Quick Answer
A foreign company entering India has four primary structural options: Wholly Owned Subsidiary (WOS), Branch Office (BO), Liaison Office (LO), and Project Office (PO). The choice depends on the nature of Indian operations, tax implications, liability exposure, and regulatory requirements. A WOS (Indian subsidiary) is a separate legal entity under the Companies Act, 2013, offering full operational flexibility and the lowest tax rate (22% under Section 115BAA). A BO and LO are extensions of the foreign parent, 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 and require RBI approval. At Virtual Auditor, we advise foreign companies on the optimal India entry structure based on their specific business model, revenue expectations, and regulatory environment.
Definition — Wholly Owned Subsidiary (WOS): An Indian Private Limited Company (or Public Limited Company) where 100% of the equity share capital is held by a single foreign company or its nominees. The WOS is a separate legal entity incorporated under the Companies Act, 2013, with its own CIN, PAN, Board of Directors, and compliance obligations. The foreign parent’s liability is limited to its equity investment in the subsidiary.
Definition — Branch Office / Liaison Office: Under Regulation 2 of the FEMA (Establishment) Regulations, 2016, a Branch Office or Liaison Office is a place of business established by a person resident outside India for carrying on permitted activities. They are not separate legal entities — they are extensions of the foreign parent company. The foreign parent bears unlimited liability for the acts and obligations of the BO/LO.
A WOS is a separate Indian company incorporated under the Companies Act, 2013. The foreign parent holds 100% of the equity. The WOS can engage in any business activity permitted under the FDI Policy and FEMA NDI Rules. It can earn revenue, hire employees, acquire assets, enter into contracts, and operate as a full-fledged Indian business.
Key characteristics:
A Branch Office is an extension of the foreign parent in India. It is not a separate legal entity. RBI approval is mandatory under Regulation 4 of the FEMA (Establishment) Regulations, 2016. The BO can carry on only specific activities:
Key characteristics:
A Liaison Office is a purely representative office. It cannot earn any income in India, cannot engage in any commercial activity, and can only act as a communication channel between the foreign parent and Indian parties.
Permitted activities (Regulation 4(b)):
Key characteristics:
A Project Office can be set up by a foreign company to execute a specific project in India. The project must have been awarded to the foreign company by an Indian company, and the project must be funded by inward remittance from abroad, or by a bilateral/multilateral financing institution, or the project has been cleared by an appropriate authority in India.
Key characteristics:
Comparison: Indian Subsidiary (WOS) vs Branch Office vs Liaison Office vs Project Office
| Parameter | WOS (Subsidiary) | Branch Office | Liaison Office | Project Office |
|---|---|---|---|---|
| Legal status | Separate Indian entity | Extension of parent | Extension of parent | Extension of parent |
| Liability | Limited to equity | Unlimited | Unlimited | Unlimited |
| Revenue in India | Yes, unrestricted | Yes, restricted activities | No | Project-specific only |
| Tax rate | 22% (Sec 115BAA) | 40% + surcharge | Nil (if no PE) | 40% + surcharge |
| RBI approval | Not required (automatic route) | Required | Required | Automatic for most |
| Manufacturing | Permitted | Not permitted | Not permitted | Not permitted |
| Govt incentives | Eligible (Startup India, PLI) | Not eligible | Not eligible | Not eligible |
| Profit repatriation | Dividends (TDS applies) | After-tax profits | N/A (no income) | After-tax profits |
| Setup timeline | 4-6 weeks | 6-10 weeks | 6-10 weeks | 2-4 weeks |
| Closure complexity | Moderate (strike-off/winding up) | Moderate (RBI permission) | Simpler | Automatic on project completion |
Practitioner Insight — CA V. Viswanathan, IBBI/RV/03/2019/12333
In our practice at Virtual Auditor, over 80% of foreign companies we advise end up choosing the WOS (Indian subsidiary) structure. The primary reason is the 18-percentage-point tax differential — 22% for a subsidiary vs 40% for a branch office. For a company earning Rs 5 Cr in India, that is Rs 90 lakh more tax per year with a BO compared to a WOS. The second reason is limited liability — the foreign parent’s exposure is capped at its equity investment in the subsidiary. With a BO, if an employee files a labour dispute or a customer files a product liability claim, the foreign parent is directly liable. The only scenarios where we recommend a BO over a WOS are: (1) professional services firms with a global unified partnership structure (e.g., law firms, Big Four accounting networks); and (2) foreign companies that need to include Indian revenue in the parent’s consolidated revenue for bidding on global contracts where a subsidiary’s revenue does not qualify.
FDI into an Indian subsidiary is governed by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Key provisions include sectoral caps and entry routes (automatic vs government approval), pricing norms under Rule 21 (shares must be issued at or above fair market value), reporting through FC-GPR on the FIRMS portal within 30 days of share allotment, Annual Return on Foreign Liabilities and Assets (FLMA) by 15 July, and downstream investment reporting if applicable. For a detailed guide on FEMA compliance, refer to our dedicated article.
Branch Offices and Liaison Offices require prior approval of the RBI through the Authorised Dealer (AD) bank. The AD bank examines the application and, if satisfied, forwards it to the RBI Regional Office. Key eligibility criteria for BO/LO:
The RBI may impose conditions on the BO/LO — for example, restricting activities, mandating annual compliance reporting, or setting a validity period (typically 3 years for LO, renewable).
Both BO and LO must file an Annual Activity Certificate with the AD bank within 6 months of the close of the financial year. The AAC must be certified by a Chartered Accountant and must confirm that the BO/LO has carried on only permitted activities, funds have been received through proper banking channels, and all regulatory requirements have been complied with. The AD bank submits the AAC to RBI.
