Liaison Office vs Project Office vs Branch Office in India

By Dev Rao | Updated March 2026

Foreign companies entering India without incorporating a subsidiary have three options under FEMA: a Liaison Office (LO), a Project Office (PO), or a Branch Office (BO). All three require RBI approval, all three register with the Registrar of Companies, and all three are extensions of the parent company — not separate legal entities. But the similarities end there.

The single most consequential difference is revenue. A liaison office cannot earn a single rupee in India. A project office can earn revenue only from the specific project it was set up to execute. A branch office can generate revenue from multiple permitted activities indefinitely. This distinction drives everything else — tax liability, compliance burden, duration, and closure complexity. If you pick the wrong structure, you either overpay on compliance or risk RBI enforcement for exceeding your permitted scope.

Under the FEM (Establishment in India of a Branch Office or a Liaison Office or a Project Office) Regulations, 2016 (Notification No. FEMA 22(R)/2016-RB dated March 31, 2016), each structure has a defined set of permitted activities. The RBI's Draft Foreign Exchange Management (Establishment in India of a Branch or Office) Regulations, 2025 proposes removing minimum net worth and profit track record requirements, but until finalized, the 2016 thresholds remain enforceable.

Quick Comparison Table

RBI Approval Process and Setup

All three structures fall under the same FEMA regulation, but the approval pathway differs significantly.

Liaison Office and Branch Office

Both require prior RBI approval through an Authorized Dealer Category-I Bank using Form FNC. The AD Bank processes the application if the parent company's principal business falls in a sector permitting 100% FDI under the automatic route. If the business falls under the government approval route — or if the applicant is an NGO or government body — the RBI forwards the application to the Ministry of Finance.

Processing takes 40-45 days. The RBI issues an approval letter valid for 6 months, within which the office must be set up and begin operations. Required documents include: notarized Certificate of Incorporation (English translation if applicable), audited financial statements, banker's report on the parent company, passport copies of authorized signatories, and a commitment letter from the designated bank.

Project Office

Project offices enjoy a general permission under the FEM Regulations. A foreign company that has secured a contract from an Indian company to execute a project in India can set up a PO without prior RBI approval, provided: (a) the project is funded by inward remittance from abroad, or (b) the project is funded by a bilateral or multilateral international financing agency, or (c) the foreign company has been awarded a contract by an Indian company and the contract value does not exceed USD 5 million. The AD Bank must be notified within 10-15 days of setup.

If the project is funded by the Indian client directly, or the contract value is high with no external financing, RBI approval may be needed. Proprietary concerns (sole proprietorships) established abroad cannot open a project office in India.

Tax Treatment: The 35% Foreign Company Rate

The tax difference between these three structures is stark. Since April 2024 (Finance Act, 2024), the corporate tax rate for foreign companies — including branch offices and project offices — has been reduced from 40% to 35%. With surcharge and cess, the effective rate ranges from 36.40% to 38.22%, depending on income levels.

Compare this with a domestic subsidiary company that can opt for the concessional rate of 22% under Section 115BAA of the Income Tax Act, 1961 (effective rate approximately 25.17% with surcharge and cess). That is a 11-13 percentage point gap — a substantial cost for revenue-generating operations.

Liaison Office: No Tax If Compliant

A liaison office that stays within its permitted scope generates no Indian income and has no income tax liability. It does not need to file an income tax return in most cases. However, if the Income Tax Department determines the LO is effectively carrying on business — signing contracts, negotiating deals, earning commissions — it can deem the LO a Permanent Establishment under the applicable DTAA and impute taxable income. Multiple tribunal rulings have gone this way.

Project Office and Branch Office: Full Taxation

Both the PO and BO are taxed on profits attributable to Indian operations at the 35% foreign company rate. Transfer pricing rules under Sections 92-92F of the Income Tax Act apply to all transactions with the parent company. Documentation under Rule 10D is mandatory. If gross receipts exceed the threshold under Section 44AB, a tax audit by a practicing chartered accountant is required, with the report due by October 31 of the assessment year.

