# Converting a Branch or Liaison Office into an Indian Subsidiary

> Source: https://krystal7.com/insights/convert-branch-liaison-office-to-subsidiary-india
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 22 Oct 2026; updated 25 Oct 2026
> Summary: Converting a branch office to subsidiary form in India means incorporating, selling office assets at up to book value and closing via the AD bank.

*Written by CA Nandini, Krystal7 Consultants. Last updated 26 October 2026.*

## AI Overview Summary

- Indian law has no form that converts a branch or liaison office into a subsidiary. The parent incorporates one, moves the business and closes the office through its AD bank.
- Paragraph 11 of the RBI Master Direction allows a sale of office assets to a wholly owned subsidiary only on closure. The price cannot exceed the book value the statutory auditor certifies.
- A branch with income between INR 1 crore and INR 10 crore pays an effective 37.128 percent. A subsidiary under section 200 pays 25.168 percent.
- Section 70(1)(c) of the Income Tax Act, 2025 takes a transfer of capital assets to a wholly owned Indian subsidiary outside capital gains. Section 71 withdraws the relief if ownership changes within eight years.
- The office applies to cancel GST in Form GST REG-16 within 30 days and files GSTR-10 and its last AAC. It reports the closure to the Registrar within 30 days under section 380(3).

**Indian law has no procedure that converts a branch office (BO) or liaison office (LO) into a subsidiary. The foreign company incorporates an Indian subsidiary and moves the business, staff and assets into it. It then closes the office through its AD bank under FEMA 22(R)/2016-RB. The RBI Master Direction caps the price of office assets sold to the subsidiary at book value. The usual reason is tax. A branch pays 35 percent plus surcharge and cess, while a subsidiary under section 200 pays an effective 25.168 percent.**

This page explains when the move makes sense and sets out the steps in order with a timeline. It covers the transfer of assets, contracts and employees, closure with the AD bank and the Registrar, PAN, TAN and GST, and the overlap period. A worked example puts rupee figures on a Japanese company's Bengaluru branch.

## Can a branch or liaison office be converted into a subsidiary?

Not directly. FEMA 22(R)/2016-RB (FEMA 22(R) on this page) and the RBI Master Direction for these offices cover opening, running and closing an office. Neither has a form that turns the office into a company. The Companies Act, 2013 has none either, because the office is part of the foreign company and has no shares to convert.

The rules do use the word. Paragraph 5(ii) of the Master Direction covers LOs of NBFCs and construction and development companies, whose validity is two years. At expiry they "shall have to either close down or be converted" into a joint venture or wholly owned subsidiary. The steps are still to incorporate a subsidiary, transfer the business and close the office.

| Move | Route | Source |
|---|---|---|
| LO to BO | AD bank upgrade under advice to RBI, if the parent meets the BO tests; same PAN, bank account redesignated | RBI FAQs 10 and 5 |
| LO or BO to subsidiary | No conversion form; incorporate the subsidiary, transfer assets, close the office | FEMA 22(R), regulations 4(k) and 4(m) |
| Assets of the office to the subsidiary | AD bank approval, only on closure, at no more than book value | Master Direction, paragraph 11 |
| Closure of the office | Application to the designated AD bank with the paragraph 10 documents | Master Direction, paragraph 10(i) |
| Winding up rules for the closure | Chapter XX of the Companies Act applies only if the foreign company raised money by issuing securities in India | Companies Act, 2013, section 391(2) |

Sources: RBI, FEMA 22(R)/2016-RB as amended up to 21 Jan 2019; Master Direction on BO, LO and PO, updated as on 18 May 2021; RBI FAQs of 26 Dec 2016; Companies Act, 2013, section 391; all read 26 Oct 2026. RBI's FEMA notifications list, checked 26 Oct 2026, shows no final replacement for FEMA 22(R).

## When does moving to a subsidiary make sense?

It makes sense in three cases. The office has outgrown its permitted activities, the tax gap costs more than the move, or the office is creating permanent establishment (PE) risk. A subsidiary can do any business the FDI rules allow, pays domestic company tax and limits the parent's liability.

