How to set up a branch office of a foreign company in India?

How to set up a branch office of a foreign

company in India?

The Indian market has seen significant growth in the past few years and has turned out to be a lucrative workspace for companies in India as well as abroad. This has attracted foreign companies to start their branch office (BO) in India to boost profits. As India continues to grow at an unprecedented pace, arousing foreign companies’ keen interest to tap the resources and opportunities, there are a set of regulations, rules, and compliances that they need to follow to set up their branch office.

If the company follows all the rules and meets all the requirements leading to the right establishment presence, it can make all the difference between wasted efforts and success in setting up the branch. One of the main challenges is the lack of a viable and good commercial space in major cities of India under their budget. Therefore they can take the alternative of setting it up in business centers to establish a strong physical presence. The Government of India is making all the attempts to help foreign companies looking to set up a branch office in India. Let’s look at the important aspects that you need to consider while setting up a branch office of a foreign company in India.

Branch office of a foreign company in India

The main reason as to why foreign companies set up a branch office is to help them with easier management and carrying out activities in that particular area or country. It can be seen as an extension of the parent company, headquartered in a different country. The companies act, 2013, has all the provisions required for setting up a business in India. According to the companies act 2013, a foreign company is a company or body corporate incorporated outside India and which has a place of business, whether by itself or through an agent, in this country. The RBI under section 11 issues directions to the authorized person for conducting foreign exchange business, and this includes setting up a branch office as well. FEMA,1999 together with RBI, established the rules for the formation of a branch office.

Eligibility requirements for setting up of branch office by a foreign company in India

The foreign exchange management act (FEMA) governs the establishment of a branch office for a foreign company or corporation in India. There is a set of established regulations to which the foreign company has to adhere to in order to start a branch office. One of the most fundamental factors to become eligible is that the business must use its assets only to perform the company’s activities and other associated operations. Also, the foreign company cannot acquire any piece of land or purchase it for renting purposes and must strictly use it to carry out business activities. Two more important qualifications are

Necessary registration requirements for setting up a branch office in India

The procedure of setting up a branch office of a foreign company in India can take up several weeks. Most of the time will be taken by RBI as it can take up to 4 weeks to approve and grant permission, given all the requirements are met, and all the documents are handed over on time. The company needs to provide a detailed history of all the activities and objectives of the parent company. A list of proposed and intended activities that are going to be carried out at the branch office in India is also needed to be informed. The company also needs to inform the main reason as to why they chose India to set up its branch office. Finally, they need to fill a number of forms provided by RBI and make sure that the company functions under a sector that fully allows foreign direct investments (FDI), and if the operations of the company do not fall under the required sector, then it should send the form to the foreign ministry. Once all the required and important information is disclosed, and transparency is maintained, the process of registrations gets easier.

What are the important documents required for setting up a branch office?

A wide set of documents are needed to be deposited by the branch office of the foreign company to set up in India. The company also needs to fill the required set of standard forms given by competent authorities while attaching a few more documents with it. Documents that are required by the parent company to be submitted are:

What is the procedure for setting up a branch office of a foreign company in India?

Once all the above-mentioned eligibility requirements, documents requirements, and other compliances are met, the company can submit the application of form FNC along with the mentioned documents. The official exercises due diligence with respect to the background of the applicant. If all the requirements are met satisfactorily by the applicant’s company, the branch office can be set up in India. However, before receiving the approval letter, a copy of the FNC form is forwarded to the reserve bank of India (RBI), and a unique identification number (UIN) is allotted to the branch office. Only after receiving the UIN, the approval letter is given to the branch office. The registration of the branch office can take up to 45 days, and renewal of the registration is not required for up to 2 to 3 years. Once the approval is given, the branch office needs to set up the office within 6 months, and in case the office is not set up within 6 months, the approval lapses. The branch offices are also allowed to shift their office from one city to another inside the territory of India without any special approval.

Compliances under the companies act, 2013

Under the companies act, 2013 if any foreign company establishes a branch office in India or any other place of business, it shall be treated as a foreign company under section 2(42). This act defines a foreign company as “A foreign company is a company or body corporate incorporated outside India having a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.” The foreign companies are governed under the chapter XXII of the companies act, 2013 and companies (registration of foreign companies) rule, 2014. Every foreign company is required to file an eForm FC-1 to MCA or the ministry of corporate affairs within 1 month of the establishment of a branch office in India. In case there needs to be an altercation in the documents submitted, the company needs to submit the detailed list of altercations as prescribed by the format by the registrar of companies in eFORM FC-2 within 1 month of alteration.

Important conditions for setting up of branch office in India

Taxation in India

Income tax is applicable on the profits earned by the branch office of a foreign company in India that is 40%, and additional surcharges as applicable. Goods and services tax (GST) is also applicable to the supply of goods and services by the company.

Net worth requirement

The parent company or the foreign mother company must have a profitable past record for at least 5 continuous years. The company must be able to show a net worth of more than or equal to $100,000, which must be supported by a financial statement.

Permission for-profit remittances

The profits made by the branch office in India are freely allowed to remit from India to its parent company abroad without having to pay any additional charges or fines. However, before sending the remittances, it must make payment of applicable taxes and also audit the books of accounts.

What are the basic rights granted to branch offices in India?

Right to acquire a property

The branch office of a foreign company is allowed to acquire immovable property like buildings or plots of land for the purpose of setting up factories, offices, or any other infrastructure. But if the company originates from Pakistan, Bangladesh, Sri Lanka, Iran, Bhutan, China, and Afghanistan, they are not allowed to acquire or buy land in India. However, they are only allowed to carry out permitted activities supplemented to the operation of the parent company. One can also lease the property, but the lease period must not exceed a period of 5 years.

INR current accounts for carrying out business transactions

The branch offices of the foreign company are required to open their bank accounts with any bank in India. They must open a current account that is non-interest bearing and make all the transactions through that account.

Remittance of profit

The branch offices can remit profits to their parent company abroad after it’s subjected to taxes and after the documents are produced to authorized dealers.

Term deposit account

This type of account is sanctioned only by an authorized dealer to the satisfaction of the bank that the deposit is made out of surplus funds of the company. The branch office must, however, utilise the funds only for their Indian offices and within 3 months of maturity. These accounts are not available for shipping or airline companies.

Funding of branch office by a foreign company

There are three important way through which the funding of branch office can be raised in India-

Debentures and borrowings

These are redeemable and can be either convertible or non-convertible. Companies can issue bonds, debt securities, or debentures, and when these get converted into equity shares, they are treated as foreign direct investments.

Share capitals

These can either be equity shares, which is the most common way in which Indian companies usually finance. Another option is called preference share capital which is convertible shares, and such shares are regarded as FDI.