A foreign company that wants a foothold in India faces a fork in the road. It can incorporate an Indian subsidiary and bring in equity — a capital account transaction governed by the FDI framework. Or it can stay foreign, and simply establish a place of business here: a branch office, a liaison office, a project office, or some other establishment. That second route is the subject of Section 6(6) of the Foreign Exchange Management Act, 1999, and of the regulations the Reserve Bank has made under it. The distinction matters enormously, because the type of office a foreigner is allowed to open dictates what it may earn, what it may spend, and — as the Supreme Court showed in Union of India v. U.A.E. Exchange Centre — whether the Indian tax authorities can treat it as a taxable permanent establishment at all.
Where Section 6(6) sits in the architecture of FEMA
FEMA is built around a simple binary. Current account transactions under Section 5 are presumptively free; capital account transactions under Section 6 are presumptively forbidden unless the Reserve Bank or the Central Government permits them. The establishment of a place of business by a foreigner sits at the seam between these two categories. Opening an office does not, by itself, transfer an asset or create a foreign liability in the classic capital-account sense, yet it plainly affects India's external position — a foreign entity that puts down roots here can remit profits, repatriate winding-up proceeds, and influence the balance of payments. The drafters therefore carved out a dedicated power.
That power is Section 6(6), which provides that without prejudice to the rest of Section 6, the Reserve Bank may, by regulation, prohibit, restrict or regulate the establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Note the verbs: prohibit, restrict, regulate. The provision is not a grant of freedom to the foreigner — it is a grant of regulatory authority to the RBI. For a fuller picture of how the Act partitions powers between the RBI and the Government, see the chapter on the regulation of foreign exchange dealings and the broader hub on FEMA notes.
The bare text and its deliberate breadth
Two features of the language repay close reading. First, the object of the power is establishment — the act of setting up a place of business — not the foreigner's trading transactions once established. Those downstream dealings are caught by other limbs of FEMA. Second, the phrase “branch, office or other place of business” is deliberately open-ended. It is not a closed list of corporate forms but a functional test: does the foreigner have a fixed place from which activity is carried on in India? This wording lets the RBI sweep in liaison offices, project offices, and any novel arrangement a foreign promoter might invent to avoid the label.
The provision speaks of a “person resident outside India”, which ties back to the residence test in Section 2(v) discussed in the definitions chapter. A foreign body corporate is a non-resident; so is a firm or association of individuals formed outside India. All of them fall within Section 6(6) the moment they seek a place of business here. The RBI has exercised the power not by case-by-case fiat but by framing a comprehensive regulation, which is where the real law lives.
FEMA 22(R)/2016 — the governing regulation
The operative instrument is the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016, notified as Notification No. FEMA 22(R)/2016-RB dated 31 March 2016. It was made in exercise of the power under sub-section (6) of Section 6 and expressly supersedes the earlier Notification No. FEMA 22/2000-RB dated 3 May 2000. The day-to-day operational detail — application forms, eligibility certificates, AD-bank procedures — is collected in the RBI's Master Direction on Establishment of Branch Office, Liaison Office, Project Office or any other place of business in India by foreign entities.
The basic scheme is permission-based. A body corporate incorporated outside India (including a firm or other association of individuals) that wishes to open a branch office or a liaison office must obtain prior permission. Permission flows through one of two channels: the RBI route, where an Authorised Dealer Category-I bank clears applications that meet the prescribed eligibility norms, and the Government route (approval routed through the RBI in consultation with the Central Government) for sensitive sectors and applicants. The 2016 regulation reflects FEMA's general philosophy of channelling foreign exposure through authorised intermediaries — the same architecture you meet in the chapter on regulation of foreign exchange dealings.
The liaison office — a mute presence
A liaison office (also called a representative office) is defined as a place of business that acts as a channel of communication between the parent or group company abroad and parties in India. The defining constraint is financial sterility: a liaison office cannot undertake any commercial, trading or industrial activity, directly or indirectly, and must maintain itself entirely out of inward remittances received from the head office through normal banking channels. It earns nothing in India; it merely listens, relays, and represents.
