location or proposed activity;
- The latest audited balance sheet of the applicant entity;
- Board resolution to open a branch office; and
- Information about the local representatives of the parent company in the branch office.
Prior approval of the RBI will be required if applicants or companies from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau want to open a branch office in Jammu and Kashmir, the northeast region and Andaman and Nicobar Islands.
The registration process for a branch office generally takestwo to three weeks. Additionally, the foreign company must meet these requirements before qualifying for the establishment of a branch office:
- The company should be profitable during the immediately preceding five financial years in the home country; and
- The minimum net worth of the company should be US$100,000 verified by the latest audited balance sheet or account statement.
If the company does not meet these requirements, but is a subsidiary of a company that does, then the parent company may also submit a Letter of Comfort on the subsidiary’s behalf during the application process.
A project office can be established if a foreign company has received a contract from an Indian company to execute a project in India.
One of the following criteria must be met in order to obtain permission to set up a project in India:
- Project is funded directly by inward remittance from the overseas head company;
- It is funded by a bilateral or multinational international financial agency like World Bank or IMF;
- It has been cleared by relevant authorities in India; or
- The Indian company awarding the contract has been granted a term loan for the project.
If none of the above criteria are met, the foreign company must make a specific request with the Central office of the RBI for approval.
It takes about two weeks to receive approval for the project office. The project office must be opened within six months from the date of approval letter. If it is not set up by then, an extension of six months may be granted by the RBI.
Prior approval of the RBI will be required if applicants or companies from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau want to open a project office in Jammu and Kashmir, the northeast region, and Andaman and Nicobar Islands.
Only applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau, and Pakistan have to register with the state police. It does not apply to other countries.
A project office can open non-interest- bearing foreign currency accounts in India for expenses and credits. The office can maintain both a foreign and Indian rupee account while operating in India. After the project is completed, the project office may repatriate any capital surplus once all tax liabilities have been paid and the final account audit is completed.
Limited liability partnership (LLP)
A limited liability partnership (LLP) is a hybrid cross between partnership firms and a company (private or public). LLP has limited liability for its partners like a company, and it receives tax benefits like a partnership firm. Under this structure, the liability of the partner is limited to their agreed contribution, and it provides flexibility without the imposition of detailed legal requirements.
Foreign companies are allowed to make any downstream investment in any other company or LLP operating in sectors that permit foreign investment. However, investors or companies from Bangladesh and Pakistan are only permitted to make investment in LLPs in sectors that allow FDI through the government route.
A company that has received foreign investment can now be converted into an LLP under the automatic route without government approval.
Here are a few advantages of setting up an LLP:
- The process is simpler and less expensive compared to other office types. The minimum fee for incorporating an LLP is INR 500 (US$7), depending on the capital contribution.
- There is no requirement to get the accounts audited unless the annual turnover exceeds INR 4 million (US$55,750) or contribution to the LLP exceeds INR 2.5 million (US$34,900).
- There is no minimum capital requirement for registration of an LLP.
- Partners are not liable to pay the company debts from their personal assets.
- Partners are permitted to enter into any legal contracts outside India.
An LLP must be registered on the website of the Ministry of Corporate Affairs. Here are the steps to set up an LLP in India:
- Obtain a Designated Partner Identification Number (DPIN) for each partner by filing eForm DIR-3 through the ministry's online portal;
- Acquire Digital Signature Certificate (DSC) of the partners;
- Apply for the name of the LLP to be registered by filling Form 1;
- Once the name is approved, fill up Form 2 (Incorporation Document and Statement) online;
- An initial LLP agreement has to be filed within 30 days of incorporation of LLP.
After submitting the required forms and documentation, the registrar will register the LLP within two weeks of filing Form 2. The LLP must be registered with the RoC. There is no limit on the maximum number of partners, but a minimum of two partners are required for forming an LLP, and at least one of them has to be a resident of India (that is, their stay in India should be more than 181 days in the preceding financial year).
It is possible to convert an existing partnership firm and existing private and public company into an LLP.
An LLP is taxed at 30 percent of its total income. An additional surcharge of 12 percent is levied if the total income of the LLP exceeds INR 10 million (US$140,000). Further, health and education cess at the rate of four percent will be added to the income tax and applicable surcharge.
Wholly owned subsidiary (WOS)
A wholly owned subsidiary ( WOS) operates as an independent legal entity whose 100 percent common stock is owned by another company, the parent company. The WOS can be a part of the same industry as its parent company or a part of an entirely different industry.
For foreign investors, the WOS allows them to have control over business operations, provide limited liability, and see fewer restrictions on business activities compared to a liaison office or project office. However, the activities must be in accordance with the FDI policy.
Foreign companies can set up wholly owned subsidiaries in the form of private limited companies in sectors where 100 percent FDI is permitted. A private limited company is a business entity held by a small group of people.
At least two directors, with one being an Indian resident, must be appointed and registered through India’s e-filing system for Director Identification Numbers (DIN). A minimum authorized share capital of INR 100,000 (US$1,400), two directors, and two shareholders (who can be same as the directors) are required to establish a private limited company. After name registration, the company has 20 days to file its MOA and AOA, and proceed with formal incorporation.
The following forms must be filed with the Ministry of Corporate Affairs for establishing a WOS in India:
- RUN facility for reservation of name; and
- SPICe for incorporation of the company.
Once the documents are submitted, the RoC will issue a Certificate of Incorporation and a Corporate Identification Number. It takes about four to five weeks to complete the process.
WOS will be subjected to Indian taxes and laws as applicable to other domestic companies in India. Under this structure, companies have to pay Corporate Income Tax (CIT).
A partnership firm is a business entity formed between two or more people to operate a for-profit business. The status of the partnership firm does not have separate identity from its partners. Unlike the LLP, liability of the partners here is not limited. It can extend to personal assets of the partners, and the actions of an active partner can hold other partners liable. Also, partners must purchase land and hire employees in their names and not through the firm.
Foreign investment into partnership firms require approval from the RBI and government. However, NRIs or PIOs can contribute to the capital of the partnership firm without prior approval, provided it meets the required stipulations.
Following documents are required from the partners to set up a partnership firm in India:
- Identity proof;
- Residence proof;
- Address proof of the firm;
- If office space is rented, then rent agreement and NOC from the owner; and
- Attested partnership deed.
The partnership deed must be notarized on a non-judicial paper with a minimum value of INR 200 (US$3) or more and signed by all the partners.
While the registration of the firm is not mandatory, you can register the firm at the Registrar of Firms/ Department of Industries of the state/city you are planning to set up the firm. The registration in each state varies – it could either be completed online or manually. In case of offline applications, the processing time can be extended up to one month.
Once all the documents are collected, the following procedure should be followed:
- Submit the application with Registrar of Firms/Department of Industries;
- The registrar will then issue Certificate of Registration; and
- Apply for a separate PAN card in the name of the firm.
PAN card in the name of the firm is required whether or not the partnership firm is registered.
A partnership firm is taxed at 30 percent of its total income. Further, health and education cess at the rate of four percent will be added to the income tax.