PE Risk from Remote Employees in India

Why Remote Employees in India Create Tax Exposure

The global shift to remote work has created an often-overlooked tax trap for foreign companies: a single employee working from India can potentially create a permanent establishment (PE), triggering corporate tax obligations in India at effective rates of 25-35% on profits attributable to Indian operations.

This risk is not theoretical. Indian tax authorities have become increasingly aggressive in asserting PE claims against foreign companies, particularly those with employees, contractors, or GCC (Global Capability Center) staff working from Indian locations. The stakes are high: a PE determination means your company must file Indian tax returns, pay corporate tax on India-attributable profits, comply with transfer pricing documentation requirements, and potentially face penalties for prior-year non-compliance.

The November 2025 OECD update to the Model Tax Convention attempted to provide clarity on when remote work creates a PE. However, India has explicitly rejected key elements of this guidance, making the Indian position materially more aggressive than the OECD standard. Understanding this divergence is critical for any company with remote workers in India.

Types of Permanent Establishment Under Indian Law

India's PE framework draws from two sources: Section 92F of the Income Tax Act, which defines PE for domestic law purposes, and Article 5 of India's bilateral tax treaties (DTAAs), which defines PE for treaty purposes. Where a DTAA exists, the treaty definition prevails if it is more beneficial to the taxpayer.

Fixed Place PE (Article 5(1))

A fixed place of business through which the enterprise wholly or partly carries on its business. For remote employees, this can include:

• Home office: An employee's home in India can constitute a fixed place PE if the employer requires or expects the employee to work from India, the location has a degree of permanence (typically 6+ months), and the employee carries out core business functions (not merely preparatory or auxiliary activities)
• Co-working space: A dedicated desk or office in a co-working space used regularly by the employee can constitute a fixed place
• Client premises: If your employee works at an Indian client's office for extended periods, this may create a PE

Service PE (Article 5(2)(l) or equivalent)

Most of India's DTAAs contain a Service PE provision, which is triggered when a foreign company furnishes services in India through employees or other personnel for a specified duration. The typical thresholds are:

For countries with a 90-day threshold (including the USA, UK, and Singapore), a single remote employee working full-time from India will breach this threshold within approximately 3 months, creating a Service PE.

Dependent Agent PE (Article 5(5))

A dependent agent PE arises when a person acting on behalf of the foreign enterprise in India habitually exercises authority to conclude contracts in the enterprise's name. In the remote work context, this risk emerges when:

• A remote sales representative in India closes deals and signs contracts for the foreign company
• A country manager in India has authority to commit the company to commercial terms
• A senior executive working from India routinely approves business decisions that bind the company

The dependent agent test does not require a fixed location. Even an employee working from home who has contracting authority can create a dependent agent PE.

Construction PE (Article 5(3))

While less relevant to remote work, foreign companies in construction, engineering, or infrastructure should note that a building site, construction or installation project constitutes a PE if it lasts more than the specified period (typically 6-12 months depending on the DTAA).

The OECD 2025 Update: New Framework for Remote Work PE

On November 19, 2025, the OECD released its 2025 Update to the Commentary on the Model Tax Convention, introducing a structured framework for analyzing when remote work arrangements create a PE. The update introduces two key tests:

The 50% Working Time Safe Harbor

Under the OECD framework, a home office is generally not considered a PE if the employee works from the home location for less than 50% of their total working time over a reference period. This provides a clear safe harbor for employees who occasionally work from another country but primarily work from the employer's office or another country.

The Commercial Reason Test

Even if the 50% threshold is exceeded, the OECD commentary holds that a home office does not constitute a PE if the choice to work from home was made by the employee for personal reasons (not at the request or requirement of the employer). The key question is: was there a commercial reason for the employer to have the employee work from that location? If the employer did not direct, require, or benefit commercially from the employee's Indian location, no PE arises under the OECD framework.

India's Position: Rejecting the OECD Safe Harbors

This is the critical point that most analyses overlook. India has explicitly stated that it does not accept the OECD's 2025 framework for home office PE. Specifically, India has rejected:

• The 50% working time threshold: India does not agree that a temporal safe harbor should determine PE status
• The commercial reason test: India does not accept that the employee's personal choice to work from India negates PE risk
• The general approach to home office PE: India's position is that any arrangement where business activities are carried out from India through an employee can potentially constitute a PE, regardless of the employer's involvement in the location decision

This means that the OECD's safe harbors, while influential in many European and OECD-member jurisdictions, provide no protection in India. Foreign companies cannot rely on these safe harbors when structuring remote work arrangements involving Indian-based personnel.

