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Branch Office

Q1. Who can set up a Branch Office in India?

Ans. A foreign company engaged in manufacturing or trading activities can set up branch offices in India after obtaining prior approval from the Reserve Bank of India (RBI).  

A branch office offers little more flexibility in operations as compared to a liaison office and is generally suitable for companies making an entry into the Indian market. Further, a branch office may not be a viable option for a foreign company looking at expansion / diversification in India.

Q.2.
How to set up a Branch Office in India? 

Ans.
With effect from February 1, 2010, foreign companies desirous of setting up a Branch Office are required to fill application Form “FNC” (to download form, visit: www.rbi.org.in/upload/ECM/docs/FNC1.doc) and submit the same to: 

The Chief General Manager-in-Charge, 
Reserve Bank of India, 
Foreign Exchange Department, 
Foreign Investment Division, 
Central Office, Fort, 
Mumbai-400 001

The application should be submitted to the Reserve Bank of India by the foreign company through a designated Authorized Dealer (AD) Category - I Bank (to access the list of AD Category-I banks, please visit: http://www.rbi.org.in/Scripts/CategoryI.aspx), along with the following documents: 

English version of the Certificate of Incorporation (Company Registration) / Registration or Memorandum & Articles of Association of the foreign company attested by Indian Embassy.

Latest Audited Balance Sheet of the applicant entity.

Applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company as per Annex -2 of the FNC form, subject to the condition that the parent company satisfies the eligibility criteria as prescribed above. 

The applications submitted will be considered by the Reserve Bank under the following two routes:

Reserve Bank Route - Where principal business of the foreign company falls under sectors where 100% Foreign Direct Investment (FDI) is permissible under the automatic route.

Government Route - Where principal business of the foreign company falls under the sectors where 100% FDI is not permissible under the automatic route. Applications from foreign companies falling under this category are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

The following additional criteria are also considered by the Reserve Bank while sanctioning Branch Offices of foreign companies:

Track Record: A profit making track record during the immediately preceding five financial years in the home country.

Net Worth: The total paid-up capital and free reserves, less (-) intangible assets (as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name) should not be less than USD 100,000 or its equivalent.

The Branch Office established with the Reserve Bank’s approval will be allotted a Unique Identification Number (UIN) (www.rbi.org.in/scripts/Fema.aspx ). 

The Branch Office shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India. More information on PAN can be obtained from Chapter 4 on “Taxation”, of this publication.

Branch Offices have to file an Annual Activity Certificate (AACs) prepared by the Auditors to the designated Approved Dealer Category-I bank and a copy marked to the Directorate General of Income Tax (International Taxation), New Delhi as at end of March 31 along with the audited Balance Sheet on or before September 30 of that year, stating that the Branch Office has undertaken only those activities permitted by Reserve Bank of India. In case the annual accounts of the Branch Office are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.

Q.3. What are the permitted activities for a branch office?

Ans.
A branch office is allowed to undertake only those activities that are permitted by RBI.  Normally, the branch office should be engaged in the activity in which the parent company is engaged. 

The following activities are permitted by RBI:

Export / import of goods

Rendering professional or consultancy services

Carrying out research work, in areas in which the parent company is engaged

Promoting technical or financial collaborations between Indian companies and parent or overseas group company

Representing the parent company in India and acting as buying / selling agent in India

Rendering services in information technology and development of software in India

Rendering technical support to the products supplied by parent / group companies

Undertaking activities for foreign airline/shipping company

A branch office is not allowed to carry out retail trading, manufacturing or processing activities in India. 

Q.4.
Can a Branch Office open an Indian Rupee (INR) Account? 

Ans.
Branch Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorized Dealer (AD) Category - I Bank for opening the accounts.

Moreover, Authorized Dealer (AD) Category-I Banks can allow term deposit account for a period not exceeding 6 months in favor of a Branch Office provided the bank is satisfied that the term deposit is out of temporary surplus funds and the Branch Office furnishes an undertaking that the maturity proceeds of the term deposit will be utilized for its business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.