### The tax rate gap

A branch pays tax as a foreign company. For tax year 2026-27, the First Schedule to the Finance Act, 2026 sets 35 percent. Surcharge is 2 percent above ₹1 crore of income and 5 percent above ₹10 crore, and cess of 4 percent applies on top. A domestic company under section 200 of the Income Tax Act, 2025 pays 22 percent, plus a 10 percent surcharge and 4 percent cess.

| Entity and income band | Base rate | Surcharge | Effective rate |
|---|---|---|---|
| Branch, income up to ₹1 crore | 35% | Nil | 36.40% |
| Branch, income above ₹1 crore up to ₹10 crore | 35% | 2% | 37.128% |
| Branch, income above ₹10 crore | 35% | 5% | 38.22% |
| Subsidiary under section 200, any income | 22% | 10% | 25.168% |
| Subsidiary not under section 200, turnover up to ₹400 crore, income above ₹1 crore up to ₹10 crore | 25% | 7% | 27.82% |

Source: Finance Act, 2026, First Schedule; Memorandum to the Finance Bill, 2026 for the section 200 surcharge and the 4 percent cess; our arithmetic; read 26 Oct 2026.

The subsidiary's dividends then bear tax under section 207 at 20 percent, or a lower treaty rate. On our reading of the Income Tax Act, 2025, a branch pays no separate tax when it remits its after tax profit. So the real gap depends on how much profit the subsidiary pays out. Our guide to [corporate tax rates for foreign companies](/insights/corporate-tax-rates-in-india-for-foreign-companies) sets out the other rates.

### Scope limits under the RBI rules

An LO may only represent the parent, promote exports and imports, promote technical or financial collaboration, and act as a communication channel. Regulation 2 of FEMA 22(R) says it "does not undertake any commercial/trading/industrial activity". Its approval runs for three years, and two years for NBFCs and construction companies. Our [liaison office guide](/insights/liaison-office-in-india-rbi-rules) covers the limits.

A BO may do eight listed activities, from import and export of goods to IT services and product support. Our [branch office guide](/insights/branch-office-in-india-rbi-rules) lists them. Services a branch supplies to its head office are not exports for GST. CBIC Circular No. 161/17/2021-GST of 20 Sep 2021 says so, and confirms that an Indian subsidiary supplying its foreign parent can export.

### Permanent establishment exposure

An LO that negotiates or signs contracts steps outside liaison work and can become a PE of the parent. A branch is almost always a PE. In Hyatt International Southwest Asia Ltd v. Additional Director of Income Tax, 2025 INSC 891, the Supreme Court held that "temporary or shared use of space is sufficient" for a fixed place PE.

A subsidiary is a separate taxpayer, so its profit is taxed in its own hands. The parent can still have a PE through the subsidiary's staff or through secondees, so the move reduces the risk without removing it. Our guide to [avoiding PE risk in India](/insights/how-to-avoid-permanent-establishment-risk-in-india) covers the tests.

| Point | Liaison office | Branch office | Subsidiary (Private Limited) |
|---|---|---|---|
| Income in India | None allowed | Yes, within eight activities | Any business the FDI rules allow |
| Income tax | No income; Form 162 each year | 35% plus surcharge and cess | 22% under section 200, plus 10% surcharge and cess |
| Tax on sending profit abroad | Not applicable | None, on our reading | 20% on dividends, or the treaty rate |
| Services to the parent under GST | No supplies | Not exports | Exports if the other conditions hold |
| Validity | 3 years, renewable | No fixed period | Perpetual |
| Liability | Foreign company fully liable | Foreign company fully liable | Limited to the subsidiary |

Sources: FEMA 22(R), regulations 2 and 4; Master Direction, paragraph 5 and the activity annex; CBIC Circular No. 161/17/2021-GST; Income Tax Act, 2025, sections 200 and 207; read 26 Oct 2026.

