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24 Jun2022
  • By Authored by CA Manish Gupta and CS Disha Aggarwal
  • Category Income Tax
  • Views 839

As per the world bank annual rating, India is ranked 63rd among 190 economies in the ease of doing business. The Indian market has always been an attractive place of business for foreign companies and foreign nationals because of its rapidly growing demand. Foreign companies setting up business in India have various options available by which they can enter Indian markets by registering themselves. This article looks at some crucial facets of India's available structures and their benefits.

There are various options available for foreign entities to establish their footprints in India. Any of the following business structures can be opted, with each having its pros and cons:

1: Limited Liability Company (Private Limited or Public Limited)

2: Joint venture with Indian Partner

3: Limited Liability Partnership

4: Liaison Office

5: Branch Office

6:  Project Office 

Different Business Structures & their tax regimes

1: Limited Liability Company (Private Limited or Public Limited)

Establishing a limited liability company by a foreign entity is a hassle-free process and also has a low cost of incorporation. Most foreigners prefer to incorporate a limited liability company in India as it is the easiest way to enter the Indian market. The said company is considered as a separate legal entity from its members. A foreign company can hold up to 99.9 per cent of their shares in a limited company. Limited companies can own property, hire employees, sue and be sued. A limited company also has eternal existence, meaning its existence is not dependent on the status of shareholders or members. It can also borrow funds.

Establishing a limited company provides the most control and robust presence to a foreign company. However, there are fewer compliances and restrictions in the private company as compared to public companies and therefore most foreign companies prefer to establish a private company as their subsidiary. 

A Limited Liability company does business in India and is, therefore, subject to corporate tax at a rate of 22%, 25% or 30%plus applicable surcharge and cess, depending upon the turnover of the concerned company and other conditions. 

2: Joint Venture

A joint venture or simply JV is a partnership where two or more people or companies agree to put in goods, services or capital for a uniform commercial project. Compatibility between the contracting parties is vital for establishing a risk-free joint venture.

The associated parties should have a clear vision, and all the relevant conditions should be penned out in the clauses of the agreement for maintaining a successful joint venture in India. Corporate joint ventures are regulated by the Companies Act, 2013 and the Limited Liability Partnership Act, 2008. In sectors where 100 per cent FDI is not allowed in India, a joint venture is the best medium, offering a low-risk option for companies wanting to enter the vibrant Indian market.

The joint venture has relatively lower risk as compared to other business ventures, and JVs are subject to corporate tax @ 30% plus applicable surcharge and cess.

3: Limited Liability Partnership

LLP is a combination of both a Private limited company and a partnership firm. It carries the advantages of both entities. LLP is a separate legal entity, and the liability of members is limited to their agreed contribution. A foreign company can establish an LLP in only those sectors where the RBI has permitted it. The government of India has eased the FDI Policy and is in the process of increasing the list of sectors under 100 per cent FDI. LLP must incorporate on the MCA Portal to have legible proof of the company's existence in India. LLPs can buy or own property, produce revenue, and remit earnings outside of India.

LLPs are taxed at 30 per centplus applicable surcharge and cess.

4: Liaison Office

Liaison offices (LO) in the layman's language can be defined as an office that facilitates the close working relationship between the parent company situated abroad and the business parties in India. It is also referred to as Representative Office and is a good way to establish a new presence in India. These offices have some restrictions as they cannot undertake any business activities in India and cannot earn any income in India. Reserve Bank of India prescribes specific criteria for setting up a Liaison Office (Representative Office) in India, which are as under:

* It is vital to have a profit-making track record during the immediately preceding three financial years in the home country, and in addition to this, the net value should be not less than USD 50,000 or its equivalent

* In case the condition mentioned above is not fulfilled by the subsidiary company, a letter of comfort (LOC) is to be submitted by the parent company, which satisfies the above requirement.

* The specific approval of RBI under FEMA 1999 and the Insurance Regulatory and Development Authority (IRDA) is required.

