A Branch office (“BO”) is an outlet setup by a foreign company in India to carry out the branch activity for its business. The foreign company can earn revenue through its Indian Branch office undertaking activities as allowed by the Reserve Bank of India (“RBI”). It has to meet all its Indian office expenses through remittances from the head office or through the revenue generated from the Indian operation permitted by RBI.
Foreign companies are permitted to set up a BO in India. But unlike the case of setting up a company, a BO requires an approval from RBI. The foreign company is allowed to commence the operations upon getting the Branch License (“License”) from RBI.
BO is suitable for a foreign company to test and understand the Indian market with a very strict control by RBI, as it does allow the companies to do business but just to do the activity which are mentioned in the application of BO, any additional activity to be carried by the BO shall be illegal. The establishment of a BO is regulated as per Section 6(6) of Foreign Exchange Management Act (FEMA), 1999 read along with notification no FEMA 22/2000-RB dated May 3, 2000.
Activities allowed to BO in India
Foreign companies, including US companies, are allowed to set up BOs in India for the following purpose:
- Export or import of goods
- Rendering professional or consultancy services
- Carrying out research work in respect of the areas in which the parent company is engaged.
- Engage in activities promoting technical or financial collaborations between Indian companies and parent company or overseas group company.
- Acting as buying or selling agents in India or representing the parent company in India.
- Rendering information technology and software development services in India.
- Rendering technical support in respect of the products supplied by the parent company / group companies.
- Foreign airline / shipping company
- Foreign banks
BO is prohibited to carry out manufacturing activities on its own but allowed to subcontract these to an Indian manufacturer. BOs that are established with the approval of RBI are allowed to remit profit of the branch (net of applicable Indian taxes) outside India, subject to RBI guidelines.
BO is prohibited from carrying out, directly or indirectly, retail trading activities of any nature or manufacturing or processing activities in India.
Requirements and conditions of a BO
- The name of Indian BO shall be same as parent company.
- The BO does not have any ownership; it is just extension of the exiting company in the foreign country.
- All the expenses of the BO are met by the head office, if it does not have the revenue from Indian operations.
- In order to start a BO in India, the foreign parent company shall have a profitable track record during immediately preceding three years in the home country.
- The Net Worth (total of paid-up capital and free reserves, less intangible assets) shall be not less than or equal to USD 100,000. Net Worth shall be as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called.
- It is suitable for foreign companies looking to setup a temporary office in India and not interested or not planning to have long term plans for the Indian operations; except banking, shipping and airlines etc. mentioned above, to operate through BO.
Rights of a Branch Office
- Immovable property: BO of a foreign company has the right to acquire immovable property in India for their use, to carry out the permitted activities and the various supplementary functions. In the case of the companies from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan and China, this right is contingent and can be exercised only with prior RBI approval. BO is allowed to carry out permitted activities from leased property, however the lease period is not allowed to be over five years.
- INR current accounts (non-interest bearing): BOs are required to approach their ADs for opening such bank accounts.
- Remittance of profits: BOs are allowed to remit profits outside India subject to applicable taxes and on producing the required documents to AD. The documents required are:
- A certified copy of the audited balance sheet and certified profit and loss account of the relevant financial year.
- A chartered accountant’s certificate certifying that the profit has been earned from the permitted activities, not by the revaluation of the assets of the branch along with the manner of arriving at the remittance.
- Term deposit account: Such an account can be sanctioned by the AD for a branch office of a foreign company to the satisfaction of the bank that the term deposit is out of the temporary surplus funds. BO must deliver an undertaking to the effect that the maturity proceeds of the term deposit will be utilized for their Indian office(s) within three months of maturity. This type of account is permitted for six months and is not available to shipping / airline companies.
A foreign company is allowed to operate through four BO’s, in the four zones of the country, without any hassles. Any number offices over and above that have to be justified with an explanation. The company may identify a ‘Nodal Office’ in India from amongst the BOs, that will overlook the functioning and activities of all the other BOs in the country.