Our [branch office vs subsidiary guide](/insights/branch-office-vs-subsidiary-in-india-for-uae-company-2026-expansion-guide) runs the same comparison for a UAE parent.

## What are the steps, in order?

Build the subsidiary first and close the office last. The staff always need a legal employer and the customers always need a legal supplier. We run the work in this order.

1. **Plan.** List every contract, employee, asset, registration and open tax year of the office.
2. **Incorporate the subsidiary.** File SPICe+ with the parent and a nominee as subscribers, and report the subscriber shares on Form FC-GPR within 30 days.
3. **Fund it.** Bring in share capital through banking channels, allot within 60 days of receipt and file FC-GPR within 30 days of allotment.
4. **Register it.** Open the bank account, then take GST, PF, ESI and the state shops and establishments registration as they apply.
5. **Move the contracts.** Novate customer, vendor and lease contracts to the subsidiary from a fixed date.
6. **Move the employees.** Issue new contracts from the same date, with past service recognised.
7. **Transfer the assets.** Sell eligible assets at no more than book value, with the statutory auditor's certificate and AD bank approval.
8. **Close GST.** Apply for cancellation in Form GST REG-16 within 30 days, then file the final return in GSTR-10.
9. **Finish the office's last year.** Audit it, file the Annual Activity Certificate (AAC) and the last tax return or Form 162.
10. **Close with the AD bank.** File the paragraph 10 documents and remit the closing balance.
11. **Close with the Registrar and the tax department.** Report the closure under section 380(3), and cancel the TAN after the last TDS statement.

| Step | Time on our filings, or the legal limit | Source |
|---|---|---|
| Name reservation (RUN or SPICe+ Part A) | 48 working hours | Krystal7 timeline, Oct 2026 |
| Drafting the memorandum and articles | 36 working hours after documents arrive | Krystal7 timeline |
| Apostille and notarisation abroad | About 4 to 5 business days for the client | Krystal7 timeline |
| SPICe+ filed, then approved | Within 24 working hours of apostilled documents, then 96 to 120 hours | Krystal7 timeline |
| Bank account, then GST registration | About 30 calendar days after incorporation, then about 48 hours | Krystal7 timeline |
| FC-GPR | 30 days from each issue of shares | FEMA 395/2019-RB, regulation 4(1) |
| GST cancellation application | 30 days from the transfer of the business | CGST Rules, rule 20 |
| Final GST return (GSTR-10) | 3 months from the date of cancellation or of the order, whichever is later | CGST Act, section 45; Circular No. 69/43/2018-GST |
| AAC with audited financial statements | By 30 September after each 31 March | FEMA 22(R), regulation 4(l) |
| Form 162 for an LO's last year | 8 months from the end of the financial year | Income Tax Rules, 2026, rule 234 |
| AD bank closure | No time limit in the Master Direction | Master Direction, paragraph 10 |
| Return of alteration to the Registrar | 30 days from the alteration | Companies Act, 2013, section 380(3) |

Source: Krystal7 incorporation timeline restated Oct 2026; the rules named in each row; read 26 Oct 2026. Land border parents need Press Note 3 approval for the subsidiary, which adds about 6 months on our filings.

Our [SPICe+ guide](/insights/spice-incorporation-spice-plus-guide-2026) and [FC-GPR timeline](/insights/fc-gpr-filing-timeline-and-process-for-foreign-founders) cover steps 2 and 3.

## How do you transfer assets and contracts to the subsidiary?

Regulation 4(k) of FEMA 22(R) lets the office ask its AD bank to approve a transfer of its assets. The buyer can be a joint venture, a wholly owned subsidiary or another entity in India. Paragraph 11 of the Master Direction sets the conditions.

1. The office must have followed the operating rules, including regular AACs, copies to the Director General of Income Tax (International Taxation) and a PAN.
2. A sale to a joint venture or wholly owned subsidiary is allowed only when the foreign company intends to close the office.
3. The statutory auditor certifies each asset's date of purchase, cost, depreciation and book value, and confirms no revaluation. "The sale consideration should not be more than the book value in each case."
4. The assets must have been bought from inward remittances. Goodwill and pre operative expenses cannot be included, and revenue expenses such as leasehold improvements cannot be capitalised and transferred.
5. The AD bank ensures that all applicable taxes are paid.