The most common conversion. A foreign company that started with an LO for market exploration decides to commence operations and incorporates an Indian subsidiary. The LO is then wound up after RBI approval. The LO cannot be “converted” — a new subsidiary must be incorporated separately, and the LO must be closed through the AD bank and RBI process. Employees of the LO can be transferred to the subsidiary through new employment contracts.
A Branch Office can be converted to a subsidiary by incorporating a new Indian company and transferring the BO’s business (assets, contracts, employees) to the subsidiary. The BO is then wound up. This transfer may have GST implications (business transfer as a going concern is exempt under Entry 2 of Schedule II read with Notification 12/2017-CT(R) if specific conditions are met) and income tax implications (capital gains on transfer of assets, TDS on payment to the foreign parent). Careful tax structuring is required — at Virtual Auditor, we coordinate the FEMA, Companies Act, and tax workstreams for such conversions.
Closure of a BO or LO requires application to the AD bank with audited accounts, tax clearance certificate from the Income Tax department, NIL liability certificate, and Board Resolution of the foreign parent authorising closure. The AD bank processes the application and remits the remaining funds to the foreign parent. Total closure timeline: 3-6 months.
Practitioner Insight — CA V. Viswanathan
A common mistake we see at Virtual Auditor is foreign companies setting up an LO “to save costs” when they actually intend to earn revenue from Day 1. The LO then engages in commercial activities — invoicing Indian customers, negotiating contracts, providing services — which immediately violates FEMA regulations and creates a PE for income tax purposes. The consequences are severe: RBI can direct closure of the LO and impose FEMA penalties, and the Income Tax department can assess the foreign parent at 40% on income attributed to the PE. We have handled multiple cases where companies had to file compounding applications with RBI and face tax assessments because they chose the wrong structure to begin with. The correct approach: if you will earn revenue in India, incorporate a subsidiary. The LO is only for genuine market exploration with zero income.
Which structure has the lowest setup cost for a foreign company entering India?
The Liaison Office has the lowest setup cost since it requires only RBI approval and basic office infrastructure — no capital investment, no incorporation fees, no share capital. However, it cannot earn income, which severely limits its utility. For revenue-generating operations, the Indian subsidiary is most cost-effective in the medium to long term because of the significantly lower tax rate (22% vs 40% for a Branch Office). At Virtual Auditor, we offer Indian subsidiary registration at Rs 49,999 (professional fees; government fees extra).
Does a WOS need RBI approval?
No, if the investment is in a sector where FDI is permitted under the automatic route (which covers most sectors including IT/ITES, SaaS, manufacturing, consulting, e-commerce marketplace). The subsidiary is incorporated through the MCA, and the FDI is reported to RBI post-facto through the FC-GPR filing on the FIRMS portal. Government approval (not RBI approval) is required only for restricted sectors or investments covered by Press Note 3 of 2020 (bordering countries). In contrast, a Branch Office and Liaison Office always require prior RBI approval.
Can a Branch Office manufacture goods in India?
No. The permitted activities for a Branch Office under Regulation 4(a) of the FEMA (Establishment) Regulations do not include manufacturing. A BO can render professional/consultancy services, engage in export/import, conduct research, provide IT services, and represent the parent company. If the foreign company needs to manufacture in India, it must set up a WOS or a JV subsidiary. This is a frequently misunderstood point, and we have seen foreign companies set up BOs with the intention of manufacturing, only to discover the restriction during the RBI application process.
What is the Permanent Establishment (PE) risk with a Liaison Office?
An LO creates a PE risk if its activities go beyond pure liaison. Under Article 5 of most Double Taxation Avoidance Agreements, a PE is created when the LO (1) constitutes a fixed place of business through which the foreign parent carries on business, or (2) LO employees habitually exercise authority to conclude contracts on behalf of the parent, or (3) the LO provides services exceeding the threshold (typically 90-183 days in a 12-month period). The Income Tax department routinely audits LOs and reclassifies them as PEs if commercial activities are detected — this triggers 40% tax on attributable income plus interest and penalties.
Can a foreign company have both a subsidiary and a Branch Office in India?
Yes. There is no legal prohibition. Some large multinational groups maintain a WOS for their primary commercial operations and a separate BO for specific professional services. However, inter-entity transactions (between the subsidiary and the BO) must comply with Transfer Pricing norms and FEMA regulations. Additionally, the existence of both may increase scrutiny by the Income Tax department regarding profit shifting between the two structures. In most cases, consolidating operations under a single WOS is more efficient.
How does GST apply to a Branch Office vs a Subsidiary?
Both a BO and a WOS must register for GST if they supply taxable goods or services in India. However, there is a critical difference: services provided by the foreign parent’s head office to its Indian BO are treated as supplies between distinct persons under Schedule I of the CGST Act — even if made without consideration. This means the BO must pay GST on a reverse charge basis on services received from its own head office. For a WOS, services from the foreign parent are inter-company transactions attracting GST on reverse charge under Section 5(3) of the IGST Act (import of services). The valuation for both must be at arm’s length — the open market value of the services.
Virtual Auditor — AI-Powered CA & IBBI Registered Valuer Firm
Valuer: V. VISWANATHAN, FCA, ACS, CFE, IBBI/RV/03/2019/12333
Chennai (HQ): G-131, Phase III, Spencer Plaza, Anna Salai, Chennai 600002
Bangalore: 7th Floor, Mahalakshmi Chambers, 29, MG Road, Bangalore 560001
Mumbai: Workafella, Goregaon West, Mumbai 400062
Phone: +91 99622 60333 | Email: support@virtualauditor.in
Book a Consultation