Minimum Alternate Tax (MAT) at 15% of book profits applies where tax payable under normal provisions is lower.

Duration and Renewal Rules

Duration is where the three structures diverge most dramatically.

A liaison office is approved for a fixed period — typically 3 years (2 years for construction sector and NBFC entities). Renewal requires a fresh application through the AD Bank with justification for continued presence. The RBI can refuse renewal if the LO has not served its stated purpose. Under the Draft 2025 Regulations, the RBI proposes removing this tenure cap, but until finalized, the 3-year limit stands.

A project office exists for the duration of the project. Once the project is completed or wound up, the PO must close. There is no renewal — only project extension if the contract is amended. This makes it the most naturally time-bound structure.

A branch office has no fixed tenure. It continues indefinitely until the parent company decides to close it, subject to annual compliance. This makes it the only unincorporated structure suitable for long-term, ongoing operations.

Closure and Repatriation

Closing any of these three structures requires clearance from two authorities: the Registrar of Companies (ROC/MCA) and the RBI via the AD Bank.

The process involves: (1) filing Form FC-2 with the ROC, attaching all annual Forms FC-3 and FC-4 filed during the office's existence; (2) obtaining a No Objection Certificate from the Income Tax Department; (3) submitting closure application to the AD Bank with financial statements, asset inventory, and repatriation calculation; (4) RBI permission to repatriate the remaining balance to the parent company.

For project offices, closure is relatively straightforward — the project ends, surplus funds are repatriated after settling all Indian liabilities (vendor dues, employee settlements, taxes). For liaison offices, the process is simpler because there is no Indian income to settle tax on — but all AACs must have been filed consistently. For branch offices, closure is the most complex because outstanding tax liabilities, ongoing contracts, and employee settlements must all be resolved.

A critical compliance point: failure to file the Annual Activity Certificate for three consecutive years triggers automatic closure. The AD Bank issues a notice, and if the entity does not respond within 30 days, it proceeds with closure and reports to the RBI, Enforcement Directorate, and ROC.

Which Should You Choose?

Choose Liaison Office if:

• You want to explore the Indian market before committing capital — market research, distributor meetings, relationship building
• Your parent company has a shorter track record (3 years profitable vs 5 for BO) or lower net worth (USD 50,000 vs USD 100,000)
• You have no plans to generate revenue in India for the next 1-3 years
• You need a low-cost, low-compliance presence while evaluating whether to incorporate a subsidiary
• You want to avoid Indian income tax liability entirely

Choose Project Office if:

• Your foreign company has been awarded a specific contract by an Indian entity — infrastructure, engineering, IT implementation, construction
• The engagement has a defined start and end date
• You need to earn revenue from the project but do not plan ongoing Indian operations
• You want the fastest setup — general permission with AD Bank notification in 10-15 days, no prior RBI approval needed in most cases
• You want automatic closure on project completion rather than a separate winding-up process

Choose Branch Office if:

• You need an ongoing, revenue-generating presence in India without incorporating
• Your parent company has a strong financial track record (5 of 7 years profitable, USD 100,000+ net worth)
• You want to provide professional/consultancy services, IT development, or handle export/import directly
• You need operational flexibility across multiple permitted activities, not just one project
• You accept the 35% foreign company tax rate as a cost of not incorporating

Consider a Subsidiary Instead if:

• You want the lower 22-25% domestic tax rate under Section 115BAA
• You plan long-term operations with independent fundraising capability
• You need limited liability protection separate from the parent