### Income tax on the transfer

Section 70(1)(c) of the Income Tax Act, 2025 covers a company's transfer of a capital asset, other than stock in trade, to its subsidiary. The Act does not treat it as a transfer if two conditions hold. The parent or its nominees hold the whole share capital, and the subsidiary is an Indian company. On our reading this covers a foreign company selling its branch assets to its wholly owned Indian subsidiary. A joint venture with an outside shareholder does not qualify.

Section 71(1) withdraws the relief if, within eight years, the subsidiary turns the asset into stock in trade or the parent stops holding the whole share capital. We hold the nominee's share expressly for the parent and flag the eight year window before any investor joins.

The foreign company and its subsidiary are associated enterprises under section 162, so the sale is also an international transaction for transfer pricing. FEMA caps the price at book value, while transfer pricing asks for an arm's length price. We get an asset valuation before pricing, so the FEMA file and the transfer pricing file in Form 48 show the same numbers.

### GST on the transfer

A branch that sells capital goods on which it took input tax credit pays the higher of two amounts under section 18(6) of the CGST Act. One is the credit taken, less five percentage points for every quarter or part of a quarter since the invoice (rule 40(2) of the CGST Rules, 2017). The other is tax on the transaction value. The branch and the subsidiary are related, but rule 28 accepts the invoice value where the buyer can take full credit.

A branch may transfer its business with a specific provision for the transfer of liabilities. Section 18(3) and rule 41 then let it pass unused credit to the subsidiary in Form GST ITC-02. A practising chartered or cost accountant certifies the transfer, and the subsidiary accepts it on the portal. Section 22(3) makes the transferee of a going concern liable to register from the date of transfer.

### Contracts and leases

The foreign company signed the customer contracts, so each needs a novation to the subsidiary or a fresh contract. We use one three party letter per customer that names the effective date. The branch collects its own invoices raised up to that date. Leases need the landlord's consent. Our [wholly owned subsidiary guide](/insights/wholly-owned-subsidiary-in-india) covers the subsidiary's own setup.

## How do employees move without losing benefits?

The subsidiary is a new employer, so each employee signs a new contract with it. Section 73 of the Industrial Relations Code, 2020 protects workers with one year of continuous service when an establishment passes to a new employer. No retrenchment notice or compensation is due if three conditions all hold:

1. Service is not interrupted by the transfer.
2. The terms after the transfer are no less favourable.
3. The new employer is liable to pay retrenchment compensation on the basis of continuous service, treating the transfer as no break.

Gratuity needs five years of continuous service under the Code on Social Security, 2020, or one year for fixed term staff. The four labour codes have been in force since 21 Nov 2025. An employee with four years in the branch loses the gratuity credit unless the subsidiary recognises that service. We write past service into every offer letter, and the branch pays the subsidiary the accrued gratuity liability. The branch auditor can then certify that employee dues are met, as paragraph 10(i)(b) of the Master Direction requires.

Provident fund moves with the employee. The subsidiary registers its own establishment, and each employee transfers the old balance to it through the EPFO member portal. Our guide to [PF and ESI for foreign owned companies](/insights/pf-esi-foreign-owned-company-international-workers) covers registration.

