Employer of record model (offshore hiring)
An employer of record takes on personnel on its payroll on behalf of the foreign company. However, such employees can only undertake non-commercial activities such as market research and business development. An employer of record enables companies to outsource talent internationally without having to set up a legal entity in the country where employees are located.
In case these employees undertake non-core or preparatory/auxiliary activities then the foreign company runs the risk of creating a permanent establishment (PE) in India. If tax authorities become aware of any commercial or cost reduction activities, the foreign enterprise will be treated as an assessee in default and would be required to undertake compliances prescribed for a foreign company operating in India. Such compliances include obtaining a Permanent Account Number, undertaking benchmarking study to attribute income in India, and the payment of tax and filing of income tax returns.
The tax rate is 35 percent on net basis plus a cess of four percent on the tax, together with interest and penalty as prescribed by law.
A Permanent Establishment (PE), also referred to as a “business connection” under Indian domestic law, refers to a fixed place of business through which the business of a non-resident enterprise is wholly or partly carried on.
This includes branches, factories, warehouses, offices, and other fixed premises. Profits attributable to such establishments in India are taxable under domestic law and applicable tax treaties.
If employees undertake core business functions or revenue-generating activities on behalf of the foreign company, it may trigger the creation of a Permanent Establishment (PE) in India under the Income-tax Act or the applicable Double Taxation Avoidance Agreement (DTAA).
Should the Indian tax authorities conclude that such activities constitute a PE, the foreign company shall be treated as an assessee in default and would be required to comply with all Indian tax obligations applicable to foreign entities with a PE. This includes obtaining a PAN, filing income tax returns, attributing profits to the PE, and paying corporate taxes, along with applicable interest and penalties.
Working with a supplier/ agent/ partner
This approach is similar to how international trade functions by using a simple import-export model -selling goods to India or procuring goods from India.
Foreign companies can do business with India and within India through the medium of international trade. By entering partnerships with suppliers or agents, foreign companies can gain access to the Indian market. However, no single supplier, agent, dealer or distributor must account for more than 25 percent of the total business done by the foreign company in India since such an arrangement will create a Permanent Establishment of the foreign company in India. It is advisable to undertake a due diligence of the Indian partner and necessary steps to protect trademark and patents, if applicable, to be on the safer side. However, in the long term, establishing an entity may well be the best solution to expand in the Indian market.