The permitted activities of a liaison office are a tightly bounded list: (i) representing the parent company or group companies in India; (ii) promoting export from and import into India; (iii) promoting technical or financial collaborations between the parent or group companies and Indian companies; and (iv) acting as a communication channel between the parent company and Indian parties. Anything that smells of revenue — invoicing customers, signing trading contracts, charging commission — is out of bounds. A liaison office is thus the lightest possible footprint a foreigner can have while still being physically present in India.
The branch office — the parent's trading arm
A branch office is a far more potent creature. It is an extension of the foreign parent, permitted to carry on substantive business and to earn income in India. The regulation lists the activities a branch may undertake: export and import of goods; rendering professional or consultancy services; carrying out research work in which the parent is engaged; promoting technical or financial collaborations between Indian and overseas group companies; representing the parent as a buying or selling agent in India; rendering services in information technology and development of software in India; rendering technical support to products supplied by the parent or group companies; and acting as a foreign airline or shipping company.
Two prohibitions define the outer limit. A branch office is not permitted to carry on retail trading activities of any nature, and it is not permitted to carry on manufacturing or processing activities in India, directly or indirectly — the qualification being that a branch set up in a Special Economic Zone may undertake manufacturing and service activities within the SEZ subject to the conditions there. Profits earned by a branch are freely remittable, net of applicable Indian taxes, on production of the prescribed auditor's certificates — there is no separate cap or lock-in, the only conditions being that the funds are genuine business profits and that Indian tax has been provided for. A branch may, with prior RBI approval, undertake activities beyond the standard list, but it can never stray into the two prohibited zones. Unlike a liaison office, a branch is a genuine income-earning presence in India — and therein lies its tax exposure, because an income-earning fixed place is precisely the raw material of a permanent establishment under most double-taxation treaties.
The project office — a temporary base for a contract
The third statutory form is the project office: a place of business established to execute a specific project in India. A foreign company that secures a contract from an Indian company to carry out a project may set up a project office without separate prior RBI approval, provided certain conditions are met — broadly, that the project is funded by inward remittance from abroad or by a bilateral or multilateral international financing agency, or has been cleared by an appropriate authority, or the Indian party awarding the contract has been granted a term loan by a bank or financial institution for the project. The project office is, by design, tethered to a single project and is wound up when the project ends.
For exam purposes the project office is best understood as a middle path — more active than a liaison office (it actually executes work and can receive project receipts) but narrower than a branch (its mandate is confined to the contract that justified it). Surplus on completion of the project, net of taxes, may be repatriated, subject to AD-bank scrutiny under the closure procedure discussed below. Because the project office is conceived as a fixed place through which the foreign contractor performs real work in India, it is the form most naturally exposed to being treated as a permanent establishment — a risk the foreign entity manages through careful structuring of the contract and the scope of on-site activity rather than through the office form itself.
Eligibility — net worth and the profit track record
The RBI route is gated by two financial filters drawn from the parent's audited home-country accounts. For a liaison office, the applicant must have a profit-making track record during the immediately preceding three financial years in the home country, and a net worth of not less than USD 50,000 or its equivalent. For a branch office, the bar is higher: a profit-making track record during the immediately preceding five financial years and a net worth of not less than USD 100,000 or its equivalent. “Net worth” means paid-up capital plus free reserves, less intangible assets, certified by a Certified Public Accountant or equivalent.
An applicant that cannot satisfy these criteria on its own — a newly incorporated entity, or a subsidiary with thin reserves — is not necessarily shut out. It may submit a Letter of Comfort from its parent, provided the parent itself satisfies the net-worth and track-record conditions. This sponsorship mechanism lets well-capitalised groups bring in lightly-capitalised special-purpose vehicles while still anchoring the regulator's comfort in a creditworthy promoter. The figures are a perennial favourite for objective questions: USD 50,000 and three years for liaison; USD 100,000 and five years for branch. A useful mnemonic is that the more powerful office (the branch, which can earn) carries the heavier entry burden (higher net worth, longer track record), while the sterile office (the liaison, which cannot earn) carries the lighter one — the regulatory friction scales with the economic footprint the foreigner is allowed to leave. The certificate of net worth must come from a Certified Public Accountant or its equivalent in the home jurisdiction, and the accounts relied upon are the parent's audited financials, not projections.
