1.1 Residential Status of the Overseas Branch under FEMA:
As per definition given in Section 2 clause (iv) of Foreign Exchange Management Act, Person Resident in India includes “any office, branch or agency outside India owned or controlled by a person resident in India”. And because of its residential status as Resident In India, overseas branch is subject to all FEMA restrictions as are applicable to Person Resident in India.
1.2 Whether setting up an Overseas Branch is a Capital Account transaction or Current Account transaction?
It is generally seen that all capital Account transactions are prohibited unless they are specifically permitted. For setting up a branch outside India, an Indian entity is required to open foreign currency bank account outside India. The opening up of bank account outside India by a person resident in India is considered as capital account transaction and is regulated by Notification No.10. (as amended by Notification No.47). Therefore, setting up branch outside India, per se may not amount to capital account transaction but the opening up of a bank account outside India, is a regulated capital account transaction. The said Notification No. 10 provides for rules relating to opening up of a bank account for offices set up outside India.
Even acquisition or purchase of office equipments and furniture and acquiring immovable properties are also capital account transactions. However, the explanation to the Notification provides that acquisition of furniture and office equipment required for normal business operations will not be regarded as capital account transaction.
RBI gives general permission for following capital account transactions.
- To Open Foreign Currency Bank Account (subject to cap on remittance from India
- To Purchase office equipments and other assets for normal business operation
- Recently, Indian corporate who have setup overseas office can acquire immovable property outside India for their business and also for staff residential purposes with the prior permission of Reserve Bank of India. Necessary application be made in a prescribed form to RBI. [AP Dir Circular No.71 dt.13.01.2003]
1.3 Who can open branch outside India i.e. Indian Entity:
As per sub-regulation No. (4A) of Regulation 7 of Notification No.10, a firm or a company or a body corporate registered or incorporated in India (hereinafter referred to as ‘the Indian entity’) may open, hold and maintain in the name of its office (trading or non-trading) or its branch set up outside India or its representative posted outside India, a foreign currency account with a bank outside India by making remittances from India for the purpose of normal business operations of the office/branch or representative.
As per Notification, firms, companies or body corporate registered or incorporated in India can open branch or office outside India. In notification there is no mention of “Proprietary concern”. However if one refers to FORM OBR, there is a mention of “Proprietary concern” in clause 1(b) of Part I of the said form. The said form was issued under the regime of FERA however, still, Authorized dealers are relying on this form as a procedural measure. In our opinion, to avoid any ambiguity one shall write to RBI for clarification or for seeking permission for opening branch by proprietary concern.
1.4 Form to be filled up & submitted:
Form OBR with full details and supporting to be submitted to concerned Authorized Dealer who, in turn, submits the same to RBI and permits Indian entity for setting up an overseas branch.
1.5 Permitted Remittance For Setting Up Overseas Branch /Office or Posting Representatives
For Setting up Branch/Office outside India
Indian entity can remit foreign exchange up to 2 % of Average Annual Turnover of last 2 Accounting Years of Indian entity for meeting initial expenses of setting up of Branch / Office or posting Representative.
For Recurring Expenses
Indian entity can remit foreign exchange up to 1 % of Average Annual Turnover of last 2 Accounting Years of Indian Entity for meeting recurring expenses of branch/office or representative per year.
No restriction of above 2 % and 1 % of Annual Average Turnover of Indian Entity shall be applicable provided
i) Remittances are made out of EEFC A/c of Indian Entity. Or
- ii) Overseas Branch or Office is set up or Representative is posted by 100 % EOU or a unit in EPZ, HTP or STP within 2 years of the establishment of the unit.
Even an Indian Entity without Turnover Track Record is also entitled to setup an overseas branch if he is an exporter and has got balance in EEFC A/c.
1.6 Closure of the Overseas Branch/Office Bank A/c.:
The account so opened, held and maintained shall be closed
- i) If Overseas branch / office is not setup within 6 months of opening the Bank A/c. Or
- ii) Within 1 month of the closure of the overseas branch / office. Or
iii) Where no representative is posted within 6 months of opening of the Bank A/c. and the balance held in the account shall be repatriated to India.
1.7 Prohibitions on the Operation of Overseas Branch /Office / Representative:
1) The Overseas Branch / Office / Representative shall not enter into any contract or agreement in contravention of the Act, Rules or Regulations of FEMA.
2) The Overseas Branch / Office / Representative shall not create any financial or contingent liabilities for Head Office in India.
3) The Overseas Branch / Office / Representative should not invest surplus fund abroad without RBI’s prior approval but such surplus fund should be repatriated to Head Office in India.
4) The details of bank account opened outside India should be promptly reported to concerned Authorized Dealer.
1.8 Special RBI Permission for establishing Warehouse:
The special RBI permission is required to be obtained for establishing a warehouse outside India.
As per regulation 9 of the Notification No.23 on “Export of Goods and services” , where goods are exported to a warehouse established outside India with RBI permission sales consideration is to be brought (repatriated) to India as soon as it is realized or if not realized – latest within a period of 15 months from the date of shipment of goods or within period further extended by RBI.
- OVERSEAS BRANCH FROM TAXATION ANGLE
2.1 The Head Office (The Indian entity) in India is entitled for claiming credit for the tax paid by the overseas branch to avoid double taxation under Tax Treaties. In absence of Tax Treaty with any country, the Indian entity can claim tax credit U/s. 91 of the Income Tax Act which provides for unilateral tax credit in absence of a tax treaty.
2.2 Export Profit deduction U/s. 80 HHC is available to Head Office for sale of Goods to an Overseas Branch. (Export realization to be repatriated to Head Office in India within 6 months of the date of export)
2.3 Indian Transfer Pricing Law is not applicable to Head Office (India) for export of goods to overseas branch but Transfer Pricing Law, if any; in the host country shall be applicable to overseas branch.
2.4 No Capital Gain Tax is levied to Head Office on transfer of Assets to the Overseas Branch.
2.5 Loss of overseas branch can be adjusted with profit of HO in India reducing overall tax burden of HO and again such Overseas Branch can carry forward the same loss to be set off in subsequent years.
2.6 In countries like US, France, Canada there is a tax, charged to the Overseas Branch, called BPT (Branch Profit Tax) at the time of remittance of Branch Profit to H.O. (i.e. to resident country). But as per Indian
Income Tax Act, Branch profit is clubbed with Head Office profit on accrual basis and credit for BPT paid by the concerned Branch is available against tax payable by HO in the year in which the Branch has paid tax. This system can create practical difficulties in getting credit for branch profit taxes due to time mismatch (Time Difference) & hence due care needs to be taken for timely remittance of branch profit to HO to enable HO to get the tax credit for BPT.
– wherein following recommendations to the Government are made.
– The credit for taxes paid overseas shall be allowed in the year in which the foreign taxed income is assessable in India.
– That liability towards advance tax shall be computed after taking into account the overseas taxes paid.