By Manu Rao | Updated March 2026
A foreign company wanting to test the Indian market without setting up a full subsidiary has two options under FEMA: a Branch Office (BO) or a Liaison Office (LO). Both are registered with the Registrar of Companies. Both need RBI approval. And both have strict rules about what they can and cannot do in India.
Getting this choice wrong can trigger regulatory action from the RBI. A liaison office that starts earning revenue in India is violating its terms. A branch office that could have been a liaison office is overpaying on compliance. This comparison covers exactly what each structure permits.
Quick Comparison Table
| Criterion | Branch Office | Liaison Office |
|---|---|---|
| Governing Law | FEMA 1999, FEM (Establishment in India of a Branch Office or Liaison Office or Project Office) Regulations 2016 | Same — FEMA 1999, FEM Regulations 2016 |
| RBI Approval | Required via AD Category-I Bank (Form FNC) | Required via AD Category-I Bank (Form FNC) |
| Permitted Activities | Export/import, professional/consultancy services, R&D, IT/software development, technical support for parent company products | Representing parent company, promoting exports/imports, spreading awareness, acting as communication channel — NO commercial activity |
| Revenue Generation | Yes — can earn revenue in India | No — cannot earn any income in India |
| Taxation | Taxed at 40% on Indian income + surcharge + cess (as a foreign company under Section 115A/115JB of IT Act) | Generally not taxable if operating within permitted scope — no Indian income |
| Duration | No fixed tenure — continues until closed | Typically approved for 3 years, renewable |
| Parent Company Requirement | Profit track record of 5 out of last 7 years, net worth of USD 100,000+ | Profit track record of 3 out of last 5 years, net worth of USD 50,000+ |
| Funding Source | Inward remittance from parent or local revenue | Inward remittance from parent only — no local income |
| Employees | Can hire Indian employees | Can hire Indian employees for liaison activities only |
| Compliance | Annual Activity Certificate from CA, annual return to RBI via AD Bank, ROC filings, IT return | Annual Activity Certificate from CA, annual return to RBI via AD Bank, ROC filings |
| Closure Process | RBI approval through AD Bank + ROC strike-off | RBI approval through AD Bank + ROC strike-off |
What a Liaison Office Can Actually Do
A liaison office in India is a communication channel. That is the legal framing, and the RBI enforces it strictly. Under the FEM (Establishment) Regulations 2016, a liaison office may:
- Represent the parent company in India
- Promote export and import from/to India
- Promote technical and financial collaborations between the parent company and Indian companies
- Act as a communication channel between the parent and Indian parties
What it cannot do is earn money in India. No invoicing Indian clients. No signing commercial contracts. No providing paid services. All expenses — rent, salaries, utilities — must be funded through inward remittances from the parent company abroad.
The RBI monitors this. The Annual Activity Certificate (AAC) submitted by the liaison office's chartered accountant must confirm that the LO stayed within its permitted activities. If the AAC flags revenue generation, the RBI will issue a show-cause notice.
Typical Use Case
A Japanese electronics manufacturer wants to explore the Indian market before committing capital. They open a liaison office in Mumbai with 3 staff members. The team meets potential distributors, attends trade shows, collects market data, and reports back to Tokyo. No sales, no invoices, no Indian revenue. After 18 months, the parent company decides to enter India seriously and converts to a subsidiary or branch office.
What a Branch Office Can Do
A branch office has far more operational freedom. Under the same FEM Regulations, a BO can:
- Export/import goods
- Render professional or consultancy services
- Carry out R&D work
- Promote technical and financial collaborations
- Represent the parent company as a buying/selling agent
- Provide IT and software development services
- Render technical support for products supplied by the parent
A branch office can generate revenue in India. It can bill Indian clients. It can sign service agreements. This is the critical difference.
However, a branch office cannot engage in manufacturing or processing activities in India unless specifically approved by the RBI. Retail trading is also restricted.
Tax Implications
The tax difference between these two structures is significant because one earns income and the other does not.
Branch Office
A branch office is taxed as a foreign company in India. The corporate tax rate is 40% on net Indian income, plus applicable surcharge (2% if income exceeds INR 1 crore, 5% if exceeding INR 10 crore) and 4% health and education cess. This is higher than the 22-25% rate available to domestic companies under Section 115BAA.
The branch office must also consider Permanent Establishment (PE) implications under the applicable DTAA between India and the parent company's country. If the branch office constitutes a PE — which it almost always does by definition — the profits attributable to the PE are taxable in India. The parent company can claim credit for Indian taxes paid against its home-country tax liability, subject to DTAA terms.
Transfer pricing rules under Sections 92-92F of the Income Tax Act 1961 apply. The branch office's transactions with the parent company must be at arm's length. Documentation requirements under Rule 10D apply.
Liaison Office
If the liaison office genuinely operates within its permitted scope and generates no Indian income, it has no Indian tax liability. It does not need to file an income tax return in most cases, though some CAs recommend filing a nil return as a protective measure.
But here is the risk: if the Income Tax Department determines that the liaison office is actually carrying on business in India — even informally — it can assess the LO as having a PE and impute income. Several tribunal cases have gone this way. The LO must maintain clean records showing it stayed within FEMA limits.
Parent Company Eligibility
The RBI sets different thresholds for each structure:
- Branch Office: The parent must have a profit track record in 5 of the immediately preceding 7 financial years in its home country and a net worth of not less than USD 100,000
- Liaison Office: The parent must have a profit track record in 3 of the immediately preceding 5 financial years and a net worth of not less than USD 50,000
The liaison office has a lower bar. This makes it the default entry point for smaller foreign companies or those with shorter operating histories.
Duration and Renewal
Liaison offices are approved for a fixed period, typically 3 years. Renewal requires a fresh application through the AD Category-I Bank, along with a justification for continued presence. The RBI can refuse renewal if it finds the LO is not serving its stated purpose.
Branch offices have no fixed tenure. They continue until the foreign company decides to close them, subject to annual compliance.
Closure Process
Closing either structure requires:
- Application to RBI through the AD Bank
- Final Annual Activity Certificate from a CA
- Settlement of all Indian liabilities (employee dues, rent, taxes)
- Repatriation of remaining funds to the parent company
- Striking off the establishment registration with the ROC
The closure process typically takes 3-6 months. Delays happen when the RBI or ROC has queries about outstanding liabilities.
Which Should You Choose?
Choose Liaison Office if:
- You want to explore the Indian market before committing capital
- Your parent company does not meet the branch office eligibility criteria
- You have no plans to earn revenue in India in the near term
- You need a temporary presence (1-3 years) for market research
Choose Branch Office if:
- You need to provide paid services or earn revenue in India
- Your parent company has a strong profit track record and net worth above USD 100,000
- You want a permanent presence without incorporating a separate Indian company
- You need to handle export/import operations directly
Consider a Subsidiary Instead if:
- You want to raise capital independently in India
- You want the 22-25% domestic tax rate instead of 40%
- You plan long-term operations with growth
Many foreign companies start with a liaison office, graduate to a branch office, and eventually incorporate a subsidiary. There is no single right answer — it depends on your stage and intentions.
Need guidance on which establishment type fits your India plans? Contact Beacon Filing — we handle RBI applications, ROC registrations, and ongoing compliance for foreign companies.