STRUCTURING OF CROSS-BORDER BUSINESS

Foreign investors have the following structuring options for entry into India:
• Liaison Office/Representative Office
• Branch Office
• Project office
• Incorporation of Company
• Franchising
a. Liaison Office:
Liaison office basically acts as a representative and cannot carry out any commercial or industrial activity on its own. Setting up a liaison office needs prior permission of the Reserve Bank of India (RBI). A liaison office typically undertakes the following:
• Representing the parent / group company and acting as a communication channel.
• Marketing for the parent Company - without actually entering into any contract itself.
All expenses for establishing and running the liaison office have to be met through inward remittances. No income can be generated locally. As the liaison office is not permitted to be engaged in any commercial activity, it earns no income and is therefore not liable to pay any income tax.
b. Branch Office:
Prior approval from the RBI is required for setting up a branch office. However, Government has granted general permission to foreign companies for setting up branch offices in designated Special Economic Zones for undertaking manufacturing and service activities. Branch office can perform almost all the activities that a parent company can perform in India without the hassle of going for incorporation. Typically, the branch office carries out the following activities:
• Entering into contracts for export / import of goods.
• Rendering professional or consultancy services.
• R & D
• Promoting technical or financial collaboration.
• Acting as buying / selling agents.
• Rendering services or technical support.
The major advantage of a branch office is the ease of setting up and exiting. However, profits from the branch office is taxable in India and the tax is higher than that for an Indian Company. A branch office is taxed at the rate of 41.86%, whereas an Indian Company (incorporated in India) is taxed at the rate of 33%. Profits (post tax) are fully repatriable out of India.
c. Project Office:
Foreign companies can set up a Project Office for carrying out a specific project in India. Prior approval from the RBI is not required. Project offices however cannot carry out any activity other than the activity relating to the project. Like branch office, a project office is also subject to income tax at the rate of 41.86%. A foreign company may open a Project Office in India provided it has secured a contract from an Indian company to set up a project in India and the following conditions are fulfilled:
1. the project is funded by inward remittances from abroad, or
2. the project is funded by a bilateral or multilateral International Financing Agency, or
3. the project has been cleared by an appropriate authority, or
4. Indian company awarding the contract has been granted term loan through a Public Financial Institution or bank in India.
d. Incorporation Of Indian Company:
A foreigner can incorporate a wholly or partly owned company in India.
While this option affords greater freedom in operation and lesser tax liability, it entails expense in complying with the administrative procedures under the Companies Act. Also winding up (if necessary) becomes a long and cumbersome exercise. This option is advisable if the operations planned in India are large enough to justify the additional administrative burden.
A company incorporated in India (by foreigners) is liable to pay tax at the rate applicable to any other domestic company (currently 33.66%).
e. Franchising:
A foreign company can open a franchise in India. Many companies such as Mc Donald’s, Pizza Hut, Subway, Kentucky Fried Chicken have entered India through the franchising route. Franchising is contract driven i.e. through an agreement with the Indian counterpart. Prior approval of the RBI is required by the Indian partner for remitting money for acquisition of franchise in India.
Reserve Bank of India has allowed royalty payment up to 2% for exports and 1% for domestic sales on the use of foreign trade mark and brand name without any transfer of technology. Further, for use of trade mark, a company is required to obtain licence from the trade mark authorities. There is no fixed term for the grant of license and the same is dependent on the terms of license agreement entered into between the would be licensor and the licensee.