Establishment of Branch office outside India

Contributed by CA. Sudha G. Bhushan

2011

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 Brief Note on Branch office outside India 1

Preface:

If a person resident in India desires to enter into overseas market, he can enter either by establishing the branch or
liaison office outside India or he can form an independent company outside India. The company formed outside
India can be either wholly owned subsidiary (WOS) or a joint venture (JV) with a person resident outside India.

The investment in wholly owned subsidiary (WOS) or a joint venture (JV) with a person resident outside India is
governed in terms of clause (a) of sub-section (3) of section 6 of the Foreign Exchange Management Act 1999, (42
of 1999) read with FEMA Notification 120/RB-2004 dated July 7, 2004, (GSR 757 (E) dated November 19, 2004),
viz. Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004, as amended from
time to time.

There is no specific regulations governing the opening of branch office/representative office by Indian residents
outside India as such however Regulation 7(4A) of the Notification No. FEMA 47/2001-RB dated 5th Dec. FEMA
47/2001-RB dated 5th Dec,2001 gives the general permissions discussed later in the note

Residential Status of Branch office of an Indian Company established outside India:

Section 2(v) of the Foreign Exchange management Act,1999 defines the person resident in India and as per clause
(iv) an office, branch or agency outside India owned or controlled by a person resident in India is said to be resident
in India therefore for the purpose of FEMA a branch office outside India of a company established in India is said to
be person resident in India.

General Permission: -

A person resident in India being a firm or a company or a body corporate registered or incorporated in India
(the Indian entity) are eligible to establish a branch outside India.

Conditions to be fulfilled: - The general permission is available to open an overseas branch and a bank account
outside India only if the following conditions are fulfilled.

BY CA. Sudha G. Bhushan

 Brief Note on Branch office outside India 2

(i) Conducting normal business activities

The overseas branch or office has been set up or representative is posted overseas for conducting normal
Business activities of the Indian entity.

(ii) Permissible amount of remittance

The total remittances by the Indian entity shall not exceed

Remittance for Initial expenses: - 15 per cent of the average annual sales/ income or turnover of the Indian entity
during the last two financial years or up to 25 per cent of the net worth whichever is higher, where the remittances
are made to meet initial expenses of the branch or office or representative.

Recurring expenses: - 10 per cent of such average annual sales/ income or turnover during the last financial years
where the remittances are done to meet recurring expenses of the branch or office or representative.

However, above restrictions on remittance shall not apply in the following cases where

the remittances to the account maintained under this sub-Regulation are made out of funds held in EEFC
account of the Indian entity, or

the overseas branch/office is set up or representative posted by a 100% EOU or a unit in EPZ or in a
Hardware Technology Park or in a Software Technology Park, within two years of establishment of the Unit

(iii) Prohibitions on the activities of the overseas branch

The Overseas Branch/Officer/representative shall not

1. Enter into any contract or agreement in contravention of the Act, Rules or Regulations made thereunder;
2. Create any financial or contingent liabilities for Head Office in India.

BY CA. Sudha G. Bhushan

 Brief Note on Branch office outside India 3

3. Invest surplus fund abroad without prior approval of Reserve Bank of India but such surplus fund should be
repatriated to Head Office in India.

Important clarifications

Purchase of Office equipments and other assets for the normal

business operations of the overseas branch office shall not be
treated capital account transactions and hence No RBI permission.

Acquisition of immovable property outside India by way of lease,

not exceeding a period of five years by the overseas branch or
office is permitted without obtaining the RBIs permission.

Procedures and Compliances:-

At the time of remittance for opening an overseas branch, a duly filled up Form OBR is to be submitted to the
concerned Authorized Dealer with the full details and the requisite supporting documents. Please follow the link for
FORM OBR : - https://docs.google.com/document/d/1Isx4plkf_l6Zvi9nXtFYkPpBoO78_D4lT4UBz-xFXFg/edit?hl=en_US

BY CA. Sudha G. Bhushan

 Brief Note on Branch office outside India 4

The document purports to provide only the general information. For further information you may get in touch with
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BY CA. Sudha G. Bhushan