Global expansion enables foreign firms to tap into a vast global talent pool anywhere in the world— including India, a global leader in tech, finance, and engineering. 

EOR services further help in this by assisting the firms in hiring, onboarding, and managing the talent remotely from around the world. However, while global expansion is exciting, it comes with exposure to compliance risks.  Permanent Establishment (PE) Risk is one of the most overlooked compliance risks where the business can get unexpectedly taxed. 

Permanent Establishment (PE) is a principle in international tax law that determines whether a foreign company is liable to pay corporate tax in a country where it has significant operations. This tax can sometimes be applicable even when the company doesn't have any physical presence.

When can your firm be taxed under PE?

If your company is hiring or operating in India in a way that establishes a real connection between the business of non-residents with the activities performed in India to generate revenue for non-residents, and the activities appear to be local and ongoing, the Indian tax authority (CBDT) may deem you to have created a PE, which will make your company taxable under Indian law.

Types of Permanent Establishment

1. Fixed Place PE

There must be a place of business where personnel exist, such as an office, a factory, a branch, or a project site.

2. Service PE

Service PE is when employees or contractors of your firm deliver services within India for more than 90 days in a fiscal year. 

3. Digital or Virtual PE

This PE arises when a foreign firm conducts significant business in India through digital means and earns revenue from Indian users, even without a presence in the country.

4. Agency PE 

Under this structure, the representative in India sells or distributes goods or services in its own name but does it exclusively or primarily on behalf of the foreign enterprise.

2. Dependent Agent PE

For this PE, there must be a person who acts on behalf of the foreign entity, which could be an agent, and the person should be in the other contracting state, i.e., India in the present case.  The agent shall not be an independent agent who is acting in the ordinary course of business

However, these risks can be avoided by selecting an Employer of Record (EOR) service partner.