Secondment vs Local Hire: Tax, Visa & PE Implications of Each

Why the Staffing Structure Decision Matters More Than You Think

When a foreign company establishes operations in India — whether through a wholly owned subsidiary, branch office, or liaison office — one of the earliest and most consequential decisions is how to staff key positions. The two primary options are secondment (deputing employees from the parent company to the Indian entity) and local hiring (directly employing individuals through the Indian entity).

This is not merely an HR decision. The staffing structure directly impacts whether the foreign parent creates a permanent establishment in India, whether salary reimbursements attract GST, whether the arrangement triggers Fees for Technical Services (FTS) withholding, and which visa category the employees require. Indian tax authorities have become increasingly aggressive in scrutinizing secondment arrangements, particularly after the Supreme Court's landmark 2022 ruling in CCE&ST v. Northern Operating Systems Pvt. Ltd.

Secondment: How It Works and What Triggers

The Basic Structure

In a secondment arrangement, the foreign parent company deputes one or more of its employees to the Indian entity for a defined period. Typically, the secondee continues to be on the payroll of the foreign entity, retains a lien on their employment with the parent, and the Indian entity reimburses the salary cost (with or without a markup) to the foreign parent.

The secondee works under the day-to-day supervision of the Indian entity but remains contractually employed by the foreign parent. At the end of the secondment period, the employee returns to the parent company.

Tax Risk 1: Permanent Establishment Exposure

Indian tax authorities routinely contend that seconded employees constitute a "service PE" of the foreign entity in India under Article 5 of most Double Taxation Avoidance Agreements. The argument is that the secondee is providing services on behalf of the foreign entity rather than working as an employee of the Indian entity.

If a PE is established, the foreign parent becomes liable to tax in India on the income attributable to the PE. This can include a notional profit attribution based on the services rendered by the secondee, typically calculated as a markup of 15-25% on the cost of the secondee's compensation.

The PE risk is assessed under the following tests:

• Fixed place PE: If the secondee operates from a fixed office of the Indian entity for an extended period (typically more than 183 days in a 12-month period)
• Service PE: If the secondee provides services to the Indian entity that constitute "services" under the DTAA, triggering the service PE threshold (usually 90-183 days depending on the treaty)
• Agency PE: If the secondee has the authority to conclude contracts on behalf of the foreign parent

Tax Risk 2: Fees for Technical Services (FTS)

Indian tax authorities have also sought to classify secondment reimbursements as "Fees for Technical Services" under Section 9(1)(vii) of the Income Tax Act, 1961, and under the relevant DTAA article. If the reimbursement is treated as FTS, withholding tax at 10-15% (depending on the DTAA) applies on the gross amount reimbursed, plus applicable surcharge and cess.

The FTS risk is heightened when the secondee brings specialized skills or technical knowledge that the Indian entity lacks. If the secondment is structured as knowledge transfer or technical assistance rather than operational staffing, the FTS characterization becomes more defensible for the tax authorities.

Tax Risk 3: GST on Secondment Reimbursements

The Supreme Court's May 2022 ruling in Northern Operating Systems (NOS) Pvt. Ltd. held that secondment arrangements can constitute a "supply of manpower" by the foreign entity to the Indian entity, making the reimbursement liable to GST under the reverse charge mechanism.

Following the NOS ruling, the CBIC issued Instruction No. 05/2023-GST (December 13, 2023) clarifying that the NOS judgment should not be applied mechanically to all secondment cases. Instead, each arrangement must be evaluated based on its unique facts, including:

• Who exercises effective control and supervision over the secondee
• Whether the Indian entity issues the appointment letter and has termination rights
• Whether the salary is paid directly by the Indian entity or reimbursed to the parent
• Whether a markup is charged on the reimbursement
• Whether the secondee's lien with the foreign entity is discharged during the secondment

Where the arrangement is treated as a supply of manpower, GST at 18% applies under the reverse charge mechanism, with the Indian entity liable to pay. This amount may not always be available as input tax credit, particularly for entities in exempt or mixed-supply sectors.

Local Hire: How It Works and What It Avoids

The Basic Structure

In a local hire arrangement, the Indian entity directly employs the individual. The employment contract is with the Indian entity, salary is paid from the Indian entity's payroll, the Indian entity exercises full control and supervision, and the employee's tax obligations are handled entirely by the Indian entity through TDS (Tax Deducted at Source) under Section 192 of the Income Tax Act.

