Opening of branch office by foreign company

Opening of Branch Office by Foreign Company

A branch office is the most suitable and preferred business model followed by foreign companies to establish their temporary presence in India. It carries the same business and activity as the parent company. Before setting up a branch office in India, foreign companies should take into consideration the following important factors –

1. Local costs
2. State regulations
3. Physical activity
4. Type of company

Many of the businesses establish their offices in India just to understand more about the Indian market without thinking of fulfilling any long term objective. A Foreign entity is allowed to undertake only that activity that is mentioned in the branch office application. Any additional activity carried out by a branch office will be considered an illegal activity without the RBI approval.

Activities permitted for a foreign company branch office in India

Foreign companies engaged in trading or manufacturing activities are allowed to set up branch offices in India and can undertake the following activities in the Indian Territory –

1. Export/import of goods
2. Carrying out research work in the area in which the parent company is engaged
3. Offering professional or consultancy services
4. Offering services in IT and software development in India
5. Offering technical support to the products supplied by parent/group companies
6. Representing the Indian office branch of the foreign company and acting as buying/selling agents in India.
7. Developing of financial or technical collaboration b/w Indian companies and the parent or overseas group company.
8. Foreign airline/shipping company

Activities prohibited for a foreign company branch office in India

Foreign Companies (Companies incorporated outside India) are prohibited from engaging in the following activities through the Indian branch office –

1. A Branch office in India is not allowed to engage in retail trading activities of any nature.
2. A branch office, either directly or indirectly, is not allowed to carry out manufacturing or processing activities in India.
3. Any profit earned by a branch office in India is remitted from India to the parent company only after paying the applicable taxes.

Conditions for setting up a foreign company branch office in India

Any foreign company planning to set up a branch office in India needs to meet the following important conditions –

1. The name of the branch office you plan to open should be the same as the parent company. In case you have not received any revenue from the branch office in India, the head office will be liable for paying the expenses.
2. The applicant company must be a body corporate established outside India.
3. The net worth of the Indian branch office must not exceed US £100000
4. The company should have a profit-making record during the immediate past 5 financial years in the home country.
5. Proprietary firms outside India are not allowed to set up branch offices in India.

Procedure for setting up a branch office in India by a foreign country

Foreign companies need to adhere to the following procedure in order to set up branch offices in India –

1. RBI approval– Foreign companies planning to set up their branch offices need to get approval from the foreign exchange department, the Reserve Bank of India, Central office, Mumbai. Don’t contact the RBI branch located in your respective state's capital for approval.
2. Company’s track record– When the application is submitted by the parent company to set up a branch office in India, RBI scrutinizes the application to take an overview of the track record, financial position and the activity of the company. There is no criterion specified for examining the tracking record or financial position of the parent company.

Step - 1: Application for Digital Signature of Authorized Signatory

A digital signature is the counterpart of a physical or paper signature under the information technology act. All applications to the registrar of companies must now be submitted in digital format and must be authenticated by the potential shareholders or directors' digital signatures, as applicable. The filing process begins with each promoter receiving a digital signature.

Step - 2: Filing of Application with RBI through AD Bank

The registration application for the branch office of a foreign company is filed in the prescribed form - FNC through AD Bank (Authorised Dealer) to the RBI. The AD Bank is critical since all communication with the RBI must pass via them. We have strong relationships with a large number of banks in India, which enables us to receive approval quickly. Once granted, the permit is valid for six months and may be extended if necessary.

Step - 3: Verification of KYC from Banker of Parent Company

After the FNC Form is submitted with the AD Bank, a request for document verification is issued to the foreign company's banker. This is often referred to as swift-based verification. After receipt of confirmation of the documents from the foreign banker, the approval process is initiated. The RBI/AD Banker may request clarification or further documentation.

Step - 4: Approval of RBI for Branch Office Registration in India

The AD Banker has a specific policy of authorising the formation of a branch office, and where there is a non-availability of the automatic route, the case is referred to the RBI for prior approval. After fast verification, the approval procedure takes around a week.

Step - 5: Registration of Branch Office with the ROC

Within 30 days of the RBI's approval for opening the branch office in India, the foreign company files an application for registration of the branch office in Form FC-1. If there are Indian directors, the director's DIN number is necessary. The authorised signatory's digital signature is also required when e-filing statutory forms with the ROC for approval.