## How do you close the office with the AD bank?

The office applies to its designated AD bank with the documents in paragraph 10(i) of the Master Direction. Regulation 4(m) of FEMA 22(R) lists the same set. The AD bank then allows the closing balance to go abroad.

| Document | Who provides it | Note |
|---|---|---|
| Copy of the RBI or AD bank approval for the office | Office | Paragraph 10(i)(a) |
| Auditor's certificate on the remittable amount, with a statement of assets and liabilities and how assets were disposed of | Auditor | Paragraph 10(i)(b) |
| Auditor's confirmation that all Indian liabilities, including arrears of gratuity and other employee benefits, are met or provided for | Auditor | Paragraph 10(i)(b) |
| Auditor's confirmation that no income from outside India remains unrepatriated | Auditor | Paragraph 10(i)(b) |
| Confirmation that no legal proceedings are pending in any Indian court and no legal bar to remittance exists | Parent company | Paragraph 10(i)(c) |
| Registrar of Companies report on Companies Act compliance, where applicable | Office | Paragraph 10(i)(d) |
| Proof that every AAC was filed | AD bank checks | Paragraph 10(i)(e) |
| Any other document the AD bank or RBI named in the approval | Office | Paragraph 10(i)(f) |

Source: RBI Master Direction on BO, LO and PO, updated as on 18 May 2021, paragraph 10; FEMA 22(R), regulation 4(m); read 26 Oct 2026.

The list does not name an income tax clearance or a no dues certificate. The auditor's certificate covers tax liabilities, and item (f) lets the bank ask for more. RBI FAQ 1 tells the AD bank to report an office that has not filed its AACs, so we clear any backlog first. Remittance of the closing balance uses Forms 145 and 146, which replaced Forms 15CA and 15CB. Our [Form 145 and 146 guide](/insights/form-15ca-and-15cb-requirements-guide-2026) covers them.

## What closes with the Registrar and the tax department?

The office registered with the Registrar under Chapter XXII of the Companies Act, 2013, so it reports the closure there too. Section 380(3) requires a return of any alteration in the registered particulars within 30 days. We treat the closure of the place of business as such an alteration and file it in Form FC-2. The office also files its last accounts under section 381 and its last annual return under section 384.

| Registration | What happens | Source |
|---|---|---|
| PAN | Keep it. It belongs to the foreign company, which still files returns for the office years and receives dividends from the subsidiary | Our practice |
| TAN | Cancel after the last quarterly TDS statement (Form 138 for salaries, due 31 May for the January to March quarter) and the last certificates | Income Tax Rules, 2026, rule 219 |
| GST registration | Apply in Form GST REG-16 within 30 days; pay under section 29(5) on stock and capital goods still held; file GSTR-10 | CGST Act, sections 29 and 45; rule 20; Circular No. 69/43/2018-GST |
| Last income tax return or Form 162 | BO files its return for the last tax year; LO files Form 162 within 8 months | Income Tax Act, 2025, section 505; rule 234 |
| Registrar | Form FC-2 within 30 days; final accounts and annual return | Companies Act, 2013, sections 380(3), 381 and 384 |

Source: the provisions named in each row; read 26 Oct 2026.

On cancellation, section 29(5) of the CGST Act charges the higher of two amounts on the stock and capital goods still held. One is the credit on them, and the other is the output tax on them. Circular No. 69/43/2018-GST measures the stock on the day before cancellation and allows payment with GSTR-10. If every asset has already moved to the subsidiary, the payment is nil. A liaison office makes no taxable supplies, so it usually has no GST registration to close.

## How long is the overlap period and what does it cost?

The overlap runs from the subsidiary's incorporation to the AD bank's closure of the office. In our worked example it lasts about eleven months, because the office cannot close until its last year is audited. Running both entities in that period costs money.

1. **Two sets of statutory work.** The office files its AAC, Forms FC-3 and FC-4, and a return or Form 162. The subsidiary starts its own audit, AOC-4, MGT-7, ITR-6 and FLA return.
2. **Two GST registrations and two payrolls** until the transfer date, at least for the handover month.
3. **Two bank accounts**, and rent on the office until the lease moves.
4. **Professional fees.** Our published band for an India subsidiary for a foreign parent is USD 1,200 to USD 1,700. Our compliance retainer starts at USD 300 a month, and we quote the closure work in writing within 48 hours of a scoping call.

Fix the transfer date at a month end, ideally 31 March. The office then closes a full final year and needs one audit, one AAC and one return for its last year.

