Start with domestic law and the applicable treaty
A foreign enterprise can create an Indian taxable presence through people or premises even without incorporating here. Start with the domestic source rule for a business connection (section 9(1)(i) of the Income-tax Act, 1961 for years governed by that Act). Where the enterprise qualifies for treaty benefits, test Article 5 and any protocol or Multilateral Instrument (MLI) changes in force for the period. Under the usual Article 7 rule, India may tax business profits attributable to an Indian permanent establishment (PE), subject to the particular treaty. Consider separately any royalty, fees for technical services or other income subject to a different article.
A PE finding can affect registration, records, return filing, withholding and, where the relevant provisions apply, tax audit or transfer pricing reporting. Identify the actual obligations and deadlines for the tax year. The individual worker’s salary or professional income and any payroll obligations are separate from the foreign enterprise’s corporate exposure.
Three routes to a permanent establishment
| Test | What to examine |
|---|---|
| Fixed place | Identify a sufficiently permanent place at the enterprise’s disposal through which it carries on its business. A home, a serviced office or a desk can qualify on the facts; examine actual use, access, control, permanence and treaty exceptions. |
| Service | Some treaties deem a PE when an enterprise furnishes covered services in India through employees or other personnel. Check who furnishes the service, where and for whom, exclusions, related enterprises and the treaty’s counting rule. |
| Dependent agent | Identify who acts for the foreign enterprise and what they routinely do: contract authority, securing orders, stock or delivery, or the principal role in concluding contracts, where the applicable text includes that test. Examine the independent agent exception. |
Sales teams and the MLI
MLI Article 12 can extend an agency PE rule to a person who habitually plays the principal role leading to covered contracts the foreign enterprise routinely concludes without material modification. Check that the treaty is covered, both countries’ notifications and reservations match, and the provision applies for the relevant period. The United States is not an MLI signatory. Apply the India–US treaty’s own Article 5(4), including habitual exercise of authority to conclude contracts on behalf of the enterprise, its stock and delivery rule, and habitual securing of orders wholly or almost wholly for the specified enterprises. Overseas electronic signature does not settle what the Indian team does in practice. A Bengaluru sales head who negotiates price and scope presents a material risk, but apply the specific treaty limb to the evidence.
Homes and coworking spaces
Reimbursement for internet or a laptop, a dedicated room, occasional visits or a coworking lease are relevant facts in context. They do not individually determine whether an enterprise has a fixed place of business. Examine why work occurs in India, how regularly the place is used for the enterprise and whether it is available for carrying on its business. The Supreme Court’s E-Funds and Hyatt judgments illustrate that the factual use and control of premises matter.
The OECD’s 2025 commentary says a home or similar place generally is not a place of business where the individual works there for less than half their total working time for that enterprise over a relevant 12-month period, absent other facts supporting that result. At or above half, examine the facts, including whether there is a commercial reason for working from that country. This commentary is interpretive guidance; it is not a binding Indian exemption or a substitute for treaty text and applicable case law.
Services and day counts
Article 5(2)(l) of the India–US treaty excludes included services as defined in Article 12 and includes a general threshold of more than 90 days in any 12-month period and a separate limb for services performed for a related enterprise. Article 5(2)(k) of the India–UK convention excludes services taxable under Article 13 and uses more than 90 days in any 12-month period generally or more than 30 days where services are performed for an associated enterprise. Apply the treaty and its modifications in force. Keep dated activity records and check how overlapping personnel and projects are treated; headcount multiplied by contract length is not a reliable treaty day count.
Personnel working in India and customers located abroad do not, by themselves, resolve where the enterprise furnishes the service or whether its activities meet the treaty. Distinguish services the foreign enterprise supplies through personnel from support it simply purchases from an Indian provider. In E-Funds, the Supreme Court examined the actual services and who furnished them.
Attribute profits after determining PE status
Start with the applicable Article 7, including any treaty-specific attribution rules. Analyse the functions performed, assets used and risks assumed, using reliable accounts and evidence. Where applicable, Rule 10 of the Income-tax Rules, 1962 addresses cases in which actual income attributable under the domestic source rule cannot be definitely ascertained. No standard share of sales or operating profit applies to every PE.
Morgan Stanley, as discussed in the Supreme Court decisions below, limits further attribution where the arm’s-length remuneration already reflects all relevant functions and risks. Salary, an employer-of-record (EOR) fee or a routine cost-plus price does not establish that result. Transfer pricing remuneration and whether a PE exists are separate questions.
| Structure | What to check |
|---|---|
| Direct remote employment | Review actual sales authority, service delivery, use of premises and responsibility for payroll and withholding. |
| EOR or staffing provider | Check who directs staff, who supplies services, who controls premises and whether personnel act for the foreign enterprise. Confirm payroll and social security responsibilities separately. |
| Indian captive subsidiary | Document the intercompany services and benchmark pricing. Check independently for premises at the parent’s disposal, seconded staff and agency conduct. |
Worked examples
1. US software company: remote sales in Bengaluru
Assume annual global sales of US$10 million (₹83 crore at ₹83 per US dollar), including US$3.5 million (₹29.05 crore) in sales handled by the Bengaluru executive. They negotiate and settle pricing before a US executive signs. Review the order and approval evidence against India–US Article 5(4). If a PE exists and the facts support using a 30% operating margin and attributing 40% of that segment’s operating profit, the segment profit is ₹8.715 crore and the attributed amount is ₹3.486 crore. These percentages are assumptions for the example.