* A designated Authorised Dealer Category–I Bank needs to forward an application for establishing an office to General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, along with the prescribed documents.

* RBI will give the office a Unique Identification Number.

* Along with the Application, the English version of the Certificate of Incorporation (COI) or MOA & AOA (attested by the Indian Embassy/Notary Public), in addition to required documents, should also be filed.

* Latest audited financial statement of the applicant entity should also be filed in the Country of Registration.

* The LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.

As the Liaison offices are not permitted to undertake any business activities, they are not earning any income in India. Hence, they are not liable for any income tax. Any income generated from the business will be taxable in the country where the foreign company is incorporated. However, when the Liaison office becomes a permanent establishment in India, it will be taxable as a foreign entity @ 40% plus applicable surcharge and cess.

5: Branch Office

A branch office can be defined as a location other than the main office where a business is conducted. It is an outlet of a company or, more generally, an organization that is physically separated from the organization's main, unlike a subsidiary which does not constitute a separate legal entity. 

A foreign company can set a business activity in India with the prior approval of the Reserve Bank of India, provided:

* The company should be engaged in trading or manufacturing activities, 

* The profit in the immediately preceding five financial years is necessary to be mentioned, 

* Net worth of at least USD 1 Lakh in its home country is also required.

* Like the LOs, the BOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.

There are tremendous opportunities in India as a Foreign Company, even in the E-commerce Sector where govt recently allowed 100% FDI in the E-commerce Sector.

An example of a Foreign company having branch offices in India is Nestle India, a subsidiary of Nestle S.A. of Switzerland. The company has eight manufacturing facilities and four branch offices spread across the region of India. The four branch offices in Delhi, Mumbai, Chennai and Kolkata help facilitate the sales and marketing of its products. 

The branch office is considered a shadow of a foreign company, and hence, it is required to file a tax return as a foreign company in India and taxable at the rate of 40% plus applicable surcharge and cess.

6: Project Office

A Project office (PO) is a place of business established to represent the interests of a foreign company executing a project in India. Such offices are prohibited from undertaking or carrying on any activity other than the activity relating to the execution of the project for which such office is established.

In case a foreign company wants to establish an office, and the foreign company has secured a contract from an Indian company to execute a project in India, prior permission from RBI is not needed, provided:

* Funded directly by inward remittance from abroad or

* Funded by a bilateral or multilateral International Financing Agency or

* Cleared by an appropriate authority or

* A company or entity in India provided a contract has been granted a Term Loan by a bank in India or a Public Financial Institution for the project.

Besides that, in case the above conditions are not met, the foreign entity has to approach the RBI for approval.

A PO does business in India and is, therefore, subject to corporate tax @ 40%plus applicable surcharge and cess. A Project office can repatriate profits back to their parent company on completion of the project after paying taxes.

Conclusion:

Business Setup in India can be a daunting task when it comes to following the legal requirements. For smooth business operations, the business needs to adhere to the legal formalities and compliance with applicable laws for New Company Registration in India.

The best way to ensure that your company is always safe and does not face legal complications and consequences is by hiring professional legal counsel to provide advice and oversee and maintain legal records. A Skilled professional can guide you regarding all the points regarding company registration in India.

In conclusion, India offers a wide range of business structures for foreign entities looking to enter the Indian market. Each structure has its own advantages and considerations. Limited liability companies provide control and robust presence, while joint ventures offer a low-risk option. Limited liability partnerships combine the benefits of both a company and a partnership. Liaison offices facilitate close working relationships, while branch offices serve as outlets for conducting business. Project offices represent foreign companies executing projects in India. Understanding the options and their tax regimes is crucial for making informed decisions and successfully establishing a presence in India's vibrant market.

Ready to Establish Your Business in India? Get Expert Guidance for Hassle-Free Company Registration and Compliance. Mail us at info@manishanilgupta.com.

Disclaimer: The information given above by the author is to provide general guidance to the readers. This information should not be sought as a substitute for legal opinion.

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