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Hiring in India can create corporate tax exposure even without an entity. This guide explains PE triggers, EOR limitations and treaty differences for US, UK, Australian and New Zealand employers, with practical scenarios, tax calculations and a checklist for reviewing your planned India operation.
Permanent establishment risk in India arises when a foreign business’s activities meet the taxable-presence test in an applicable tax treaty. An Indian subsidiary is not required. Employees working from India, local contract activity or services delivered through personnel can create exposure, depending on the facts and treaty wording.
Using an employer of record does not automatically prevent a permanent establishment. Nor does keeping every employee below 183 days. The practical question is whether your business is being carried on in India in a way that meets a relevant PE test.
For a founder approving an India hire, this changes the sequence of decisions. Assess the proposed work before choosing the employment arrangement. A payroll solution can support the arrangement you need, but it cannot decide the foreign company’s tax position.
This guide explains the rules and applies them to hiring decisions. It provides general information, not a tax opinion on a particular business. Country references assume the relevant enterprise qualifies for treaty benefits.
A permanent establishment, or PE, is a connection that can allow India to tax business profits of a foreign enterprise under a tax treaty. The analysis concerns the enterprise’s activities, rather than whether it has registered an Indian company.
Yes, one person can create exposure, although hiring one person does not automatically establish a PE. There is no general minimum headcount that protects a foreign employer.
For example, a person’s habitual contracting activities may require an agency PE analysis even without dedicated premises. Conversely, a large outsourced team does not automatically make the supplier’s office the foreign customer’s PE. These are different legal tests, not opposite ends of a headcount scale.
The Supreme Court’s e-Funds judgment of 24 October 2017 rejected PE findings on the facts before it. The decision shows why group relationships and Indian support operations must be examined against the treaty, rather than treated as proof by themselves.
No. Business connection is a domestic-law basis for taxing Indian-source income. PE is generally the treaty threshold used to allocate taxing rights over business profits.
Under section 9 of the Income-tax Act 2025, income arising through a business connection can be deemed to arise in India. Section 9(9) addresses agency activity and significant economic presence, among other matters.
For a qualifying treaty resident, section 159(4) preserves the application of more beneficial treaty provisions. A wider domestic business-connection rule does not, by itself, defeat treaty protection for business profits where the treaty requires a PE. Treaty eligibility and anti-abuse rules still need consideration.
The distinction matters when reviewing a tax memo. It should explain both the domestic charge and the applicable treaty restriction. A conclusion based only on one of them is incomplete.
The Income-tax Act 2025 applies from 1 April 2026, while earlier periods remain governed by the transition rules. The Income Tax Department’s explanation of the new Act explains this change.
Older judgments and treaty publications naturally refer to the Income-tax Act 1961. For current analysis, business connection is addressed in section 9 of the 2025 Act, and treaty relief in section 159. The corresponding older treaty-relief provision was section 90.
Always identify the period under review. A team hired in 2024 and still operating in 2026 may require analysis under both statutory frameworks. Updating section numbers does not remove exposure from earlier years.
The main routes relevant to employers are fixed-place PE, agency PE and service PE. Construction or installation activities have separate provisions in many treaties.
A location can create exposure when it has sufficient permanence, is at the enterprise’s disposal and is used to carry on its business. Ownership or a lease in the foreign company’s name is not the only way to establish that connection.
In Hyatt International Southwest Asia v Additional Director of Income Tax, decided on 24 July 2025, the Supreme Court upheld a fixed-place PE under the India–UAE treaty. The case concerned substantive operational rights in Indian hotels. Its relevance is the attention paid to actual control and business activity, not a rule that every service provider has a PE.
For your own premises review, ask whether the foreign enterprise can direct how the space is used. A dedicated team area with continuing access deserves closer examination than an employee’s occasional booking of an available desk. Reimbursement is evidence to assess, not an automatic legal verdict.
Yes. An overseas signature is not a complete defence when the work in India includes habitual contracting activity covered by the applicable agency provision.