For AY 2026–27, assuming no other taxable income, ordinary foreign company rates give 35% × 1.02 × 1.04 = 37.128%, or ₹1,29,42,820.80 before statutory rounding. A 200% penalty on that amount would be ₹2,58,85,641.60, bringing the total to ₹3,88,28,462.40 before interest and rounding. The illustration assumes, without deciding, that the relevant underreported tax equals the computed tax and that statutory misreporting conditions are proved; a PE dispute or non-filing does not automatically justify 200%.
2. Finnish engineering firm: six independent developers
Six Pune developers work from their own homes for 12 months on software for robotics deployed in Germany. The firm does not control their homes, and the developers do not negotiate or bind it. These facts point away from fixed place and agency PE. For service PE, apply the Finland–India treaty to the actual activity and relationship; the 12-month retainer alone does not show that the firm furnished a covered service through personnel in India. The developers’ Indian tax is separate; presumptive treatment depends on individual eligibility.
3. US design agency: 15 workers through an EOR
An Indian EOR puts 15 designers and editors on payroll and invoices eligible costs plus 10%, or 1.10 times those costs. The team provides creative support without contracting authority. Keep the service agreement and evidence of supervision, premises and actual work. The terms help assess agency risk, but the markup alone does not establish arm’s-length pricing, resolve service PE or preclude attribution. Confirm separately who must withhold payroll tax and make applicable contributions.
4. UK fintech: captive subsidiary after expanding from 4 to 35 workers
The team grows by 31 in two years. Assume an annual eligible cost base of GBP1.2 million at ₹105 per pound, or ₹12.60 crore. Under a documented service agreement, an assumed 15% markup produces ₹1.89 crore of operating profit and a fee of ₹14.49 crore. The 15% markup is a pricing assumption; check applicable safe harbour eligibility and make the required election if appropriate. If the subsidiary validly elects section 115BAA under the 1961 Act and taxable income equals the illustrative profit, 22% tax with 10% surcharge and 4% cess gives 25.168%, or ₹47,56,752. Moving workers to the subsidiary can clarify employer responsibilities, but it cannot eliminate a parent PE created by the parent’s actual use of premises, personnel or agents.
Records to keep
- Maintain role descriptions, written delegations and approval logs. Check whether negotiation, discount and signing practices match them.
- Record work locations, customer and related-party services, projects and relevant days in India. Review premises, leases and actual access.
- Reassess as teams, duties and arrangements change. No general headcount or spending threshold guarantees a PE-free structure.
- Determine applicable payroll, corporate filing and withholding obligations. Document related-party pricing and file the prescribed report when required.
Frequently asked questions
1. Does an EOR prevent an Indian PE?
No. Test the work the foreign enterprise carries on through the staff or premises and any agency role under the treaty. Check employment and payroll duties separately.
2. Does reimbursing broadband or laptops create a fixed place PE?
It is not decisive. Examine actual business use, availability of the premises and the duration and purpose of work there.
3. How is ordinary foreign company tax calculated for AY 2026–27?
The Finance Act, 2026 applies a 35% ordinary rate. With 4% cess and surcharge of 2% above ₹1 crore through ₹10 crore or 5% above ₹10 crore, illustrative effective rates are 36.40%, 37.128% and 38.22%, before applicable marginal relief. Section 115A is not the source of this ordinary rate; check the relevant Finance Act for other years.
4. Does supporting overseas customers from India rule out a service PE?
No. Examine the applicable treaty, the identity of the enterprise furnishing the service, the role of personnel in India and the day count.
5. Does an independent contractor label settle the analysis?
No. Examine actual control, independence, ordinary course of business, authority and conduct. A worker’s label does not determine the treaty result.
6. Does an Indian subsidiary automatically create a PE for its parent?
No. Ownership alone does not create a PE. Test the parent’s use of premises, the role of the personnel and any agency activities separately.
Sources
- India–US income tax treaty, Articles 5 and 7
- India–UK convention, Articles 5 and 7
- UK government: treaty, protocols and synthesised MLI text
- Finlex: Finland–India tax treaty
- India’s MLI notifications and reservations
- OECD 2025 Model Tax Convention update: cross-border remote work
- Supreme Court of India: E-Funds IT Solution Inc.
- Supreme Court of India: Hyatt International Southwest Asia Ltd.
- Finance Act, 2026, section 2 and First Schedule (AY 2026–27)
- Income Tax Department: domestic company rates and surcharge
- Income Tax Department: section 115BAA option and Form 10-IC