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Liaison Office/ Branch Office VIS-À-VIS Wholly owned Subsidiary (WOS)

January 15, 2018     by Prasanna Nagure

The choice of business form entirely depends on the end goals to be achieved. We have earlier dealt with the topic India-entry-basics.

A foreign entity planning to enter into Indian markets has options such as to open a Liaison office/Branch office or to establish a Wholly Owned Subsidiary.  Following analysis will help you understand:

 

A. Formation:

Branch/Liaison office: The documentation and the time required for establishing a Branch/Liaison office is more. There are profitability and Net worth conditions to be fulfilled by Liaison office/ Branch office. Parent Company should have a profitable track record during immediately preceding three years in the home country and the net worth as per latest audited Balance Sheet should not be less than USD 50,000/- and USD 100000 for opening a Liaison office and Branch office respectively.

Wholly owned subsidiary: A WOS through automatic route are much quicker to form as compared to forming a Liaison office/Branch office due to simplified procedure of incorporation. Generally, there is no profitability and Net worth conditions to be fulfilled.

 

B. Restriction in operation / activities

Branch office: The branch office can’t undertake manufacturing directly or indirectly. It is permitted to undertake activities Import/Export of Goods, providing professional/ consultancy services, research work, representing and acting as buying/selling agent for parent company etc.

Liason Office: A Liaison office is not allowed to earn income in India. Permitted activities for Liaison office are representing parent company, Promotion of Import/export, financial and technical collaboration.

A Wholly Owned Subsidiary can undertake any legal activity authorized by its charter. However, it is subject to sectoral caps applicable on industries. FDI is generally free (automatic route) for almost all the sectors baring those under approval route, for eg. Defence, Railways, etc.

 

C. Taxability and repatriation

The liaison office is not subject to Income Tax (as it is not allowed to earn income) although it has to file information in Form 49C with the Income Tax Department.

The Branch shall be liable to Indian Income tax and it can repatriate its profits subject to payment of tax. The branch office is taxed at 40%

The Wholly Owned subsidiary is subject Indian Income Tax, as it’s an entity incorporated in India. It is currently taxed at 25% upto a gross turnover of INR 2500 million beyond which the tax rate is @ 30%.

 

D. Convenience of closing it down

The Branch and Liaison office can be closed by only filing closure application with RBI through AD Category I Bank and it’s not needed to go for Winding up. A liaison office cannot acquire immovable property in India although it can take property on lease. A Branch office, on the other  hand is allowed to acquire assets including immovable property in India. The Branch office shall have to liquidate the assets before applying for closing.

A wholly owned subsidiary shall have to go for lengthy winding up process. Winding up generally takes a minimum of 6 months and may take much longer depending on the complexity and the type of assets it own.

There is also a much simpler mode to close down a company provided it meets certain requirement (Section 248(2) of the Companies Act, 2013). Two important eligibility criteria for strike off are

  • not doing business for last 2 years, and
  • does not have any assets and liabilities.

To know more about Strike off, please visit this link Strike off.

 

F. How expensive it is to close down and approximate time taken

The time and costs involved in closure of branch/ liaison office are lesser as compared to Winding up of a company in India.

However, the closure of a non-operational (having no assets and liabilities) wholly owned subsidiary are simpler and happens faster via Strike off.

To know more about the ways to close down a branch / liaison office, please read Closure of Liason Office / Branch Office

 

Sources:

  1. Notification No. FEMA 22(R)/2016-RB dated March 31, 2016 on Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016
  2. Companies Act, 2013
  3. General Circular No. 01/2017,“F.No. 1/23/2013-CL-V” dated 22nd Feb 2017 notification on Section 391(2) closure of place of business by a Foreign Company
  4. bsamrishindia.com Blog on Types of Entities

 

 

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