India’s domestic rule expressly includes a person who habitually plays the principal role leading to specified contracts. Treaty language can differ. Some treaties also address habitual securing of orders. Check the actual provision and any effective Multilateral Instrument modifications before applying a generic agency definition.
A useful internal test is to inspect a completed deal. Who settled the price? Could the overseas approver reject or materially change the terms? If approval is routine and the commercial bargain is effectively completed in India, a written prohibition on signing deserves little confidence on its own.
For this reason, an authority matrix should cover material negotiations as well as signatures. Review how the process works in practice, including email records and customer relationship management logs.
Service PE can arise when the foreign enterprise furnishes covered services in India through employees or other personnel, subject to the treaty’s conditions. It is not simply a count of everyone working in India.
Identify which enterprise supplies the service and who receives it. Then establish whether the people in India fall within that provision. An internal product team, a consultancy delivering a customer project and personnel seconded to an Indian affiliate may require different analyses.
The US Treasury’s technical explanation of the India treaty illustrates why wording matters: the service provision excludes Article 12 “included services” and treats related-enterprise services differently. Exclusion from a service PE clause does not necessarily make the payment tax-free under another article.
Yes. These activities can fall within project-specific provisions, so the ordinary service test is not the only one to examine.
The India–US treaty uses more than 120 days in any 12-month period for its specified construction, installation or assembly activities and related supervision. The treaties discussed for the UK, Australia and New Zealand use more than six months for their relevant construction provisions, subject to their wording and aggregation rules.
Before scheduling a commissioning team, establish whether it belongs to a wider installation project. A short individual visit does not describe the duration of the project as a whole.
No. An activity can be commercially central without involving sales. Whether an exception applies depends on the treaty and the activity’s role in the enterprise’s business.
A “support” label is particularly weak where the company’s core product is developed or delivered by the Indian team. Describe the output and how the business uses it, rather than relying on a department name.
The UK–India synthesised treaty text also includes an anti-fragmentation rule. Connected activities cannot necessarily be split into small pieces and treated as auxiliary in isolation.
Yes, remote work can create exposure, but neither a home address nor permission to work remotely settles the issue. The employer needs a location-specific assessment of the actual arrangement.
No. It should not be treated as an Indian safe harbour. India expressly disagrees with the relevant time threshold and commercial-reason conditions in the OECD’s updated commentary.
The 2025 OECD Model Tax Convention update discusses cross-border home working, including a 50 percent working-time benchmark. But India’s position, recorded in paragraph 55 on pages 67–68, rejects those conditions for determining whether a home is a place of business of the enterprise.
Two distinctions follow. The OECD commentary does not automatically rewrite a bilateral treaty. And India’s stated disagreement does not automatically turn every home worker into a PE. The applicable treaty and relevant case law still control the assessment.
A global remote-work policy based on the OECD benchmark therefore needs a separate India review.
No. A personal reason is relevant context, but it is not a complete answer to the employer’s tax question.
Record why the arrangement exists and how it operates. Does the company require India-based coverage? Is the home used for customer meetings? Has a temporary stay become an indefinite working arrangement? Does the employee perform the same duties abroad, or has the role changed since moving?
These questions make the review concrete. A family visit with limited incidental work presents a different fact pattern from an indefinite India assignment with responsibility for regional customers. Both still need any applicable personal-tax and immigration checks.
An employer’s travel cap can be an internal risk-control policy rather than a statutory PE exemption. It may account for payroll administration or immigration restrictions as well as corporate tax.
A Reddit discussion about an employer’s 28-day India limit captures this recurring confusion. It is evidence of a real user question, not an authority for the legal answer.
Ask what the policy is designed to control. A travel limit does not replace treaty analysis, and a more generous individual-tax rule does not compel the employer to permit a longer working stay.
The service thresholds differ materially, so a single global day limit is unreliable. Start with the residence of the relevant foreign enterprise, not the employee’s nationality or the currency used for payroll.
