Hiring Indian talent? Selling to Indian customers? Using agents or representatives in India?
Then Permanent Establishment (PE) risk in India is something you cannot afford to ignore.
Many foreign companies unknowingly create a taxable presence in India, leading to corporate tax exposure, penalties, litigation, and compliance nightmares.
What Is Permanent Establishment (PE) in India?
A Permanent Establishment (PE) is a fixed place of business or business presence through which a foreign company’s activities are carried out in India.
Once PE is triggered:
India gets the right to tax your business profits
You must file Indian income tax returns
You may face GST, payroll, and withholding obligations
Non-compliance can lead to back taxes + penalties + interest
PE rules are governed by:
Indian Income-tax Act, 1961
Double Tax Avoidance Agreements (DTAA)
OECD Model Tax Convention
Types of Permanent Establishment Foreign Companies Create in India
1. Fixed Place PE
When your company has:
An office
Co-working space
Dedicated workspace
Even a “virtual office” with business control
Risk increases if business decisions are made from India
2. Dependent Agent PE (Most Common & Dangerous)
This happens when:
An Indian person negotiates or concludes contracts
Works exclusively or almost exclusively for you
Acts under your control or authority
Many founders think “they are just consultants” — tax officers think otherwise.
3. Service PE
Triggered when:
Foreign employees render services in India
Presence exceeds 90 / 183 days (varies by treaty)
Services are core to revenue generation
This is common in:
IT services
Consulting
SaaS implementation
Engineering & project-based work
4. Remote Employee PE (2026 Reality)
Hiring Indian employees directly on your foreign payroll can:
Create economic substance in India
Trigger PE if employees perform core business functions
This is now under increased scrutiny by Indian tax authorities.
Common Mistakes Foreign Companies Make
Hiring Indian staff as “independent contractors” without proper structuring
Allowing Indian team to close deals or sign contracts
Using Indian address on website or invoices
Paying commissions to Indian agents without PE review
Assuming DTAA = automatic protection (it doesn’t)
How to Avoid Permanent Establishment in India (Legally)
Option 1: Proper Contractor & Scope Structuring
Clear service-only role
No authority to bind company
Arm’s length pricing
Independent client base
Works only for very limited activities
Option 2: Employer of Record (EOR) — With Caution
EOR reduces payroll & labour law risk
Does NOT automatically eliminate PE risk
Functional control still matters
Best when combined with legal PE review
Option 3: Incorporate an Indian Subsidiary (Most Future-Proof)
Ideal if you:
Want to scale India operations
Hire teams long-term
Sell to Indian customers
Avoid PE litigation risk completely
Benefits:
Clear tax position
Treaty protection
Brand trust
Investor-ready structure
When You SHOULD Incorporate in India
You should seriously consider Indian incorporation if:
India is a revenue market
You plan long-term hiring
Contracts are negotiated from India
Customers or investors demand compliance
PE risk already exists
Ignoring this can lead to retrospective tax demands years later.
Why PE Planning Is Not a “DIY” Task
Indian tax authorities are:
Aggressive
Documentation-focused
Treaty-interpretation driven
Once PE is alleged:
Burden of proof is on you
Litigation can last 5–10 years
Penalties can exceed 200% of tax
PE planning must be done BEFORE you hire or operate.
How We Help Foreign Companies Enter India Safely
At TaxVic, we specialise in India entry, PE risk mitigation, and compliance for foreign businesses.
Our Services Include:
- PE Risk Assessment & Opinion
- DTAA Interpretation
- Contractor vs Employee Structuring
- Employer of Record (EOR) Advisory
- Indian Subsidiary Incorporation
- End-to-End Tax & Compliance Support
- Ongoing PE Defence Documentation
We work with:
SaaS companies
Tech startups
Consultants & agencies
Global service providers
Overseas founders entering India
