Greater Scrutiny for Foreign-Owned Liaison Offices in India

On February 6, India’s Central Board for Direct Taxes introduced a new regulation 114DA, notification 5/2012, as part of Section 285 of the Finance Act governing foreign-operated liaison offices in India. It states that additional reporting is required, including the submission of Form 49C – which will be applicable from the current fiscal year ending on March 31, 2012. The newly notified Form 49C seeks extensive details of the operations of liaison offices (LOs) and has far-reaching implications for such entities. With the data that the tax department gathers through such annual statements, it is likely that the activities carried on by LOs in India will come under additional scrutiny. It would therefore be advisable for foreign entities operating LOs in India to take a closer look at whether a permanent establishment (PE) exposure exists for them in India.

The additional information required includes:

• Financial year for the statement
• Name and legal address of the non (Indian) resident foreign executive
• Address of corporate head office
• Permanent account number (if allocated)
• Tax ID number in country of residence
• LO registration number, date of registration, and date of RBI registration
• Nature of LO activities
• LO address
• Annual activity certificate
• Name, address and license number of chartered accountant handling LO filings
• India specific expenses and income (such as receipts) of non-resident executive while in India
• Details of all transactions made by the non-resident executive while in India
• Details of any salary or expenses made by the LO to any individual external from the country
• Complete breakdown of all LO employees and details of all earning in excess of Rs. 50,000 per month, including their position in the LO
• Details, including PAN numbers, addresses and contact details of any agents, distributors, and representatives of the LO and non-resident person
• Names and address of the LO’s top five businesses dealt with
• Details of products and services the LO is dealing with
• Details of any other entity (including PAN) providing any other services to the LO
• Details of any other related Group entities in India, including addresses, license numbers and PAN

These details need to be collected and made ready for filing. Under some circumstances, they may trigger an appraisal over the PE status of the LO, possibly resulting in a need to upgrade the entity into a limited company.

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