The comparison below concerns service PE provisions. Other PE routes remain relevant even where a service threshold has not been crossed.
| Employer's Treaty Residence | Service PE Position to Examine | Main Qualification |
|---|---|---|
| United States | More than 90 days in any 12-month period under Article 5(2)(l)(i). | Services for a related enterprise have a separate limb with no stated minimum day threshold. Article 12 included services are excluded from this clause. |
| United Kingdom | More than 90 days in any 12-month period under Article 5(2)(k)(i). | More than 30 days for covered services to an associated enterprise. Services taxable under Article 13 are excluded from this clause. |
| Australia | More than 183 days in any 12-month period under Article 5(3)(a). | Activities must relate to the same or a connected project. The current wording replaced the older service provision. |
| New Zealand | Article 5 does not contain a general furnishing-of-services PE clause. | Fixed-place and agency provisions still apply. Fees for technical services require separate examination. |
A US employer should examine the related-enterprise limb before relying on the 90-day threshold. Article 5(2)(l)(ii) of the India–US tax treaty contains no stated minimum duration for covered services performed for a related enterprise.
For example, a US business sending personnel to provide covered services to its Indian affiliate cannot simply approve the assignment because it lasts 60 days. The relationship and nature of the service matter first.
The treaty’s protocol also contains a rule for certain activities spanning taxable years. The Treasury technical explanation explains the treatment when fewer than 30 days fall in one of those years. This affects the year of taxation rather than creating a general 30-day exemption.
A US LLC also needs an eligibility review. US incorporation alone does not establish that all of its income qualifies for treaty benefits.
A UK employer should check whether covered services are supplied to an associated enterprise, because the relevant threshold can be more than 30 days in any 12-month period.
That rule appears in Article 5(2)(k)(ii) of the UK–India treaty as modified by the MLI. The provision excludes services taxable under Article 13.
For planning, keep affiliate support assignments visible to the tax team. Short visits approved independently by different departments can belong to the same wider service arrangement. Review the underlying engagement before treating each traveller as a separate case.
The older Australia–India service provision used a 90-day threshold, but the amended provision uses more than 183 days for the same or a connected project in any 12-month period.
The Indian government’s published Australia treaty includes the current Article 5(3) and reproduces the replaced wording in a historical footnote. Reading the footnote as current law produces the wrong answer.
This is not blanket permission to work in India for 183 days. A fixed-place or agency PE analysis remains separate. Natural-resource activities and substantial equipment also have their own provisions.
No. The published India–New Zealand treaty does not contain a general service PE clause in Article 5. A 183-day rule from another treaty should not be imported into it.
A New Zealand company must still examine fixed-place and agency PE. Its income may also require analysis under the fees-for-technical-services article. The absence of a general service clause is not an exemption for all India-related income.
Check the instruments and effective dates identified by New Zealand Inland Revenue’s India treaty page and its MLI status guidance when preparing the full opinion.
Because individual tax residence, employment-income exemptions and corporate PE use different tests. A day count relevant to one cannot be used as clearance for the others.
Not as a universal rule. Section 6 of the Income-tax Act 2025 includes a 182-day test and an alternative based on 60 days in the year plus 365 days in the preceding four years. Special rules affect certain Indian citizens and persons of Indian origin.
Separately, a treaty may provide an employment-income exemption with a 183-day condition and additional requirements. That is still not a corporate PE exemption.
A travel approval should therefore state which test has been considered. “Below the tax threshold” is too vague to be useful.
Employers should track both personnel presence and the enterprise’s service activity, then apply the relevant treaty interpretation. Do not automatically multiply every day by headcount.
Consider an illustrative project with two consultants in India for the same 40 calendar days. The records show 80 person-days and 40 calendar days of overlapping activity. Those are different measures. If a third consultant then works for another 55 days without overlap, the activity spans 95 days.
This example is a recordkeeping illustration, not a legal conclusion about a particular treaty. Record exact arrival and departure dates, the project and service recipient, plus any overlapping visits. An adviser can then apply the correct aggregation method.
