India Entry Modes

Both are governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations 2016 under FEMA. A liaison office under Regulation 3 is permitted only to act as a communication channel between the parent and Indian customers — it cannot earn any income in India and all expenses must be met by inward remittance from the parent. A branch office under Regulation 4 can carry out commercial, trading, or industrial activities and can earn income, but only in sectors where 100% FDI is permitted under the Consolidated FDI Policy. A branch office files annual reports in Form OBR with the Reserve Bank through an authorised dealer, whereas a liaison office files in Form LOR. The branch office is taxed as a foreign company in India at 40% plus surcharge under Section 115JB-equivalent provisions and the applicable double tax avoidance agreement.

A wholly-owned subsidiary (private limited company) is taxed at 25% under Section 115BAB or 22% under Section 115BAA of the Income-tax Act 1961 (subject to conditions), with dividend repatriation attracting withholding tax under Section 195 at rates as modified by the applicable DTAA. An LLP is taxed at 30% under the Income-tax Act but profits distributed to partners (including the foreign partner) are exempt from further tax under Section 10(2A). However, LLP profit repatriation to a foreign partner requires RBI approval under the FEMA NDI Rules 2019, Schedule VII, and interest on capital contribution is capped at 12% per annum under Section 40(b). For manufacturing or technology sectors, the subsidiary route at 15% tax under Section 115BAB (new manufacturing companies) is typically superior, while for professional services or investment holding, the LLP structure merits careful analysis.

Under Regulation 5 of the FEMA (Establishment of Branch/Liaison/Project Office) Regulations 2016, a foreign company may establish a project office in India without prior RBI approval if the project is funded by inward remittance from abroad, by a bilateral or multilateral development financial institution, or if the contract has been awarded by a central or state government entity. In all other cases, prior RBI approval through an authorised dealer bank is required by submitting Form POPO. The project office must file a completion report within two months of project completion and remit surplus funds to the parent. Profits are taxable in India at the foreign company rate of 40% plus surcharge under the Income-tax Act 1961, subject to Article 5 (Permanent Establishment) and Article 7 (Business Profits) of the applicable DTAA.

The lightest structure is a liaison office under Regulation 3 of the FEMA (Establishment of Branch/Liaison/Project Office) Regulations 2016, which requires RBI approval via an authorised dealer bank using Form FNC. The liaison office cannot generate revenue and cannot sign commercial contracts — it can only promote the parent's products, gather market intelligence, and facilitate communication. It must open an INR bank account, maintain books of accounts, and file annual reports in Form LOR with the RBI. From a tax perspective, a liaison office that strictly adheres to the permitted activities does not constitute a Permanent Establishment under the India-US DTAA Article 5(4)(d), meaning the parent's profits are not taxable in India. The RBI grants initial approval for three years, renewable thereafter.

Under Sections 92 to 92F of the Income-tax Act 1961 and the Income-tax Rules 1962 (Rules 10A–10THD), all international transactions between associated enterprises must be at arm's length. Management service fees paid by the Indian subsidiary to the parent are classified as 'international transactions' under Section 92B and must be benchmarked using one of the prescribed methods — most commonly the Comparable Uncontrolled Price method or the Transactional Net Margin Method under Rule 10B. Royalty payments for IP licences must also satisfy arm's length standards and comply with the applicable DTAA royalty article as well as RBI guidelines on royalty remittances (FEMA Notification No. 20(R)). The Indian subsidiary must maintain contemporaneous transfer pricing documentation under Rule 10D and file Form 3CEB, certified by a CA, with the income-tax return. The Indian tax authorities have a dedicated Transfer Pricing Officer empowered to make adjustments under Section 92CA.