Common Mistakes

• Using a liaison office to test-sell products: Foreign companies sometimes have their LO staff take orders, negotiate pricing, or facilitate payments — all of which constitute commercial activity. The RBI's Annual Activity Certificate audit catches this, and the consequences include show-cause notices and forced closure.
• Setting up a branch office when a project office suffices: If you have a single contract with defined scope and timeline, a project office is faster to set up (10-15 days vs 40-45 days), does not require minimum net worth or profit track record, and closes automatically. A branch office for one project means years of unnecessary compliance.
• Ignoring the tax gap between unincorporated and incorporated structures: At 35% (effective 36.40-38.22%), a BO or PO pays significantly more tax than a wholly owned subsidiary at 22% (effective 25.17%). For annual profits above INR 50 lakh, the tax savings from incorporating a subsidiary exceed the additional compliance costs.
• Failing to file the Annual Activity Certificate: Three consecutive years of non-filing triggers automatic closure by the AD Bank, with reports to the Enforcement Directorate. This is not a theoretical risk — it is actively enforced.
• Assuming a project office can take on new projects: A PO is approved for a specific contract. If the parent company wins a second contract in India, it needs a separate PO or must convert to a branch office. Expanding scope without RBI knowledge violates FEMA terms.

Practical Example

Consider Meridian Engineering AG, a Swiss infrastructure firm evaluating India entry. They have been awarded a INR 25 crore bridge construction contract by an Indian state government entity, with a 30-month project timeline. They also want to explore the Indian market for future contracts.

Option A: Project Office only. Setup in 10-15 days via AD Bank notification (general permission applies — project funded by inward remittance from Switzerland). Revenue of INR 25 crore is taxed at 36.40% effective rate (income under INR 1 crore profit margin assumed at INR 3.75 crore = tax of approximately INR 1.36 crore). PO closes automatically when the bridge is completed. Total compliance cost over 30 months: approximately INR 4-5 lakh (CA fees for AAC, tax filings, ROC filings).

Option B: Liaison Office + Project Office. The LO handles market research, distributor meetings, and relationship building for future contracts, while the PO executes the bridge project. LO setup takes 40-45 days and costs approximately INR 2-3 lakh for professional fees. The LO generates no revenue and has no tax liability. When the bridge project ends, the PO closes automatically; the LO continues for up to 3 years while Meridian evaluates further investment. If they win more contracts, they can convert the LO to a branch office or incorporate a subsidiary.

Option C: Branch Office. Setup takes 40-45 days. Meridian needs a USD 100,000 net worth and 5-of-7-year profit track record. The BO can execute the bridge project AND pursue other consulting/service contracts simultaneously. Annual compliance is heavier — income tax returns, possible tax audit, transfer pricing documentation, AAC, ROC filings. Estimated annual compliance cost: INR 6-8 lakh. But if Meridian plans multiple projects and long-term Indian operations, the BO avoids the overhead of opening and closing separate POs for each contract.

Verdict: For Meridian's situation — one confirmed project with market exploration — Option B (LO + PO) is optimal. It separates the revenue-generating project from the market research activity, keeps tax exposure limited to project profits, and preserves flexibility.

Key Takeaways

• All three structures — LO, PO, and BO — are governed by the same FEMA regulation but have fundamentally different rules on revenue generation, duration, and compliance.
• A liaison office cannot earn any Indian income. A project office can earn only from its specific project. A branch office can earn from multiple permitted activities.
• The foreign company tax rate is 35% (effective 36.40-38.22%) — significantly higher than the 22% (effective 25.17%) available to domestic subsidiaries under Section 115BAA.
• Project offices have the fastest setup (10-15 days, general permission) and simplest closure (automatic on project completion). Branch offices take 40-45 days and have no end date.
• Parent company eligibility thresholds differ: LO requires USD 50,000 net worth and 3-of-5 years profitable; BO requires USD 100,000 and 5-of-7 years. PO has no fixed threshold.
• Missing three consecutive Annual Activity Certificate filings triggers automatic closure — enforced by the RBI through AD Banks.

Need help choosing between a liaison office, project office, or branch office? Beacon Filing provides India entry strategy advisory, including RBI applications, ROC registrations, and ongoing compliance management for all three structures.