## Worked example

JP KK, a Japanese software company, has run a Bengaluru branch since 2022. The branch does IT services for Indian customers and employs 14 people. JP KK incorporates JP India Private Limited and moves the business on 31 Mar 2027. All figures and dates are assumptions for illustration.

### The tax gap

We compare tax year 2027-28 on a taxable profit of ₹4,00,00,000. The subsidiary opts for section 200 and pays out all its profit after tax. JP KK claims the 10 percent dividend rate under Article 10(2) of the India Japan treaty, with a tax residency certificate and Form 41.

| Item | Branch (₹) | Subsidiary (₹) |
|---|---|---|
| Taxable profit | 4,00,00,000 | 4,00,00,000 |
| Income tax at 35% or 22% | 1,40,00,000 | 88,00,000 |
| Surcharge at 2% or 10% | 2,80,000 | 8,80,000 |
| Cess at 4% | 5,71,200 | 3,87,200 |
| Corporate tax | 1,48,51,200 | 1,00,67,200 |
| Profit after tax | 2,51,48,800 | 2,99,32,800 |
| Tax on sending it to Japan | Nil | 29,93,280 |
| Cash reaching Japan | 2,51,48,800 | 2,69,39,520 |
| Total Indian tax | 1,48,51,200 | 1,30,60,480 |

Source: Finance Act, 2026, First Schedule; Finance Bill, 2026 memorandum; Income Tax Act, 2025, sections 200 and 207; India Japan treaty, Article 10; our arithmetic; read 26 Oct 2026.

The subsidiary leaves ₹17,90,720 more in Japan each year on these figures. The gap grows if the subsidiary keeps profit in India and shrinks if Japan gives less credit for Indian tax.

### The asset transfer

The branch's audited books at 31 Mar 2027 show three asset groups, all bought on 1 Apr 2024 from head office remittances.

| Asset | Cost (₹) | Book value (₹) | Can it move? |
|---|---|---|---|
| Laptops and servers | 30,00,000 | 15,00,000 | Yes, at up to ₹15,00,000 |
| Office furniture | 12,00,000 | 8,40,000 | Yes, at up to ₹8,40,000 |
| Leasehold improvements | 14,00,000 | 9,60,000 | No; paragraph 11 bars capitalised revenue expenses |
| Total sale price | Not applicable | 23,40,000 | Price cap for the sale |

Source: RBI Master Direction on BO, LO and PO, paragraph 11; read 26 Oct 2026. The leasehold improvements stay with the premises.

JP KK holds every share of the subsidiary, one through a nominee, so section 70(1)(c) takes the sale outside capital gains on our reading. Section 71 withdraws the relief if, before 31 Mar 2035, JP KK stops holding the whole capital or the subsidiary turns the assets into stock in trade.

We assume GST at 18 percent on both groups and full credit taken on purchase. From 1 Apr 2024 to 31 Mar 2027 is twelve quarters, so the credit falls by 60 percentage points.

| Item | Laptops and servers (₹) | Furniture (₹) |
|---|---|---|
| Credit taken on purchase at 18% | 5,40,000 | 2,16,000 |
| Credit left after 60 points (A) | 2,16,000 | 86,400 |
| Tax on the sale price at 18% (B) | 2,70,000 | 1,51,200 |
| Payable, the higher of A and B | 2,70,000 | 1,51,200 |

Source: CGST Act, section 18(6); CGST Rules, rules 28 and 40(2); our arithmetic on the stated assumptions; read 26 Oct 2026.

The branch charges ₹4,21,200 of GST on its invoice. The subsidiary can claim that credit in its own return.

