India, with its status as one of the world's largest consumer markets and a thriving global economy, is a highly attractive destination for companies worldwide looking to invest and establish business operations. As a rapidly developing economy, India presents an appealing opportunity for foreign companies aiming to expand their business interests.
For those based outside of India, setting up a branch office structure is often the preferred choice when they wish to extend their existing head office business into India or when they seek to establish a temporary presence in the country. Many international enterprises adopt this approach to explore the Indian market without committing to long-term obligations.
As a result, there is a noticeable increase in the number of foreign companies opting to register branch offices in India as a strategic move to tap into the country's growth potential and expand their market footprint.
What is a Branch Office?
A branch office in India is essentially an extension of a foreign company's operations that gets established and registered within India. This allows the foreign company to conduct business activities in the country while maintaining its identity as a separate legal entity.
When a foreign company opens a branch office in India, it has to comply with the rules and regulations set forth by the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs (MCA). The main purpose of a branch office is to support and advance the business interests of the parent company in India.
It's important to distinguish that, unlike a liaison office, a branch office is authorized to engage in commercial operations within India. However, the scope of its activities is limited to what the parent company does, which could include research and development, technical support, consultancy services, trading, or acting as an intermediary.
It's worth noting that a branch office makes the directors of the overseas parent company liable for any actions, both positive and negative, carried out by the branch office in India. This is why many companies prefer to establish a wholly-owned subsidiary in India instead.
Eligibility for opening a Branch office in India
An individual residing outside of India can set up a branch office in India if they meet certain requirements. These requirements include having a track record of making profits for the last five financial years in their home country and having a net worth of at least USD 100,000 or an equivalent amount.
However, there's an exception for individuals or entities that are not financially strong and are subsidiaries of other companies. In such cases, they can submit a Letter of Comfort from their parent company, as long as the parent company meets the specified criteria for net worth and profit. This letter provides assurance and support for the branch office's financial activities in India.
Step-by-step process to Set up a Branch Office in India
- Submitting Application to RBI via Authorized Dealer (AD) Bank:
The first step in setting up a branch office in India is to apply for the Reserve Bank of India (RBI) through an Authorized Dealer (AD) bank. The AD Bank serves as an intermediary between the applicant and the RBI. The application should include all the necessary documents, such as a board resolution from the parent company approving the establishment of the branch, a copy of the parent company's certificate of incorporation, and details about the expected activities of the branch office.
- Verification of KYC from the Banker of the parent company
As part of the application process, the parent company is required to provide Know Your Customer (KYC) information from its banking institution. These records typically include a letter of recommendation, bank statements, and other relevant financial information. The AD Bank reviews these documents to verify their authenticity and assess the financial stability of the parent company.
- Prior approval from RBI in exceptional circumstances
In rare instances where the planned activities of the branch office do not align with the RBI's automated procedure, it may necessitate prior permission from the RBI. To secure this approval, the applicant must provide a comprehensive and detailed justification for their request. The RBI will carefully assess the application and make a decision based on its merits.
- Registering a Branch Office with the Registrar of Companies (ROC)
Once the RBI has approved the establishment of the Branch Office, the next step is to register it with the Registrar of Companies (ROC) in the specific state where the office will be located. To complete this registration, the applicant must submit the required documents, pay the applicable fees, and provide supporting documentation, including the RBI permission letter, the parent company's certificate of incorporation, and the company's articles of association and memorandum.
- Pan card, Tax deduction number, and opening Bank account:
Following registration with the ROC, the branch office should apply for a Permanent Account Number (PAN) from the Income Tax Department. A PAN card is essential for conducting financial transactions and ensuring compliance with tax regulations. Additionally, to enable the deduction of taxes at the source, the branch office must obtain a Tax Deduction Number (TAN). It's also important for the branch office to open a bank account in India to facilitate its financial operations.
- GST and Import Export code registration
If the branch office engages in the sale of goods or provision of services, it is required to register for the Goods and Services Tax (GST). In India, GST is an indirect tax imposed on the sale of both goods and services. Additionally, if the branch office plans to import or export goods, it must obtain an Import Export (IE) code from the Directorate General of Foreign Trade (DGFT). This IE code is a prerequisite for all businesses involved in importing or exporting products.
Document required for Setting up a Branch Office in India:
The following is a detailed list of documents required to set up a Branch Office in India:
- Official approval by the company's board for establishing a Branch office in India.
- Certified incorporation proof of the company's legal existence issued by the registrar of companies.
- Accompanying letter providing additional information and explaining the purpose of establishing a Branch office in India.
- Formal application submitted to the RBI for approval to set up a Branch office in India.
- Memorandum of Association (MOA)
- Articles of Association (AOA)
- Initial form capturing basic company details and proposed project office location in India.
- A form containing a declaration of accuracy, compliance, and completeness of provided information.
- Information about the company's history, nature of business, and key stakeholders.
- Names and details of the company's directors are required for ROC registration.
- Names, addresses, and shareholdings of the company's shareholders necessary for ROC registration.
- Director's declaration confirming compliance with legal requirements and regulations.
Conclusion:
Setting up a Branch Office in India could be a smart move for multinational companies looking to explore the Indian market, understand its economic possibilities, and expand their presence here. It's important to follow clear step-by-step instructions and work with a chartered accounting firm like KDP Accountants. They have in-depth knowledge of Indian regulations and procedures and can guide you through the registration process while making sure you meet all the requirements. KDP Accountants has a strong track record of offering expert advice and support to foreign companies wanting to establish a branch office in India.
The above note is subject to further study and clarifications. This note does not form an opinion from our end and before taking any decision based on above, it is recommended to consult our experts on the subject.Kamdar, Desai & Patel will not be liable for any damages (including, without limitation, damages for loss of business projects, or loss of profits) arising in contract, tort or otherwise from the use of or inability to use this article, or any of its contents, or from any action taken (or refrained from being taken) as a result of using this article or any such contents.
