Setting Up Business in India: Comparing Wholly Owned Subsidiary (WOS), Branch Office, and Liaison Office

Choose the vehicle by what the India operation will do

An Indian wholly owned subsidiary (WOS) is a separate incorporated company. A branch office (BO), liaison office (LO) and project office (PO) are establishments of the foreign enterprise. Compare the activities you need, the entry route, how funds move and the tax position. An MCA incorporation certificate does not itself authorize foreign investment or a regulated activity.

Permitted activities and the PE boundary

Annex C of RBI’s office direction lists BO activities: export or import of goods, professional or technical consultancy, research in the parent’s area, promotion of collaborations, representation and buying or selling agency, IT and software development, technical support for group products, and foreign airline or shipping operations. Read the actual approval. Retail trading is prohibited. Ordinary branches cannot carry out direct manufacturing or processing; check permitted subcontracting and the separate conditional route for standalone manufacturing or services in an SEZ.

An LO can represent the parent or group, promote imports or exports and collaborations, and act as a communication channel. Meet office costs through permitted head-office remittances and restrict the bank account to permitted credits and debits. An office can still contract for its own permitted administration, such as a lease; it should not use that authority to sell or conclude customer business. Ordinary LO validity is generally three years, with shorter periods for specified entities. Where an applicant is an eligible subsidiary and does not meet financial tests, the RBI direction provides for a qualifying parent or group letter of comfort.

A FEMA approval and a tax treaty address different questions. A liaison label does not prevent a fixed-place or agency permanent establishment (PE) if actual conduct meets the applicable treaty tests; equally, a regulatory breach does not automatically establish a PE. Document who negotiates and concludes customer contracts, who performs services and how profits are attributed. Apply the treaty in force and its preparatory or auxiliary exception and agent tests where relevant.

Seven worked examples

1. German equipment group: compare remittable cash

Assume a German manufacturer with €180 million global revenue is deciding how to provide software and commissioning in India. Model an approved BO service scope; do not assume ordinary BO permission covers component assembly. The illustration uses ₹10 crore of taxable profit per year in each vehicle, the WOS validly choosing legacy section 115BAA or current section 200, and the branch’s ordinary taxable business profits falling in the 2% surcharge band. Assume sufficient distributable profit, full distribution, documented eligibility for the 10% India–Germany Article 10 cap, and no other taxes, costs or currency changes.

The WOS’s illustrative net cash advantage is ₹44,76,800 a year, or ₹2,23,84,000 over five years. The ordinary 35% foreign-company rate applies to this model, with 4% cess and surcharge of nil up to ₹1 crore, 2% above ₹1 crore up to ₹10 crore and 5% above ₹10 crore, subject to marginal relief. The corresponding combined rates are 36.4%, 37.128% and 38.22% before relief. There is no general branch remittance tax in this comparison. For dividends, use shareholder withholding under applicable law and treaty; section 115-O’s old dividend distribution tax does not apply to current distributions.

2. US software parent: an Indian capability centre

A US cloud company with USD 80 million annual recurring revenue plans a 120-person Indian engineering centre. Assume ₹32 crore eligible operating costs and a separately supported 17% cost-plus markup, yielding ₹37.44 crore in service revenue and ₹5.44 crore operating profit. If that equals taxable profit under the 22% option, tax with surcharge and cess is ₹1,36,91,392. A 17% assumption is not automatic safe harbour. Check the eligible activity, tax year, transaction thresholds, pricing documentation and valid election before relying on safe harbour. Check the applicable accountant’s report, legacy Form 3CEB or current Form 48.

Supply to the foreign parent may be zero-rated if all export-of-services conditions are met, including place of supply and permitted receipt of payment. Circular 161/17/2021 distinguishes an Indian-incorporated subsidiary from an Indian branch of the foreign recipient. If using an LUT, calculate the refund under the applicable GST rules: a ₹4.80 crore ledger balance is not automatically refundable, and the Rule 89(4) formula excludes capital-goods ITC from Net ITC.

3. French cosmetics company: test the market through an LO

A French brand considering a €2 million operating investment instead budgets €12,000 monthly for market research with two local consultants. A 24-month period costs €288,000 on that assumption. The company provides evidence of €450,000 net worth and five profitable years; the AD bank tests the USD-equivalent amount, the applicant’s financial statements and permitted activities. A 45-day approval window is a planning assumption. A three-year ordinary permission does not allow invoicing for goods or services. Commercial launch requires a properly approved vehicle and applicable product, import and retail permissions.

4. Japanese metro rail contractor: use a project office where eligible

A Japanese consortium has a ₹450 crore Indian metro signaling contract for 42 months, or three and a half years. A PO can fit the project term. General permission requires the qualifying Indian contract, necessary regulatory clearances and a prescribed funding or financing condition. Confirm whether the asserted JICA funding meets the rule and whether a specific approval applies. Before closure or remittance, account for Indian taxes and other liabilities and submit the prescribed bank documents. The contract value is revenue consideration, not taxable profit.