If the individual is a foreign national, the Indian entity sponsors their employment visa and handles FRRO registration.

What Local Hire Eliminates

A genuine local hire structure eliminates the following risks:

• No PE risk: The employee works for the Indian entity, not on behalf of the foreign parent. There is no "service" being provided by the foreign entity
• No FTS risk: Since there is no cross-border payment for services, the FTS provisions do not apply
• No GST on reimbursements: There are no cross-border reimbursements to characterize as supply of manpower
• No Form 15CA/15CB for salary payments: Salary is paid domestically from the Indian entity's bank account

Side-by-Side Comparison: Secondment vs Local Hire

Visa Requirements: E1 vs E2 Employment Visa

E1 Visa (Direct Employment)

The E1 subcategory applies to foreign nationals directly employed by an Indian company. Requirements include a formal employment contract with the Indian entity, proof that the role requires specialized skills not available locally, a minimum annual salary of USD 25,000 (approximately INR 21 lakh at current rates), and the Indian entity must be registered with the relevant authorities.

E2 Visa (Intra-Company Transfer / Secondment)

The E2 subcategory applies to foreign nationals transferred from a foreign parent or group company to an Indian subsidiary or affiliate. The individual must have been employed by the foreign entity for at least one year, the transfer must be to a related entity (parent-subsidiary or affiliate), and the same USD 25,000 minimum salary threshold applies.

FRRO Registration

All foreign nationals staying in India for more than 180 days on an Employment Visa must register with the Foreigners Regional Registration Office (FRRO) within 14 days of arrival. The e-FRRO portal handles most registrations digitally. Non-compliance can result in visa cancellation and deportation orders.

The Northern Operating Systems Ruling: What Changed

The Supreme Court's May 2022 judgment in CCE&ST v. Northern Operating Systems Pvt. Ltd. fundamentally altered the legal landscape for secondment arrangements in India. The Court held that:

• No singular test determines whether a secondment constitutes employment or a supply of services — a multi-factor analysis is required
• The "substance over form" doctrine applies — the contractual label of "secondment" does not override the economic reality
• Where the foreign entity retains the employment relationship, adds markups to cost recovery, and the secondee's specialized skills benefit the Indian entity, the arrangement is more likely to constitute a taxable supply of manpower
• Each case must be assessed on its unique facts, and the NOS judgment itself should not be applied as a universal precedent

Post-NOS, many multinational companies operating in India have restructured their secondment arrangements to either convert secondees to local hires or restructure the arrangement to ensure the Indian entity is clearly the employer in substance.

Structuring Strategies to Minimize Risk

Strategy 1: Full Local Hire (Cleanest Structure)

Convert secondees to direct employees of the Indian entity. Terminate the employment relationship with the foreign parent, issue a fresh employment contract from the Indian entity, transfer payroll entirely to India, and ensure the Indian entity exercises full control and supervision. This eliminates all PE, FTS, and GST risks but may not be suitable where the employee needs to return to the parent company after a defined period.

Strategy 2: Restructured Secondment (Hybrid Approach)

If full local hire is not feasible, restructure the secondment to minimize tax exposure:

• Ensure the Indian entity issues the appointment letter and has the right to terminate
• Pay salary directly from the Indian entity's payroll — avoid reimbursement mechanisms
• Discharge the secondee's lien with the foreign entity during the secondment period
• Do not add any markup on cost-sharing — recover only actual salary costs
• Ensure the Indian entity deducts TDS on the full salary under Section 192
• Maintain documentation showing the Indian entity exercises day-to-day supervision

Strategy 3: Short-Term Assignments Under Business Visa

For assignments of less than 180 days that do not involve day-to-day employment functions (e.g., training, knowledge transfer, project oversight), a Business Visa may be appropriate. Business Visa holders cannot engage in direct employment or receive salary from an Indian entity. This structure avoids PE and FTS issues but is limited to genuine business activities such as attending meetings, establishing trade connections, and conducting training.

Social Security Agreements: Avoiding Dual Contributions

India has signed Social Security Agreements (SSAs) with 22 countries including Belgium, Germany, France, Japan, South Korea, the Netherlands, and Australia. Under these SSAs, a seconded employee who continues to contribute to the home country's social security system may be exempt from Indian Provident Fund contributions for up to 5 years (extendable in some cases).