Q.5.
Can a Branch Office be set up in a Special Economic Zones (SEZ)? 

Ans.
The Reserve Bank of India has given general permission to foreign companies for establishing branch / unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:

Such units are functioning in those sectors where 100 per cent FDI is permitted;

Such units comply with part XI of the Companies Act, 1956 (Section 592 to 602). (Information on the Indian Companies Act of 1956 could be obtained by visiting: http://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf)

Such units function on a stand-alone basis.

Q.6.
What is the permission that foreign banks need for setting up Branch Offices in India? 

Ans.
Foreign banks do not require separate approval under the Foreign Exchange Management Act (FEMA), for opening branch office in India. Such banks are, however, required to obtain necessary approval under the provisions of the Banking Regulation Act, 1949, from Department of Banking Operations & Development, Reserve Bank of India.

Q.7.
Whether profits of Branch Offices can be repatriated freely? 

Ans.
Profits earned by branch offices in India can be repatriated freely subject to payment of taxes on production of the following documents to the satisfaction of the Authorized Dealer through whom the remittance is made. 

A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year

A Chartered Accountant’s certificate certifying:

a) The manner of arriving at the remittable profit

b) That the entire remittable profit has been earned by undertaking the permitted activities

c) That the profit does not include any profit on revaluation of the assets of the branch.

Q.8.
How are profits of branch offices taxed in India?

Ans.
As regards taxation, branches of foreign companies are treated as an extension of the foreign company and are taxed at the rate applicable to foreign companies.  Currently, foreign companies are subject to tax at the rate of 40%.  The above rate needs to be further increased by a surcharge at 2% in case taxable income exceeds INR 10 million (USD 180,000). Further, education cess at the rate of 2% and secondary and higher education cess at the rate of 1% shall also be charged in addition to the above tax. 

Indian “transfer pricing regulations” are also applicable to a branch office. 

Q.9.
Can more than one Branch Office be set up? 

Ans.
Yes. Requests for establishing additional Branch Offices may be submitted through fresh FNC form (Annex 1), duly signed by the authorized signatory of the foreign entity in the home country to the Reserve Bank of India. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier.  If the number of Offices exceeds 4 (i.e. one Branch Office in each zone viz; East, West, North and South), the applicant has to justify the need for additional office/s. Further, the applicant may identify one of its Offices in India as the Nodal Office, which will coordinate the activities of all Offices in India.

Q.10.
Do Branch Offices have to submit any annual report? 

Ans.
Branch Offices have to file an Annual Activity Certificate (AACs) prepared by the Auditors to the designated Approved Dealer Category-I bank and a copy marked to the Directorate General of Income Tax (International Taxation), New Delhi as at end of March 31 along with the audited Balance Sheet on or before September 30 of that year, stating that the Branch Office has undertaken only those activities permitted by Reserve Bank of India. In case the annual accounts of the Branch Office are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.

In case of multiple Branch Offices, a combined Annual Activity Certificate in respect of all Offices in India by the Nodal Office of the Branch Office. 

The designated AD Category - I Bank shall scrutinize the Annual Activity Certificate and ensure that the activities undertaken by the Branch Office are being carried out in accordance with the terms and conditions of the approval given by the Reserve Bank. In the event of any adverse findings being reported by the Auditor or noticed by the designated AD Category -I bank, the same would be reported by the designated AD Category–I bank to the Central Office of the Reserve Bank, along with the copy of the Annual Activity Certificate and their comments thereon.

Q.11.
How to close down or wind up a Branch Office? 

Ans.
To wind up a Branch Office, officials of the branch office will have to approach the designated Authorized Dealer (AD) Category-I Bank with the following documents: 

a) Copy of the Reserve Bank’s approval for establishing the Branch Office. 

b) Auditor’s certificate: 

i. Indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; 

ii. Confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and

iii. Confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India. 

c) No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s. 

d) Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance. 

e) A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the Office in India. 

f) Any other document/s, specified by the Reserve Bank while granting approval.