Why India's Position Matters

India is not a member of the OECD. While India participates as an invitee in OECD discussions and has adopted some OECD principles, it has consistently taken its own positions, reservations, and disagreements on Article 5 and the accompanying commentary. Indian courts and tax authorities are not bound by the OECD commentary and have historically taken a more expansive view of PE.

Recent Indian Court Rulings on Remote Work and PE

Indian tax jurisprudence is evolving rapidly on the PE question. Two recent rulings provide important guidance:

CIT v. Clifford Chance Pte Ltd (Delhi High Court, December 2025)

The Delhi High Court held that physical presence in India is a mandatory precondition for a Service PE under the India-Singapore DTAA. The court ruled that virtual or digital service delivery alone does not create a PE. This is a significant protective ruling for foreign companies providing services remotely without any personnel physically present in India.

Key takeaway: If your employees are not physically in India and services are delivered entirely remotely from outside India, a Service PE is unlikely under the Clifford Chance rationale.

Delhi Tax Tribunal Rulings on Virtual PE

The Delhi Tax Tribunal has separately rejected the concept of a "virtual PE" in the absence of a specific treaty provision. The tribunal emphasized that for a Service PE to be established, employees must be physically present in India and must actually render services within India during the threshold period.

Practical Impact of These Rulings

These rulings create a distinction between two scenarios:

1. Employee physically in India: PE risk is high, particularly if the employee's presence exceeds the treaty threshold (90 or 183 days)
2. Employee outside India, services delivered remotely: PE risk is low under current jurisprudence, though this position may evolve

The critical question for most foreign companies is: do you have employees or contractors physically located in India?

High-Risk Scenarios: When Remote Workers Create a PE

Based on our experience advising foreign companies entering India, these are the scenarios most likely to trigger a PE determination:

Scenario 1: Full-Time Remote Employee in India

A US-based SaaS company hires a senior engineer who lives in Bengaluru and works from home full-time. The engineer participates in product development, attends global meetings, and has access to production systems. PE Risk: High. The employee's home is a fixed place of business, the presence exceeds any treaty threshold, and core business functions are performed.

Scenario 2: Sales Representative in India

A UK-based consulting firm has a business development manager based in Mumbai who meets clients, negotiates terms, and signs engagement letters. PE Risk: Very High. This triggers both fixed place PE and dependent agent PE risks. The employee has authority to conclude contracts in the company's name.

Scenario 3: Temporary Project Deployment

A German engineering firm sends three engineers to a client site in Chennai for a 4-month project. PE Risk: Moderate. Under the India-Germany DTAA, the Service PE threshold is 183 days. At 120 days, they are below the threshold, but aggregation of other employee visits to India in the same 12-month period could push the total past 183 days.

Scenario 4: Digital Nomad Employee

A Singapore-based fintech company has an employee who spends 3 months in Goa during winter, working remotely. PE Risk: Moderate to High. Under the India-Singapore DTAA, the 90-day Service PE threshold is breached. However, if the employee's work is preparatory or auxiliary (e.g., back-office support), the PE may be excluded under Article 5(4).

Scenario 5: GCC / Captive Center Operations

A US corporation sets up an unincorporated team of 50 employees in Hyderabad through an Employer of Record (EOR), performing software development for the parent company. PE Risk: Very High. This arrangement creates a clear fixed place PE and potentially a Service PE. Using an EOR does not eliminate PE risk if the foreign company directs and controls the work.