Rolling 12-month periods also cross financial-year boundaries. A spreadsheet that resets on 1 April can miss a threshold even when each financial year looks short in isolation.
No. An EOR arranges local employment, but the foreign company’s corporate tax exposure still depends on its activities and the applicable treaty.
An EOR generally acts as the local legal employer and administers payroll and employment obligations within its contracted scope. Peorient’s guide to how an employer of record works explains this employment model. The foreign enterprise still needs advice on its own PE position.
Peorient’s comparison of EOR providers in India can help evaluate provider arrangements. Use that comparison alongside a tax review of the proposed role, rather than treating provider selection as tax clearance.
Ask for a clear division of responsibility. Who supplies information if the foreign company receives a tax notice? Does the contract include corporate-tax advice or only employment administration? Is any indemnity capped or excluded for activities directed by the client?
An indemnity can allocate financial responsibility between contracting parties. It does not bind the Indian tax authorities or change the facts of the operation.
Yes. Treaty provisions can refer to employees or other personnel, so the name on the employment contract is not always decisive.
The Morgan Stanley judgment of 9 July 2007 distinguished stewardship activities from services performed by deputationists. The Court found service PE consequences for the latter on the facts. It was not an EOR judgment, and should not be presented as one.
The practical lesson is to document the actual relationship. Identify who directs the work and which business is responsible for its delivery. An employment agreement is one part of that evidence.
Consider a subsidiary when the planned operation needs an established local business structure, particularly for sustained customer activity or substantial operating responsibility. There is no universal employee count at which this becomes compulsory for PE purposes.
A subsidiary is not an automatic shield for its foreign parent. The e-Funds decision illustrates the need to examine the parent’s own presence separately from the Indian company’s existence.
For the financial decision, compare the recurring EOR invoice with the full operating cost of an entity. Peorient’s EOR cost breakdown for India helps identify employment costs that sit outside a headline service fee. Use the India employee cost calculator guide to separate employment costs from service fees. The structure decision should also account for the functions the Indian operation needs to perform.
They can present a different fact pattern, but neither label is an exemption. The engagement must be examined for the particular PE route it could create.
No. A contractor may still act on behalf of the foreign business in ways that fall within an agency provision. Independent-agent treatment requires more than an invoice describing the person as independent.
A Reddit thread on working for a foreign company without an EOR shows a common uncertainty: whether a full-time employment offer can simply be treated as contracting. The discussion is useful for understanding the question, but its replies are not legal guidance.
Review the person’s commercial authority and actual independence. Then assess employment classification separately. Resolving a worker’s personal tax treatment does not resolve the overseas company’s PE exposure.
Not automatically. A genuinely independent supplier delivering an agreed result presents a different arrangement from premises or personnel effectively available to run the foreign customer’s business.
For procurement, examine what is being purchased. Does the vendor manage delivery and its own workforce? Or does the overseas customer operate a dedicated team as though it were its own branch? The written statement of work should reflect the arrangement that actually exists.
This is where operational evidence becomes useful. Keep records of the vendor’s responsibility for the outcome and the limits on the customer’s use of its premises. Buying a service is not the same factual arrangement as controlling the location from which it is supplied.
The cost depends on taxable profits attributable to the PE, the applicable rate and any additional compliance consequences. It is not automatically a percentage of the foreign company’s worldwide revenue.
Ordinary business-profit taxation under a treaty focuses on the profits India is entitled to tax under that treaty. The attribution exercise must be completed before applying a corporate tax rate.
Article 7 of the India–US treaty, for example, includes rules concerning PE profits and certain same or similar sales or activities. It should not be reduced to a universal “local payroll multiplied by a markup” formula.
The work normally requires a functional analysis: what the Indian operation does and how it contributes to the business. An EOR service fee is not, by itself, the taxable profit of the foreign enterprise.
The Income Tax Department’s foreign-company rate guidance for assessment year 2026–27 gives a 35 percent ordinary rate, with applicable surcharge and 4 percent health and education cess.