The RBI route versus the Government route
Most applications travel the RBI route: the foreign entity applies in the prescribed form through a designated Authorised Dealer Category-I bank, which clears the application if the eligibility norms are met. Certain applicants and activities are diverted to the Government route, where the AD bank forwards the application to the RBI, which decides in consultation with the Government of India.
The Government route is triggered in two broad situations. The first is applicant-based: where the applicant is a citizen of, or is registered or incorporated in, Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the proposed office is in certain sensitive or restricted areas, or more generally where security or reciprocity concerns arise. The second is activity-based: where the principal business of the applicant falls in a sector requiring approval, such as defence, telecom, private security, or information and broadcasting, or where the activity is in a sector where FDI is not 100% under the automatic route. Applicants from the listed jurisdictions also face additional conditions, including registration with the State Police authorities. The split mirrors the larger RBI-versus-Government division of labour you see across capital account transactions.
U.A.E. Exchange Centre — when a liaison office is not a permanent establishment
The single most important judicial decision in this area is Union of India v. U.A.E. Exchange Centre (Civil Appeal No. 9775 of 2011, decided 24 April 2020, reported at (2020) 425 ITR 30 (SC)). A UAE company carrying on the business of remitting money for non-resident Indians had set up four liaison offices in India after obtaining RBI permission under the erstwhile FERA. The RBI permission strictly confined the offices to auxiliary functions — downloading remittance particulars, printing rupee drafts, following up with correspondent banks, reconciling accounts — and expressly barred any trading, commercial or industrial activity, with no commission or fee to be charged and all expenses met by inward remittance. The tax department nonetheless sought to treat the liaison offices as a permanent establishment and tax a portion of the company's profits in India.
The Supreme Court held that the liaison office was not a permanent establishment. The activities, though carried on through a fixed place, were of a preparatory or auxiliary character and therefore fell within the exclusionary clause in Article 5(3)(e) of the India-UAE Double Taxation Avoidance Agreement. Because there was no PE under Article 5, no profits of the foreign enterprise were attributable to India under Article 7. The decisive fact was the very limitation the RBI had imposed under FEMA's predecessor power: the office was, by regulatory design, incapable of earning income. The case is a textbook illustration of how the FEMA-side characterisation of an office (liaison, hence sterile) drives the tax-side outcome (no PE, hence not taxable).
Columbia Sportswear — the other side of the line
The mirror image is Columbia Sportswear Company v. Director of Income Tax, where the same liaison-office structure produced the opposite result. The Authority for Advance Rulings, in its ruling reported at (2011) 337 ITR 407 (AAR), held that the Indian liaison office of the US apparel company — which identified manufacturers, negotiated prices, helped select raw materials and ensured quality before goods were exported — was so deeply involved in the company's business that it amounted to a business connection and a permanent establishment, and that income attributable to it was taxable in India. A point of doctrinal interest is that the AAR declined to confine the exception for purchasing operations to the actual act of sale: it reasoned that purchase activities cannot be divorced from the larger business of manufacture and sale, and that where the Indian office's work also supported the company's operations in third countries, the office could not claim the shelter of a pure export-purchasing exclusion. The Karnataka High Court substantially upheld that view, and the matter then reached the Supreme Court.
In Columbia Sportswear Co. v. DIT (2012) 346 ITR 161 (SC), the Supreme Court's principal contribution was procedural-constitutional: it held that the AAR, though its rulings are binding on the applicant and the Department for the transaction in question, exercises judicial power and is a “tribunal” whose rulings are amenable to judicial review under Articles 136 and 227 of the Constitution, but that such a challenge should ordinarily be brought first before the jurisdictional High Court rather than directly in the Supreme Court. For the FEMA student the case matters less for that holding than for its facts: it is the canonical example of a liaison office that, on the ground, behaved like an operating arm.
