Can Foreign Companies Set Up Branch In India?

Foreign companies, as they grow, seek to expand their business over the globe. The establishment of branch offices, herein referred to as BOs, achieves this strategic growth. This article explains the route to be taken by these foreign companies in establishing their branches and the compliance to be met in the process, focusing solely on the establishment of Branch Offices and not Liaison or Project Offices.

Company incorporated outside India and engaged in a business of manufacturing or trading is permitted to open a branch office in India with specific approval from Reserve Bank of India (RBI).

FC Picture Courtesy-Slide Share

Foreign companies, including USA companies, are allowed to set up Branch Offices in India 

  • Export/Import of goods
  • Rendering professional or consultancy services
  • Carrying out research work, 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 agents in India.
  • Rendering services in Information Technology and development of software in India.
  • Rendering technical support to the products supplied by the parent/ group companies.
  • Foreign airline/shipping company
  • Foreign Banks

 A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).

Annual Compliance Activities required for a Branch Office

Every year a branch office is required to undertake the following activities:

  • Maintenance of Books of Account
  • Getting Annual Accounts audited
  • Filling of Annual Activity Certificate with RBI
  • Filing of Annual Return and Balance sheet with Registrar of Companies
  • Intimating any change in constitution of Foreign Company to RBI & ROC
  • Intimating any change in Directors of Foreign Company to RBI & ROC
  • Intimating each and every change in the BRANCH office to RBI & ROC
  • No additional place of business can be started unless approval is taken from RBI.

Prohibited Activities

  • Retail trading activities of any nature.
  • Manufacturing or processing activities, directly or indirectly.

FC Picture Courtesy-TimesofIndia

RBI has given general permission to foreign companies for establishing a branch office in Special Economic Zones (SEZs) to undertake manufacturing and service activities.

Taxation rules applicable to Branch Office 

Branch office will be liable to pay 40% (plus surcharges as applicable) of profits as income tax on the status of Foreign Company in India.

As per the functioning of branch office in India, it shall be liable to different indirect taxes as well, for example, if the Branch is providing technical services it shall be liable to pay service tax @ 12% (plus surcharges) and if it is selling the goods in India then it shall be liable to pay Value added Tax (VAT) and/or Central Sales Tax (CST) at the rates prescribed for the dealt product. There is Local Body Tax (LBT) if the goods are entering the state of Maharashtra in India as few of these indirect taxes are levied by States. With the implementation of GST, the indirect tax regime in India will get simplified.