India is becoming a new choice among all multinational companies due to its growing economy and availability of resources and labour at an economical rate. Foreign entities can mark their presence in India through the setup of Wholly owned subsidiary or Project office of Branch Office or Liaison Office in India.
Provisions related closure of Project Office/Liaison Office/Branch Office are regulated by Foreign Exchange management Act read with FEM (Establishment in India of Branch or Office or Liaison office or a project office or any other place of business) Regulations, 2016 and Master Directions No. 10/2015-16 dated 1st Jan, 2016.
Like setting up provisions, detailed procedure is also given for closure of Project Office/ Liaison Office/ Branch office. Once the objective of setting up of LO/BO/PO is fulfilled or the time limit for which approval was granted expires then foreign entity is required to close its LO/BO/PO through the legal procedure given.
Any failure in closure of Indian office through prescribed procedure may result in levy of penalty on Foreign entities and such foreign entities may face issues in further setting up of any LO/BO/PO in India in future.
1. Validity period of LO/BO/PO
- The validity period of a Liaison office is generally 3 years. However, in case of requirement, such period of 3 years can further be extended by a period not exceeding 3 years.
- Period of validity of the Project office is generally the period of the respective project.
Post expiry of validity period, foreign companies desire to close their place of business in India which is set up in form either Liaison Office or Branch Office or Project Office. Detailed procedure related to closure of LO/BO/PO is issued by Reserve Bank of India and provisions are given under FEMA, Companies Act, 2013 and other various statutory laws as applicable in India to undertake such closures. These offices must be closed once the purpose of setting them up is completed.
2. Procedure of winding up of LO/BO/PO
2.1 Process of closure of LO/BO/PO in records of AD Category-1 Bank
- Application for closure of LO/BO/PO and remittance of winding up proceeds shall be filed by the concerned office with AD Category-1 Bank alongwith all supported documents.
- Application of winding of LO/BO/PO shall be supported by following documents:
- Copy of the Reserve Bank’s/AD-1 Category Bank’s approval for establishing the BO/ LO/PO.
- Auditor’s Certificate certifying following points:
- Manner of computation of winding proceeds supported with statement of assets or liabilities of the applicant and indicating the manner of disposal of assets;
- A confirmation that all liabilities in India including arrears of gratuity and other benefits to employees, etc. have been fully paid off;
- A confirmation that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
- A Confirmation from the applicant/parent company that no legal proceedings are pending against the LO/BO/PO in any Court in India;
- In case of winding up of BO/LO, A report from the Registrar of Companies (ROC) regarding compliance with the provisions of the Companies Act, 2013.
- The designated AD Category – I banks will confirm that the Project office/ Liaison Office had done their respective compliances.
- Any other document/s required by Reserve Bank of India/AD Category-I bank while granting approval.
- Drafting and preparation of application for closure of LO/BO/PO along with other relevant documents for closure of bank account in this regard and obtaining certificate from Chartered Accountant as per the prescribed format as given in master directions issued by RBI.
- Execution and signing of documents.
- All the documents executing and signing outside India needs to be notarized and apostilled.
- Upon receipt of the executed documents, submission of application and other documents along with certificate from Chartered Accountant and certificate of closure as issued by ROC with AD Bank.
- The designated AD Category – I bank will report to the Reserve Bank (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO / LO have been scrutinized and found to be in order for closure of Branch Office.
- The AD Bank may forward the whole set of documents to RBI for their approval, if required and may ask for some additional documents in this respect.
- The AD Bank scrutinizes all the documents and if found in order, shall close the LO/BO/PO along with bank account in their records.
3. Steps for closure of LO/BO/PO in ROC
If any foreign company has its place of establishment in India via LO/BO/PO and such place of business is registered with RoC and the entity intends to close the same then first the application is required to be filed with ROC for such closure.
Before making such a request with ROC, a company must ensure that all the annual compliance is completed and updated in the records of ROC.
Following steps are need to followed for winding up of LO/BO/PO:
- Drafting of board resolutions passed by foreign companies and other relevant documents for closure of their business presence in India.
- Execution and signing of documents. Since the board resolution shall be executed by the foreign company in its native country, the same needs to be translated to English and also notarized.
- Upon receipt of the executed documents, respective e-form is to be filed with ROC for closure of LO/BO/PO in India.
- ROC scrutinizes the e-form and other documents annexed to it and if found in order, shall issue certificate for closure of LO/BO/PO
4. Remittance of winding up proceeds after closure of LO/BO/PO
Alongwith application of closure of LO/BO/PO, an application is also filed with designated AD Catergory-1 for remittance of closure proceeds to the parent entity.
Proposal of remittance of winding up proceeds shall be considered of only those entities which have followed the operational guidelines such as submission of AACs (upto current financial year) at regular annual interval along with copies endorsed to DGIT (International Taxation), obtained PAN from Income Tax authorities and have got themselves registered with RoC under Companies Act, 2103, if required. Remittance of winding up proceeds shall be allowed subject to following conditions:
- Transfer of assets by way of sales shall be allowed only if foreign entity intends to close their LO/BO/PO operations in India.
- A certificate has been obtained from statutory auditor wherein following information is given:
- Details of assets to be transferred alongwith date of acquisition
- Original Price
- Depreciation till date
- Present Book Value/ Written down value
- Sales consideration
Auditor shall also certify that assets are not re-valued after initial recognition and sales consideration is not more than book value.
- Assets should be acquired by LO/BO/PO from inward remittance and assets does not include any intangible assets such as Goodwill and pre-operative expenses. Further, no revenue expense can be capitalised and transferred under winding up proceeds.
- Payment of all applicable taxes has been made.
- Credit to Bank account on account of such transfer shall be considered as permitted receipts.
- Designated AD Category-I bank may allow remittance of winding up proceeds in respect of offices of banks and insurance companies, after obtaining copies of permission of closure of branch office from the sectorial regulators (like IRDA etc.) along with the documents mentioned above.
LO/BO/PO may also donate their assets such as old furniture, vehicle, computers and other office items etc. to any NGO and Non-profit organisation only if AD Category-1 bank is satisfied about the bonafide intention.