LIAISON OFFICE CHANGING COMPLIANCE REQUIREMENT

Till recently establishment of liaison office (LO) in India was considered to be an easy entry route with limited permissible activities but with limited requirement of legal compliance. However as per the recent changes introduced by tax authorities, annual legal compliance as well as closure of liaison office requires lot of legal formalities/documentation/submission of information. In other words legal compliance demands complete transparency in terms of functioning of liaison office in India in order to comply the laws. Filing of Annual Statement to Tax Authority:Recently the Central Board of Direct Taxes (CBDT) vide a notification introduced rule 114DA in the Income-tax Rules, 1962 requires the Annual Statement in the Form 49C to be filed with tax authorities by a Liaison office within 60 days from the end of the financial year (FY), duly verified and digitally signed by the chartered accountant or a person authorized by the non-resident. The informations which are required to be submitted in the annual statement are summarized below: Detail of the LO date of setup, nature of activities undertaken, date of approval with the Reserve bank of India (RBI), etc. Date of submitting the annual activity certificate (AAC) of the LO to the RBI (along with details of the chartered accountant signing the AAC. India specific financial details i.e. Receipts, income and expenses for the FY of the non resident person (not only of the LO) from, or in, India. Details of all purchases, sales and services form, or to, Indian parties during the year by the non-resident person ( not limited to transactions made by the LO) Details of any salary and compensation of any sort payable outside India to any employee working in India or for services rendered in India. The total no. of employees working in the LO during the year and particulars of employees drawing salary of INR 50,000 or above per month specifying their name, designation and sitting location. Details (with complete addresses including the permanent account number (PAN) of agents/ representatives/ distributors of the non-resident person in India. Name and addresses of the top five parties in India with whom the LO has been doing the liaisoning. Details of products or services for which liaisoning activity is done by the LO. Details of any other entity (including PAN) for which liaisoning activity is done by the LO. Details (with addresses and PAN) of group entities present in India as branches or incorporated entities and their business activities. Details (with addresses and PAN) of other LO of the group entities. Other group entities operating from the same premises as the office of the LO.

Thus the details sought to be submitted in the annual statement are not restricted to the activities of the Liaison office only but cover all the activities of the parent company having any relation with India such as details of income, expenses, details of purchase, sales of services/products from/to Indian parties etc.

Issues pertaining to the closure of the Liaison office:The approval for the opening of the liaison office is initially granted for 3 years and before the expiry of the said period either the applicant has to move the renewal application or the closure application to Reserve Bank of India. In case the applicant wish to close the liaison office it has to obtain various No Objection Certificate from various authorities and the most important amongst them is Income Tax authority. The income tax authority demands the below mentioned information from the applicant before granting the NOC Detail note on the activities of the head office List of employees of the Head office who visited India during the Last 3 Financial Year their purpose of visit and duration of stay in India. After the winding up of the LO, will the head office still have any presence in India in any form branch Office/subsidiary/JV etc. List of the employees in LO with their designation and nature of work. Nature and quantum of receipts received by the HO from any Indian party/vendor in the last 6 financial years. Details thereof. Details of any contract/ agreement entered into the HO form or any other affiliate of the HO with any Indian in the last 6 financial years. How did you intend to dispose off the assets held by the LO in India. Copy of the annual activity certificate till date. Copy of permission of RBI to open LO. Audited financial statement. Details of AE/BO/PO Subsidiary in India. Conclusion:To sum up the above things it can be conclude that the annual statement seeks to collect extensive details about activities of the non-resident (parent company) from India or their operation in India. The annual statement will force the non - resident to obtain and file a large volume of information relating to their operations from or in India. Furthermore, they would be required to document the role played by their LO in the overall operations since the tax authorities may use the information from the annual statement to ascertain the taxability of the non resident in India. The applicant has to comply and disclose numbers of information direct or indirect and the volume of the information is large and it would be a cumbersome exercise for LO to provide. Furthermore this will be interesting to see the reaction of tax authorities after receiving all the information/disclosure.

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