The following calculations use that published ordinary-rate framework. They exclude special-rate income and marginal relief near the surcharge thresholds. Confirm the rates and computation for the tax period being assessed.
| Total Income Band | Surcharge on Income Tax | Combined Rate Including 4% Cess |
|---|---|---|
| Up to ₹1 crore | Nil | 36.400% |
| Above ₹1 crore and up to ₹10 crore | 2% | 37.128% |
| Above ₹10 crore | 5% | 38.220% |
For an illustrative ₹50 lakh of taxable PE profit, with no other taxable income affecting the rate band, the tax is ₹18.20 lakh: ₹50,00,000 × 35% × 1.04.
For ₹2 crore on the same simplified basis, the calculation is ₹74.256 lakh: ₹2,00,00,000 × 35% × 1.02 × 1.04. These are worked arithmetic examples, not estimates of what an India hire will cost.
No. Penalties depend on the applicable provision and facts. A disputed legal position is not automatically misreporting.
Section 439 of the Income-tax Act 2025 provides for a penalty of 50 percent of the tax payable on under-reported income, increasing to 200 percent where under-reporting results from specified misreporting. The section also contains exclusions, including conditions concerning bona fide explanations and disclosure.
Other consequences can include interest and return-filing work. Transfer-pricing documentation or audit obligations need their own applicability review. Build the response around the actual tax periods and transactions rather than multiplying a headline penalty percentage across the business.
Not automatically. The fee and analysis must account for the relevant functions and risks.
In Morgan Stanley, the Supreme Court accepted in principle that no further attribution remained where the associated enterprise constituting the PE was appropriately remunerated for all relevant risk-taking functions. It also recognised that an incomplete analysis could leave further attribution to be made.
For a finance team, this means retaining the analysis behind the fee. A signed services agreement and an invoice do not demonstrate that every relevant function has been priced.
PE is only one part of the review. Company residence and the taxation of particular income streams can produce different questions.
Yes. Where the company’s key management and commercial decisions are substantively made can affect its residence. This is separate from the presence of a PE.
The company-residence rule appears in section 6(10). It concerns management of the business as a whole. A founder making company-wide decisions from India therefore presents a different issue from an employee completing assigned work there.
The CBDT’s POEM guidance should be considered with the relevant clarifications and treaty rules. Ask for a separate residence conclusion if senior leadership operates from India. Do not assume a PE memo answers it.
No. Significant economic presence, or SEP, is a domestic business-connection concept. It is not automatically a treaty PE.
Rule 13 of the Income-tax Rules 2026 prescribes a ₹2 crore transaction-payment threshold and a 300,000-user threshold for the relevant limbs of section 9(9)(d). The transaction limb concerns aggregate payments exceeding the prescribed amount. The user limb concerns the specified pattern of solicitation or interaction.
These are not salary thresholds or a headcount exemption. A foreign digital business must examine the domestic rule and then determine whether a treaty restricts India’s right to tax the relevant income.
Yes. A no-PE conclusion is not a universal tax clearance. The character of a payment can bring a separate treaty article into consideration, and GST uses its own statutory concepts.
For example, the India–New Zealand treaty’s Article 12 addresses royalties and fees for technical services separately from ordinary business profits. The correct treatment depends on the payment and applicable conditions.
Keep separate conclusions for corporate income tax and the other obligations relevant to the arrangement. An employee paying personal income tax does not settle the company’s position. An EOR invoice showing GST does not establish that the client has, or lacks, an income-tax PE.
Review the role and operating model before approving the employment route. The examples below are illustrative review priorities, not legal determinations or numerical risk scores.
Start with the home-working arrangement and the nature of the work. The absence of sales authority does not answer every fixed-place or service PE question.
Suppose a UK company hires an engineer through an EOR to work indefinitely from Pune on its core platform. Record why the role is based there and whether any space is available to the foreign business. Establish the relevant service relationships rather than assuming that a software role is auxiliary.
The useful deliverable is a short written assessment tied to that job and location. It should state which changes would require a fresh review, such as promotion into commercial leadership or a move into a dedicated office.