Step - 6: PAN Card, Tax Deduction Number & Bank A/c Opening

The Income Tax Department assigns each taxpayer a unique ten-digit alphanumeric number known as a permanent account number or PAN Number. Each taxpayer must get a Tax Deduction Account Number in order to comply with TDS regulations. These identification numbers are necessary for tax compliance. The branch office's bank account can be opened after the Income Tax Department's allotment of a Pan Number.

Step - 7: Registration with State Police

Finally, the branch office must register with the local police department (In the office of the superintendent of Police). The application must be accompanied by the permission of the RBI and the completion of the KYC process for all authorised persons in India and the overseas company.

Step - 8: GST Registration & IEC

By this stage, the Branch Office should have received the bank account and cheque book, and we will require a copy of the cheque in order to apply for GST Registration and an Import Export Code for the foreign company's Branch Office.

Application Routes

RBI considers applications made by parent companies in Form FNC (Annex-1) through two routes. The application should be submitted to RBI in the prescribed form FNC through the authorised dealer bank.

1) Reserve bank route – A foreign company need to submit this application through the reserve bank route if the principal business of the foreign entity falls under sectors where 100% FDI is permissible under the automatic route.

2) Government route – A foreign company needs to submit their application through the government route if the principal business of the foreign entity falls under the sectors where 100% FDI is not permissible under the automatic route.

Procedure for Approval from RBI

Currently, in accordance with RBI regulations, applications for branch office and BRANCH office must be made through an authorised dealer. The authorised dealer is any institution that holds a banking licence.

The RBI shall receive an application in the required form (Form FNC).

Documents required for setting up a foreign company branch office

A foreign company needs to deposit the following set of forms in order to obtain the registration –

• Three copies of Form FNC
• A letter to RBI from the principal officer of the Parent company to RBI.
• A Letter of authority from the parent company in favour of the Local Representative.
• A Letter of authorization/Resolution from the parent company sanctioning the establishment of a BRANCH office in India.
• A letter of comfort from the parent company expressing its intention to support the Indian operation.
• Two certified copies in English of the parent company's Certificate of Incorporation, Memorandum, and Articles of Association (Charter Document), attested by the Indian embassy or notary public in the registration country.
• Incorporation certificate - Translation, Notarization, and Certification by the Indian Consulate.
• The parent company's audited Balance sheet and annual accounts duly translated, notarized & Certified by the Consulate of India & Directors.
• The authorized person's name, address, email address, and telephone number in the Home Country.
• Details of the organization's bankers, their country of origin, and their bank account number.
• Commitment by the organisation that it will be open to the Government of India/Reserve Bank of India seeking a report/opinion from its banker.
• Estimated funding for operations in India.
• Details regarding the proposed local office's address, the number of people who are likely to be employed, the percentage of foreign nationals among such employees, and the address of the proposed local office's head, if one is decided.
• Details of the applicant organization's activities in the home country, including a brief description of the company's products and services.
• Bankers Certificate
• The most recent proof of identity for each director – certified by the Consulate and Banker in the directors' home country
• All Directors must provide the most recent proof of address - certified by the Consulate and Banker in their home country.
• Individuals or companies details holding more than 10% of the equity
• Organizational structure in relation to shareholding pattern
• Complete Shareholders KYC with more than 10% equity in the Applicant Company 1. 2. 3. 4. 5. 6.
• Resolution for the Purpose of Opening a Bank Account with a Banker
• Duly signed Form to open a Bank Account in an Indian Bank. 

Taxation Rules

A branch office set up by a foreign company in India does not have a separate legal entity and runs as per laws governed by the parent office. Hence, setting up a branch office in India is taxed as a foreign company and is liable to pay 40% tax plus surcharge and cess as applicable.

The Time period of registration

Registration of a branch office usually takes 45 days, and no registration renewal is required in the case of the branch office, but in some of the cases where RBI gives approval of 2-3 years, renewal of registration is required.

Validity of approval

After getting the approval from AD category I bank, a validity of 6 months is provided to the applicant company to set up their branch office. In case the applicant company fails to set up their branch office in 6 months, RBI approval is required for further extension of time.

Shifting of office

If you want to shift the branch office to another city in India, you need to approve authorized AD banks. However, no such approval is required if you want to change the branch office within the same city.