A branch would mean an establishment carrying on substantially the same activity as its Head Office. The opening and operation of such offices is regulated by the same Foreign Exchange Management (Establishment of India of Branch or office or other place of business) Regulations, 2000. Foreign companies intending to open a Branch Office in India need to obtain prior permission of RBI which would encompass approval to the particular scope of activities that are intended to be carried out in India.
As per the guidelines laid down by the RBI, the Branch Office in India is allowed to carry on only the following activities:
A Branch office is considered a part of the foreign company and is not treated as a separate legal entity. The office can undertake import and export, but not manufacturing. Whether or not a Branch Office can carry out trading, even wholesale cash and carry trading, is a controversial matter. A Branch office is subject to taxation in India at 41.2% on income accrued in India. This rate is a little higher than the rate applicable to domestic companies including subsidiaries. Thus a Branch office enjoys a simpler regulatory regime but is subject to a higher tax rate. If there is a double taxation agreement with the country in which the foreign company is incorporated, the tax paid in India can be set off against the total tax payable by the parent company abroad.
In certain cases, where income is deemed to have originated in India and such income includes royalties, fees for technical services, interest and capital gains including capital gains from share of capital in India, Branch offices may repatriate profits to their Head Office without obtaining prior approval.
The procedure for opening a Branch office is that a formal application needs to be made to the Reserve Bank of India (RBI) for representing the interests of the foreign company. The permission from RBI generally takes about 5 to 7 weeks and is considered on a case-to-case basis. Newly incorporated foreign companies or foreign companies with weak track records or inactive backgrounds or non transparent pedigree or special status unknown to Indian law such as an LLC or an S Corporation or an LLP (Limited Liability Partnerships) or a PC (Professional Corporation), can have difficulty getting the necessary approval.
The RBI usually imposes the following conditions while granting permission to establish a Branch Office:
A Branch Office can remit the profits (net of any withholding tax) generated out of its operations in India on production of the prescribed documents, and on establishing that it has earned a net profit by undertaking the permitted activities. The Branch Office need not retain any profits as reserves in India.