### The calendar

| Date | Event | Due or filed |
|---|---|---|
| 1 Dec 2026 | JP India Private Limited incorporated | FC-GPR for subscriber shares by 31 Dec 2026 |
| Early Jan 2027 | Bank account opens; GST follows | About 30 days, then about 48 hours |
| 31 Mar 2027 | Assets sold; 14 employees, customers and lease move from 1 Apr 2027 | AD bank approval for the asset sale |
| 30 Apr 2027 | Branch GST cancellation | Form GST REG-16, within 30 days of the transfer |
| 31 May 2027 | Last TDS statement for January to March 2027 | Form 138; then cancel the TAN |
| 30 Sep 2027 | Last AAC with audited accounts | AD bank and DGIT (International Taxation) |
| October 2027 | Closure application to the AD bank | Paragraph 10 documents; Forms 145 and 146 for the remittance |
| Within 30 days of closure | Registrar told of the closure | Form FC-2 |

Source: FEMA 395/2019-RB; FEMA 22(R), regulation 4(l); CGST Rules, rule 20; Income Tax Rules, 2026, rule 219; Companies Act, 2013, section 380(3); read 26 Oct 2026.

The branch also files its return for tax year 2026-27 with Form 48, because the asset sale is an international transaction. JP KK keeps its PAN for that return and for dividends from the subsidiary.

## Common mistakes

1. **Closing the office before the subsidiary can employ and invoice.** Fix: build the subsidiary, its bank account and GST registration before the transfer date.
2. **Selling assets above book value or including fit out costs.** Fix: price each asset at or below the auditor's book value and leave leasehold improvements out.
3. **Ignoring GST on the asset sale.** Fix: work out the section 18(6) amount for each capital asset and charge it on the invoice.
4. **Breaking the section 70(1)(c) relief.** Fix: keep the subsidiary wholly owned for eight years, or price the capital gains tax into any investor deal.
5. **Leaving out past service in the new contracts.** Fix: recognise past service for gratuity and leave in every offer letter.
6. **Surrendering the foreign company's PAN.** Fix: keep it for the last returns, assessments and dividends.
7. **Applying for closure with AACs missing.** Fix: file every pending AAC before the closure application.
8. **Forgetting the Registrar.** Fix: file Form FC-2 within 30 days and obtain the Registrar's compliance report if the AD bank asks for it.

## Checklist for converting a branch or liaison office into a subsidiary

1. List the office's contracts, employees, assets, registrations and open tax years.
2. Compare the branch tax cost with the subsidiary's tax and dividend cost.
3. Check Press Note 3 if the parent has a land border beneficial owner.
4. Incorporate the subsidiary and file FC-GPR for the subscriber shares within 30 days.
5. Fund the subsidiary and report each allotment on FC-GPR.
6. Open the bank account and take GST, PF, ESI and shops registrations.
7. Novate customer, vendor and lease contracts from one transfer date.
8. Move employees on new contracts that recognise past service.
9. Get the auditor's asset certificate and AD bank approval, then sell at no more than book value.
10. Charge GST under section 18(6) and consider Form GST ITC-02.
11. Cancel the office's GST registration within 30 days and file GSTR-10.
12. File the last TDS statement, then cancel the TAN.
13. Audit the last year and file the AAC and the return or Form 162.
14. Apply to the AD bank for closure and remit the balance with Forms 145 and 146.
15. File Form FC-2 within 30 days of closure.

If you want us to run the subsidiary setup and the office closure as one project, write to us through our [foreign subsidiary service](/services/foreign-subsidiary.html).

## Key terms

- **Annual Activity Certificate (AAC)**: A Chartered Accountant's certificate, required by FEMA 22(R)/2016-RB, confirming that a liaison or branch office carried on only permitted activities in the year to 31 March. It is filed with audited financial statements by 30 September with the designated AD bank and the Director General of Income Tax (International Taxation), New Delhi. (https://krystal7.com/glossary#annual-activity-certificate)
- **Designated AD bank**: The one Authorised Dealer Category I bank that a foreign company names for all dealings of its branch, liaison or project office in India. It approves the office, receives the annual certificates and allows closure and the final remittance. (https://krystal7.com/glossary#designated-ad-bank)
- **Novation**: The replacement of one party to a contract with another, with the consent of everyone involved. When a branch moves its business to a subsidiary, each customer, vendor and lease contract is novated or signed afresh with the subsidiary. (https://krystal7.com/glossary#novation)
- **Form FC-2**: The return a foreign company files with the Registrar to report an alteration in the particulars it registered for its Indian place of business. Section 380(3) of the Companies Act, 2013 requires the return within 30 days of the alteration. (https://krystal7.com/glossary#form-fc-2)
- **Section 18(6) payment (GST)**: The amount a registered person pays when it sells capital goods on which it took input tax credit. It is the higher of the credit taken, reduced by five percentage points a quarter under rule 40(2), and the tax on the transaction value. (https://krystal7.com/glossary#section-18-6-cgst-payment)