To claim the exemption, the employee must obtain a Certificate of Coverage (CoC) from their home country's social security authority before the secondment begins. Without the CoC, the Indian entity is liable to deduct PF at 12% of basic salary from the secondee's compensation.

For countries without an SSA (including the United States and China), seconded employees face dual social security contributions — both in India and the home country — with no relief mechanism.

Transfer Pricing Implications

Secondment arrangements between related parties fall within the scope of transfer pricing regulations under Sections 92 to 92F of the Income Tax Act. The Indian tax officer can scrutinize whether the reimbursement amount reflects arm's length pricing. If the reimbursement includes a markup, the tax authorities may accept it as reflecting market value. Conversely, if the reimbursement is at pure cost (no markup), the authorities may argue that a comparable third-party staffing arrangement would include a margin, and impute one.

For local hires, transfer pricing does not apply to salary payments — these are domestic transactions between the Indian entity and its employee. However, if the foreign parent provides management support, training, or oversight for the local hire, those services may separately attract transfer pricing scrutiny as management fees or technical service charges.

Companies should maintain robust benchmarking documentation for secondment cost-sharing arrangements, including comparables from third-party staffing agencies in India that provide similarly skilled professionals.

Practical Cost Comparison

For a senior manager role with a base salary of INR 50 lakh, a secondment arrangement can cost 30-50% more than an equivalent local hire when factoring in expat allowances, housing, tax equalization, and potential GST exposure. This cost differential often drives the decision toward local hiring for long-term positions, reserving secondment for short-term knowledge transfer or critical leadership roles during the initial setup phase.

FEMA Considerations for Both Structures

Under FEMA regulations, salary payments to foreign nationals working in India are generally treated as current account transactions and do not require RBI approval. However, if the secondment involves cost-sharing arrangements where the Indian entity remits funds to the foreign parent for salary reimbursement, the remittance must comply with FEMA reporting requirements through the Authorized Dealer bank.

For local hires, salary paid from the Indian entity's domestic bank account has no FEMA implications. The employee's personal remittances (sending salary abroad) are governed by the Liberalised Remittance Scheme (LRS) limit of USD 250,000 per financial year.

Compliance Documentation Checklist

For Secondment Arrangements

Foreign companies deploying secondees to India should maintain the following documentation to defend against PE, FTS, and GST challenges:

• Secondment agreement clearly defining the Indian entity as the day-to-day supervisor with rights to assign work, evaluate performance, and terminate the secondment
• Board resolution of the Indian entity approving the secondment and accepting supervisory control
• Transfer pricing documentation benchmarking the cost-sharing arrangement against arm's length comparables
• Certificate of Coverage from the home country's social security authority (if SSA applies)
• Employment Visa (E2) and FRRO registration confirmation for each secondee
• Monthly timesheets and work allocation records showing the Indian entity's operational control
• TDS deduction records showing compliance with Section 192 on the secondee's Indian salary component

For Local Hire Arrangements

Documentation requirements for local hires are simpler but still essential:

• Employment contract with the Indian entity specifying all terms, including salary, benefits, reporting structure, and termination provisions
• Employment Visa (E1) application and approval, including the sponsorship letter from the Indian entity
• FRRO registration within 14 days of arrival for stays exceeding 180 days
• PAN card application for Indian tax purposes
• Monthly payroll records and TDS deduction certificates (Form 16)

Key Takeaways

• Local hire is the cleanest structure from a tax, GST, and PE perspective — it eliminates cross-border service characterization and all associated risks.
• Secondment creates PE risk (service PE under DTAA), FTS withholding risk (10-15% on gross reimbursement), and GST exposure (18% reverse charge) — all of which require careful structuring and documentation to mitigate.
• The Supreme Court's NOS ruling (2022) and CBIC Instruction No. 05/2023-GST require a multi-factor substance-over-form analysis for every secondment arrangement.
• Both seconded employees and local hires require an Employment Visa (E1 or E2) with a minimum salary of USD 25,000/year and FRRO registration within 14 days for stays exceeding 180 days.
• Social Security Agreements with 22 countries can eliminate dual PF contributions for secondees — but only with a Certificate of Coverage obtained before the secondment begins.
• Engage a tax advisor and an immigration specialist before deploying foreign employees to India, regardless of the chosen structure, to map all compliance obligations.