Permanent establishment turns entirely on facts, and on the tax treaty between India and your own country. Nothing here is advice on your situation. It is written so you know which questions to ask and when to ask them, and the answer for your company needs a tax adviser who can see the detail.
You hired one engineer in Pune. Someone on your board asks whether that gives your company a taxable presence in India. Nobody around the table knows, and the question sits there.
It is a reasonable question, and the honest answer is that it depends on facts that are within your control. Here is what the concept means, what tends to raise the risk, and what genuinely helps.
What a permanent establishment is
Broadly, a permanent establishment is a presence in a country substantial enough that the country is entitled to tax the profits attributable to it, even though the company itself is incorporated somewhere else.
It matters because the consequence is not a filing. If your company is found to have one in India, profits attributable to that presence can be taxed in India, with the interest and penalties that follow from not having declared them.
The precise test comes from the double tax treaty between India and your country, so the thresholds differ depending on where you are incorporated. The broad categories, though, are recognisable.
The shapes it usually takes
A fixed place of business
A place at your disposal in India through which the business is carried on. An office is the obvious case. Where people worry is the less obvious one: an employee working from home, at your direction, with a long term arrangement and little else to point at.
A dependent agent
This is the category that catches most companies, and the one most worth understanding. Where a person in India habitually concludes contracts on your behalf, or habitually plays the principal role leading to contracts being concluded, that activity can create a presence for you regardless of job title.
Which is why the salesperson is the risky hire and the engineer usually is not. A developer writing code does not bind you to anything. A business development hire negotiating terms with Indian customers may be doing precisely that.
A service presence
Some treaties also treat the furnishing of services in a country, through employees, beyond a threshold period, as creating a presence. Whether this applies to you, and over what period, is treaty specific.
The hire that worries me is never the engineer. It is the business development person with an Indian title, an Indian email signature and authority to agree terms, hired by a company that has no Indian entity and has not thought about what that person is doing in its name.
Ankit Sarawagi, CPA, CA, MBA · LinkedInWhat tends to raise the risk
- The person negotiates or concludes contracts with Indian customers in your name
- They hold a title, business cards or an email signature that presents them as representing you in India
- They are your only presence in India and they are, in substance, the business there
- The arrangement is long running and exclusive rather than short and project based
- They work from a place you pay for or control
- Revenue is being earned from Indian customers and attributed entirely outside India
What an employer of record does, and what it does not
This is where a lot of marketing overstates the case, so it is worth being precise.
What it does. Employing through an EOR's Indian entity means a properly constituted Indian employer holds the employment relationship, operates payroll and meets the statutory obligations. Your company is a client of that entity rather than an unregistered foreign business directing staff in India with no structure at all. On most analyses that is a materially better position than the same person on a contractor agreement.
What it does not do. It does not change what the person actually does. If they are concluding contracts on your behalf in India, the dependent agent question is still live, because that analysis looks at the activity and the authority, not only at whose payroll they sit on.
So an employer of record reduces exposure. It does not switch it off, and any provider telling you otherwise is selling rather than advising.
What actually helps
Be clear about what the role does
Write down whether the person negotiates, agrees terms or signs anything. That single question drives most of the analysis.
Keep contracting authority outside India
If contracts with Indian customers are negotiated and concluded by people outside India, the dependent agent argument is much weaker.
Make the employment relationship properly constituted
An Indian employer, a real contract, statutory benefits and payroll operated correctly. A contractor invoice is the weakest version of this.
Be careful how the person is presented
Titles, signatures and letterheads that present someone as your representative in India are evidence, and they cost nothing to get right at the outset.
Get it reviewed before you scale
One engineer and a five person India sales team are different questions. Ask the second one before you build it, not after.
When to stop reading and get advice
Any of these is a reason to put the question to a tax adviser rather than work it out from an article:
- You are earning revenue from Indian customers
- Anyone in India negotiates or agrees commercial terms for you
- You have, or are planning, a sales or business development presence there
- The India team is becoming a substantial part of how the business runs
- You already have a contractor arrangement that has quietly run for years
We prepare the Indian filings for companies on both sides of this line, and we employ teams in India through our own entity. What we will not do is tell you that a service removes a tax risk that turns on your own facts.
The short version
Hiring one person in India does not automatically create a taxable presence. What they do matters far more than that they exist. The dependent agent category, where someone habitually concludes contracts in your name, is the one that catches companies out.
Employing through a properly constituted Indian employer puts you in a better position than directing a contractor with no structure. It reduces the risk rather than eliminating it, and the facts of the role still decide the answer.
We have seen that many of the foreign companies hiring in India often have questions about whether employing local staff could create a permanent establishment (PE) and trigger additional tax obligations.
Profitjets helps businesses manage the employment and payroll side of hiring in India, while companies assess their wider tax exposure with qualified tax advisers.
Our EOR services in India support local employment, but using an EOR does not automatically eliminate permanent establishment risk.
Frequently Asked Questions
Does hiring an employee in India create a permanent establishment?
Not automatically. It depends on what the person does, how they are presented and the treaty between India and your country. A developer writing code is a very different case from a salesperson negotiating terms with Indian customers in your name.
What is a dependent agent permanent establishment?
Broadly, where a person in India habitually concludes contracts on your behalf, or habitually plays the principal role leading to contracts being concluded, that activity can create a taxable presence for your company regardless of their job title. It is the category that catches most companies hiring into India.
Does using an employer of record remove permanent establishment risk?
No, it reduces it. Employing through a provider's Indian entity means a properly constituted Indian employer holds the relationship and meets the statutory obligations, which is a better position than directing a contractor with no local structure. It does not change what the person actually does, so the dependent agent question remains live if they conclude contracts for you.
Is a remote employee working from home in India a risk?
It can be relevant to the fixed place analysis, particularly where the arrangement is long running and the company has no other presence. It is one factor among several rather than decisive on its own, and it is treaty specific.
Which India hire carries the most permanent establishment risk?
Generally a sales or business development role, because that is the one most likely to involve negotiating or concluding contracts with Indian customers. Engineering, support and back office roles usually carry less, because they do not bind the company to anything.
What happens if a permanent establishment is found?
Profits attributable to that presence can be taxed in India, with interest and penalties for not having declared them, and there is typically a filing obligation that was missed. That is why it is worth resolving the question before building a team rather than after.
Written by
Ankit Sarawagi, CPA, CA, MBA
Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn
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