Examine the actual deal process, including the authority to settle commercial terms. This should happen before the person begins negotiating with customers.
Suppose an Australian company’s India lead agrees discounts and contract scope, while headquarters signs the final document. Retain sample workflows showing what the overseas approver genuinely reviews. If the business needs the India lead to complete commercial negotiations, acknowledge that requirement in the tax analysis.
Do not design a nominal approval process that the sales team cannot follow. The structure should support the intended business activity and its tax consequences.
Check the purpose of the assignment and its connection with an Indian recipient. Track repeat visits within the applicable period, including assignments approved by other departments.
For a US executive spending several weeks with an Indian affiliate, distinguish shareholder oversight from operational services. For secondees, document the continuing relationship with the overseas enterprise and responsibility for the work.
These records help an adviser apply the treaty. A visitor’s job title or immigration category does not, by itself, determine the corporate tax outcome.
It should connect the relevant treaty to documented facts and give the business an operating decision. A generic statement that the provider “handles compliance” is insufficient.
Provide enough evidence to reconstruct how the work will operate. The following checklist can be used for a first hire and updated as the team grows.
It should state the position for each relevant PE route, the assumptions supporting that position and the action required. Management should be able to use it to approve or redesign the arrangement.
Request a conclusion for the specific entity and period. Ask whether the planned facts create a filing obligation, and whether a protective filing or other procedure needs consideration. The adviser should also identify unanswered questions that could change the result.
Avoid a memo that only reproduces Article 5. The value lies in explaining how the provision applies to your proposed operation and what evidence supports that conclusion.
Refresh it when a material fact changes. A periodic review can help, but a calendar reminder should not be the only trigger.
Examples include a new customer-facing responsibility, authority to approve discounts, a dedicated workspace or an assignment to an Indian affiliate. A temporary remote-work arrangement becoming indefinite also deserves review.
Assign an owner for these changes. HR can collect employment facts, while the business owner confirms actual duties. Finance or tax should coordinate the updated conclusion. No single department necessarily sees the entire arrangement.
The most useful answers distinguish corporate tax from the employment arrangement and avoid treating a single fact as a safe harbour.
No. Customer location is relevant, but it does not decide every PE route. A business can conduct operations in India while serving customers elsewhere. Review what happens in India and which treaty provision could apply.
No. The payment account does not determine where the enterprise carries on business. Payroll obligations also need a separate assessment. Changing the payment route without changing the work does not establish a different PE outcome.
There is no general salary or employee-count exemption in the treaty provisions discussed here. Use role-specific analysis. A single person with relevant authority can raise questions that a larger delivery team does not raise in the same way.
An EOR’s statement does not bind the tax authorities. Ask what facts and treaty provisions support it, who prepared the assessment and whose liability it addresses. A contractual assurance is different from a binding determination under an applicable legal procedure.
No. A new arrangement does not rewrite previous activities. Establish when the relevant facts began and review earlier periods separately. Preserve existing contracts and records before making changes.
Commission a retrospective assessment using the actual facts. Reconstruct duties and travel first, then identify any tax or filing action required for each period. Do not backdate documents or replace historical facts with the arrangement you now wish had existed.
Peorient can help you compare employment providers against your operating requirements. Your foreign company’s PE conclusion should come from a qualified adviser reviewing the relevant treaty and facts.
Start with the work the India team needs to do. Then compare the provider’s legal-employer structure and the support included in its agreement. That makes the employment decision more useful and gives your tax adviser a concrete arrangement to assess.
Share your India hiring requirements with Peorient to discuss provider options. Include the planned roles and whether the team will negotiate contracts, alongside any intended office arrangement.
Written by
Director of Global Hiring Advisory · 6+ years experience
Arjun runs the global hiring advisory practice at Peorient. He previously led APAC operations at an EOR startup and advised at Singapore's EDB, overseeing workforce launches in 18 countries across EOR, PEO, and subsidiary models.