Aggregation Rules: How Days Are Counted

Understanding how India counts days for Service PE purposes is critical for threshold management. Indian tax authorities and tribunals have established several important counting rules:

Which Days Count

• Days of actual service delivery: Only days on which the employee physically performed services in India count toward the threshold
• Multiple employees are aggregated: If Company A sends Employee X for 50 days and Employee Y for 45 days to India in the same 12-month period, the total is 95 days, exceeding the 90-day threshold under many treaties
• Rolling 12-month period: The threshold is measured over any 12-month rolling period, not a calendar or fiscal year. This means you cannot reset the count by crossing a year boundary

Which Days Do Not Count

• Vacation days: Personal holidays spent in India (without performing work) should be excluded, though documentation is essential
• Travel days: Days spent solely in transit may be excludable, depending on the specific tribunal's interpretation
• Weekends and public holidays: Non-working days when no services were rendered should be excluded, per the Delhi High Court's guidance

The burden of proof lies with the taxpayer. Without meticulous time-tracking records, Indian tax authorities may count all days of physical presence, including weekends and holidays, toward the threshold.

Tax Consequences of a PE Determination

If Indian tax authorities successfully assert a PE, the consequences are substantial:

Corporate Tax Liability

Business profits attributable to the Indian PE are taxed at the foreign company tax rate of approximately 35% (including surcharge and cess). This is significantly higher than the 25% rate available to Indian domestic companies or wholly-owned subsidiaries.

Transfer Pricing Obligations

Once a PE is established, all transactions between the PE and the head office (and other group entities) must be at arm's length under India's transfer pricing rules. This requires maintaining contemporaneous documentation, filing Form 3CEB annually, and potentially defending the pricing in audits and litigation.

Withholding Tax Obligations

Payments to the foreign company that are attributable to the PE must be subject to withholding tax under Section 195. Indian customers making payments may also face disallowance of expenses if they fail to withhold tax.

Retrospective Assessment

Indian tax authorities can assess PE status for prior years (up to 6 years, or 10 years in cases of income escaping assessment). This means a PE determination in 2026 could result in tax demands going back to 2020, with interest at 1% per month and potential penalties of 100-300% of the tax amount.

Mitigation Strategies

Foreign companies can take concrete steps to manage PE risk from remote employees in India:

Strategy 1: Establish an Indian Entity

The most definitive solution is to incorporate an Indian subsidiary (foreign subsidiary registration) or branch office. When employees are hired by the Indian entity, PE risk for the foreign parent is eliminated. The Indian entity pays corporate tax at the lower domestic rate (25% vs 35% for foreign companies), and transfer pricing is managed through an intercompany agreement.

Strategy 2: Time Tracking and Threshold Management

If an Indian entity is not feasible, implement rigorous time tracking for all employees who visit or work from India:

• Track days spent in India per employee, per 12-month rolling period
• Set alerts at 50% of the treaty threshold (45 days for 90-day treaties)
• Rotate employees to stay below thresholds
• Document the purpose of each visit (business development vs service delivery)

Strategy 3: Limit Authority of Indian-Based Personnel

To avoid dependent agent PE:

• Ensure no Indian-based employee has authority to conclude contracts
• All contracts must be approved and signed by personnel outside India
• Pricing decisions, commercial negotiations, and client commitments should be made outside India
• Document the approval workflows and decision-making processes

Strategy 4: Use an Indian Subsidiary for Client-Facing Activities

Structure your operations so that all Indian client-facing activities, sales, contract negotiation, and service delivery, are performed by the Indian entity. The foreign parent provides support services (R&D, product development, shared services) that are less likely to create a PE.

Strategy 5: Document Everything

Maintain comprehensive documentation of:

• Employment contracts specifying work location expectations
• Travel logs and day-count records for all India visits
• The commercial rationale for each employee's role and location
• Approval workflows showing that contracts are not concluded in India
• Internal policies on remote work and international mobility

Key Takeaways

• A single remote employee in India can create a PE. The 90-day Service PE threshold under India's DTAAs with the USA, UK, and Singapore means a full-time remote worker breaches the threshold within 3 months.
• India rejects OECD safe harbors. The OECD's 2025 framework including the 50% working time test and commercial reason test does not apply in India. Do not rely on these protections.
• Physical presence is the trigger. Recent Delhi High Court and Tribunal rulings confirm that physical presence in India is required for a Service PE. Purely remote service delivery from outside India generally does not create a PE.
• PE tax rates are punitive. Foreign company PE profits are taxed at approximately 35%, compared to 25% for an Indian subsidiary. The cost difference makes entity formation the preferred solution for significant Indian operations.
• Establish an Indian entity if you have more than 2-3 employees working from India. The tax efficiency, compliance certainty, and risk reduction make it the superior long-term approach. Contact us to explore your options.