Read together, U.A.E. Exchange Centre and Columbia Sportswear teach that the label “liaison office” is not conclusive. What matters is whether the office in fact stays within the auxiliary, non-commercial confines that FEMA 22(R)/2016 prescribes. A liaison office that merely communicates, reconciles and represents stays sterile and non-taxable; a liaison office that quietly does the parent's real work — sourcing, negotiating, adding value to goods before export — risks being recharacterised as a PE and taxed, and may also be in breach of its FEMA permission. The two cases are the standard contrast pair for any answer on this topic, and the better script states both citations and then resolves them on the substance-over-form principle.
Operation — bank accounts, property and reporting
Once established, each office must operate within FEMA's continuing controls. A liaison office may maintain only non-interest-bearing rupee accounts fed by inward remittances; it cannot generate Indian income to fund itself, so even its surplus accumulates only from head-office money, never from local earnings. A branch office and a project office may maintain rupee accounts to receive their permitted receipts, and a project office may, on conditions, hold a foreign-currency account where the project so requires. Each approved office is allotted a Unique Identification Number (UIN) by the RBI, must obtain a Permanent Account Number, and must file an Annual Activity Certificate from a chartered accountant through its AD bank confirming that it has confined itself to permitted activities. A liaison office's approval is time-bound and renewable on application through the AD bank, whereas a branch office's approval is generally tied to the continuance of its permitted activity. The AD bank is the first-line regulator here: it scrutinises the Annual Activity Certificate, flags unpermitted activity to the RBI, and is the gatekeeper for any extension, additional activity or additional office.
Acquisition of immovable property is regulated separately. A branch or other office (other than a liaison office) may acquire property in India necessary for, or incidental to, carrying on its permitted activity, subject to filing the prescribed declaration; a liaison office may not acquire immovable property other than on lease for a term not exceeding five years. Entities from the restricted jurisdictions — Pakistan, Bangladesh and the others listed above — require prior RBI approval even to lease property. The interaction between holding rupee balances, remitting them and the wider rules on holding of foreign exchange is worth keeping in view.
Closure and remittance of winding-up proceeds
An office cannot simply disappear. Closure of a branch or liaison office is processed by the AD Category-I bank, and the remittance of winding-up proceeds is governed by the Foreign Exchange Management (Remittance of Assets) Regulations, 2016. The foreign entity must produce a defined dossier: a copy of the RBI or AD-bank approval for establishment; an auditor's certificate showing the manner of computation of the remittable amount and confirming that all liabilities in India have been met or adequately provided for; a certificate that no income accruing from sources outside India remains unrepatriated to India; confirmation that there is no legal proceeding pending and no impediment to remittance; and, where the office was registered with the Registrar of Companies, a report from the Registrar confirming compliance.
Crucially, the auditor must certify that sufficient funds have been set aside to meet all Indian tax liabilities, and the applicant must declare that the profits being remitted arise purely from the normal course of permitted business and not from any other source. This closure discipline dovetails with the duty to repatriate covered in the chapter on holding of foreign exchange: the State will not let foreign-held value leave the country until it is satisfied that Indian creditors and the Indian exchequer have been paid.
Contravention and consequences
Establishing or operating an office outside the four corners of the permission is a contravention of Section 6 read with the 2016 regulation, exposing the foreign entity to penalty under Section 13 of FEMA. The civil-penalty character of FEMA — a sharp break from the quasi-criminal regime of FERA — is traced in the chapter on the FERA to FEMA transition. A liaison office that crosses into commercial activity, a branch that ventures into retail trading or manufacturing, or an office whose Annual Activity Certificate reveals unpermitted conduct can be directed to cease, and the contravention can be compounded under Section 15 or proceeded against under Section 13.
There is also a second, parallel consequence that aspirants often miss: a FEMA breach frequently triggers a tax exposure. As Columbia Sportswear shows, an office that exceeds its permitted auxiliary role does not merely violate FEMA — it may simultaneously become a permanent establishment, dragging the foreign parent's profits into the Indian tax net. The FEMA characterisation and the income-tax characterisation are legally distinct but practically intertwined, which is precisely why U.A.E. Exchange Centre and Columbia Sportswear are decided as much on what the office actually did as on what its permission said it could do.
