The risk of Permanent Establishment (PE) is the risk that a firm hiring or conducting business in another country like India may be deemed to have a taxable business presence in that country. This can create unexpected corporate tax obligations, legal liability, and compliance obligations. It is extremely important for global employers that hire remote talent across borders to understand and manage PE risk.
When does PE Risk Arise?
If you’re a company hiring or operating in India in a way that establishes a real and intimate connection between the business of non-residents with the activities performed in India to generate revenue for non-residents and the activities appears to be local and ongoing, the Indian tax authority (CBDT) may deem you to have created a PE—and that makes your company taxable under Indian law.
Employing an EOR service provider is the best way to grow internationally without the associated public relations risk.
What is an Employer of Record (EOR)?
Employer of Record (EOR) involves hiring and managing employees through a third-party company in another country. It is the legal employer, handles compliance, taxes, payroll, etc., for the partnering company to avoid establishing a local entity for hiring employees in that jurisdiction.
Some of the services provided by an EOR in India include:
- Employee benefits and health insurance
- Income tax (TDS) and other statuary deductions (PF, ESI, gratuity)
- Employment contract creation (in English & local languages)
- Compliance with Indian employment and tax laws
- Monthly payment of salaries
- Onboarding and offboarding support
Why PE Risk Is a Big Deal for Foreign Firms Hiring in India?
If your company is considered to have a Permanent Establishment in India, you could be subject to:
- Corporate Income Tax on Indian-source revenue
- Back taxes and penalties (including interest)
- Audits by Indian tax authorities
- Legal issues and damage to your company's international reputation
In many cases, simply hiring a full-time remote employee in India can trigger the risk - especially if they're involved in sales, client interactions, or technical delivery
How an Employer of Record Helps You Avoid PE Risk
An Employer of Record (EOR) is a third party that legally employs workers on your behalf in foreign countries.
You manage the day-to-day work — but the EOR handles:
- Contracts (locally compliant)
- Payroll and tax withholdings
- Statutory benefits
- Local compliance and labor laws
This setup lowers the risk of PE because you’re not hiring directly or establishing a fixed business presence.
Source: https://www.orbtrak.com/insights/what-is-permanent-establishment-risk