## Frequently Asked Questions

### Can a branch office be converted directly into an Indian subsidiary?

No. Neither FEMA 22(R) nor the Companies Act, 2013 has a conversion form. The foreign company incorporates a subsidiary, moves the business and assets, and closes the branch through its AD bank.

### Can a liaison office be converted into a subsidiary?

Not directly, for the same reason. An LO can be upgraded to a branch office through the AD bank if the parent meets the branch tests (RBI FAQ 10). For a subsidiary, the parent incorporates one and closes the LO.

### Can the subsidiary use the branch's PAN, TAN or GSTIN?

No. The PAN belongs to the foreign company, and the subsidiary gets its own PAN and TAN through SPICe+. Our Haryana challan of 14 Aug 2026 shows ₹143 for PAN and TAN. The subsidiary takes its own GST registration.

### At what price can the office sell its assets to the subsidiary?

At no more than book value, certified by the statutory auditor. Paragraph 11 of the Master Direction also needs the assets to have been bought from inward remittances. Goodwill, pre operative expenses and leasehold improvements cannot be transferred.

### Does the foreign company pay capital gains tax on the asset transfer?

Not if section 70(1)(c) of the Income Tax Act, 2025 applies, on our reading. The subsidiary must be an Indian company wholly owned by the parent or its nominees. Section 71 withdraws the relief if that ownership ends within eight years.

### Is GST payable when the branch sells assets to the subsidiary?

Yes, for capital goods. Section 18(6) of the CGST Act charges the higher of the reduced credit and tax on the transaction value. The subsidiary can usually claim the tax as credit.

### Do employees lose their gratuity when they move?

Not if the subsidiary recognises their past service. Gratuity needs five years of continuous service under the Code on Social Security, 2020. We write past service into the offer letters and move the accrued liability with the staff.

### Does the AD bank need an income tax clearance before closure?

The Master Direction's closure list does not name one. The auditor certifies that all Indian liabilities, including tax, are met or provided for. The bank can still ask for any document it named in the approval.

### How long do the office and the subsidiary run side by side?

Until the office's last year is audited and the AD bank closes it. In our worked example that is about eleven months, from a December incorporation to an October closure. A 31 March transfer date keeps the office's last year clean.

### Does moving to a subsidiary remove permanent establishment risk?

It reduces the risk without removing it. The subsidiary is taxed on its own profit. The parent can still have a PE through people who act for it in India, so keep contract signing and secondments under review.

### Does a parent from a land border country face extra steps?

Yes. Its subsidiary needs government approval under Press Note 3, which adds about six months on our filings. The Ministry of Home Affairs clears the directors and the shareholding separately.

## Sources

- Reserve Bank of India, Notification No. FEMA 22(R)/2016-RB, 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, as amended up to 21 Jan 2019, regulations 2, 4(d), 4(k), 4(l) and 4(m), read 26 Oct 2026, https://rbi.org.in/scripts/NotificationUser.aspx?Id=10327&Mode=0
- Reserve Bank of India, Master Direction on Establishment of Branch Office, Liaison Office, Project Office or any other place of business in India by foreign entities, updated as on 18 May 2021, paragraphs 3, 4, 5, 10 and 11 and the activity annex, read 26 Oct 2026, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10404
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- Press Information Bureau, the four labour codes in force from 21 Nov 2025, 21 Nov 2025, read 26 Oct 2026, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463

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