5. UK logistics firm: reassess a liaison office’s actual conduct

Assume two Chennai staff members regularly negotiate terms and sign trial agreements from 2021, and a 2024 survey finds the correspondence. Examine what authority they exercised and the applicable India–UK treaty Article 5; assess Article 7 attribution separately. If ₹60 crore of relevant revenue were used only as a planning input, 30% would be ₹18 crore of revenue, not necessarily ₹18 crore of attributable profit. To illustrate the tax separately, assume actual attributable taxable profit of ₹2 crore in each of FY 2021–22 through FY 2023–24. At the then ordinary 40% foreign-company rate plus 2% surcharge and 4% cess, tax would be ₹84,86,400 per year, or ₹2,54,59,200 over three years, before other adjustments. Interest or penalties require their own statutory facts. Neither a percentage of revenue nor the office label proves the assessment.

6. Singapore parent: plan incorporation and share issue as separate steps

A Singapore parent plans to invest SGD 200,000. One illustrative 30-calendar-day project plan reserves days 1–5 for name and documents, days 6–10 for incorporation filings, day 11 for the assumed certificate, days 12–20 for banking and remittance, and days 21–30 for issue and FC-GPR. Those blocks have 5, 5, 1, 9 and 10 calendar days. They are not official processing promises. Use SPICe+ Part A for the new company’s name and Part B with relevant linked forms. Legalize or apostille foreign documents where required. Record the receipt, issue and reporting dates separately.

7. UAE investor: trace land-border ownership and control

A Dubai investor proposes ₹15 crore in equity and has a 26% shareholder who is a citizen of a country sharing a land border with India. Apply the current NDI beneficial-ownership and control tests at the investor level and separately check ultimate effective control of the investee. Under S.O. 2174(E), published on 2 May 2026, and the accompanying FDI policy, the non-controlling route described by DPIIT for ownership up to 10% cannot be assumed for a qualifying 26% interest. Trace holdings, citizenship and control, and obtain any required government approval before investing. Use the government’s current filing route and reporting directions; five months is a planning estimate, not a guaranteed decision time.

Set up an Indian subsidiary and document the reporting handoff

• Confirm the sector, applicable caps, conditions, ownership chain and approvals before receiving investment.
• Choose the company’s subscribers and directors. A private company ordinarily needs at least two members. Where one member is a nominee, document beneficial ownership under section 89 and check separate significant beneficial ownership requirements.
• At least one director must stay in India for at least 182 days during the financial year, applied proportionately in the first financial year for a newly incorporated company. This is a stay test, not an Indian citizenship requirement.
• Retain bank evidence of the inward funds. Under the ordinary covered cash subscription route, issue equity instruments within 60 days of receipt or refund within the subsequent 15 days if not issued. File FC-GPR on FIRMS within 30 days from issue where required.
• File the section 10A commencement declaration in Form INC-20A within 180 days where applicable, before commencing business or exercising borrowing powers. Calendar later reports, including FLA when applicable; FC-GPR and FC-TRS are transaction filings.

Frequently asked questions

1. Can a foreign parent own 100% of an Indian private company?

Where permitted by the sector and investor rules, yes. Distinguish beneficial ownership from the statutory minimum membership. Document nominee holding and any required filings.

2. Does the resident director need Indian citizenship?

No. Section 149(3) uses the prescribed stay test, with first-year proportionality.

3. What does a branch need to remit profits?

The designated bank checks the audited accounts and the CA’s certification of remittable profit, including permitted activities and exclusion of revaluation gains. Check applicable tax documentation for the remittance date.

4. Which annual filings can apply to a liaison office?

The RBI annual activity certificate is separate from MCA Form FC-4, ordinarily due within 60 days of the financial-year close for an applicable foreign company, and from the tax statement. Apply legacy section 285 and Form 49C or current section 505 and Form 162 under Rule 234, as the period requires. Both the amended legacy rule and the current rule prescribe eight months from financial year-end. Check the separate accounts filing and recipients for the AAC.

5. Can an LO become a subsidiary?

It does not automatically become a separate company. Coordinate new incorporation or a permitted investment structure with the AD bank, and document any asset transfer, LO closure and remittance.

6. What should the compliance tracker record?

Keep approvals, tax year and forms, transfer and inward remittance dates, tax and corporate filing receipts and evidence of bank acceptance.

Sources

• RBI Master Direction: Branch, Liaison and Project Offices, including Annex C
• RBI FEMA 395/2019 reporting regulations, updated June 2026
• DPIIT Press Note 2 (2026 Series) on land-border investment
• DPIIT FDI procedure and land-border reporting guidelines
• Government confirmation of the 2026 NDI amendment and threshold
• Companies Act, 2013, sections 3, 10A, 89, 149 and Chapter XXII
• MCA SPICe+ and linked filings FAQs
• MCA Form FC-4 instruction kit
• Income Tax Department Form 162 FAQs
• Finance Act, 2026, company rates and surcharge
• Income-tax Act, 2025, including sections 200 and 505
• India–Germany treaty, Article 10
• India–UK treaty synthesised text, Articles 5 and 7
• CBIC Circular 161/17/2021-GST, exports to related entities