Exam strategy and common traps
Anchor the answer in Section 6(6) and FEMA 22(R)/2016-RB dated 31 March 2016 (superseding FEMA 22/2000), and have the numbers cold: liaison — USD 50,000 net worth and a three-year profit track record; branch — USD 100,000 and a five-year track record. The most common trap is conflating the three forms: a liaison office earns nothing and merely communicates; a branch office earns income but cannot do retail trading or manufacturing (except in an SEZ); a project office is tied to one specific contract.
The second trap is treating the “liaison office” label as decisive on tax. Pair U.A.E. Exchange Centre (auxiliary, Article 5(3)(e), no PE) with Columbia Sportswear (active sourcing role, PE, taxable) to show the examiner you understand that substance governs. Finally, remember the jurisdiction-sensitive Government route for applicants from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong and Macau, and the closure discipline under the Remittance of Assets Regulations. For the wider statutory map, keep the FEMA hub and the capital account transactions chapter to hand — Section 6(6) is one limb of the same Section 6 that governs cross-border assets generally.
Frequently asked questions
What is the difference between a branch office and a liaison office under FEMA?
A liaison office is only a channel of communication for the foreign parent — it cannot undertake any commercial, trading or industrial activity and must meet all its expenses out of inward remittances from the head office. A branch office is an income-earning extension of the parent that may carry on substantive business (export/import, consultancy, IT services, acting as buying/selling agent), but it cannot do retail trading or manufacturing in India except within a Special Economic Zone. Both are established under Section 6(6) and FEMA 22(R)/2016.
What are the net-worth and track-record requirements for branch and liaison offices?
Under the RBI route in FEMA 22(R)/2016, a liaison office requires a profit-making track record in the immediately preceding three financial years and a net worth of not less than USD 50,000 or its equivalent. A branch office requires a profit-making track record in the immediately preceding five financial years and a net worth of not less than USD 100,000 or its equivalent. An entity that cannot meet these on its own may rely on a Letter of Comfort from a parent that does.
Does a liaison office in India create a permanent establishment for tax purposes?
Not necessarily. In Union of India v. U.A.E. Exchange Centre (2020) 425 ITR 30 (SC), the Supreme Court held that a liaison office confined by its RBI permission to preparatory or auxiliary activities fell within Article 5(3)(e) of the relevant DTAA and was not a permanent establishment, so no profits were taxable in India. But where the office actually carries on the parent's business — as in Columbia Sportswear Company v. DIT (2011) 337 ITR 407 (AAR) — it can be recharacterised as a PE and taxed.
Which provision of FEMA governs branch and liaison offices?
Section 6(6) of FEMA empowers the Reserve Bank to prohibit, restrict or regulate the establishment in India of a branch, office or other place of business by a person resident outside India. The detailed rules are in the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016 — Notification No. FEMA 22(R)/2016-RB dated 31 March 2016, which superseded FEMA 22/2000-RB.
When does a branch or liaison office application need Government approval rather than RBI approval?
The Government route (through the RBI in consultation with the Central Government) applies where the applicant is a citizen of or incorporated in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau, or where the proposed activity falls in a sensitive sector such as defence, telecom, private security, or information and broadcasting, or in a sector where FDI is not permitted 100% under the automatic route. All other eligible applications go through the RBI route via an Authorised Dealer Category-I bank.
How is a branch or liaison office closed and its proceeds remitted?
Closure is processed by the Authorised Dealer Category-I bank, and remittance of winding-up proceeds is governed by the Foreign Exchange Management (Remittance of Assets) Regulations, 2016. The entity must furnish the establishment approval, an auditor's certificate on the remittable amount confirming all Indian liabilities and tax liabilities are met or provided for, a certificate that no foreign-source income remains unrepatriated, and, where applicable, a compliance report from the Registrar of Companies.