How a US SaaS Company Accidentally Created a PE in India

The Background: A US SaaS Company Scales Into India

In early 2024, a Delaware-incorporated SaaS company with USD 15 million ARR decided to expand into the Indian market. Their product — a cloud-based procurement platform — had attracted interest from three large Indian manufacturing companies. The founders believed they could serve the Indian market from their San Francisco headquarters without establishing a legal entity in India. They were wrong.

Over 18 months, the company made three decisions that, individually, seemed operationally reasonable but collectively created an undeniable permanent establishment in India. The resulting tax exposure was substantial: the Indian tax authorities assessed the company on profits attributable to its Indian operations at the foreign company corporate tax rate of 35% (effective rate approximately 37.13%-38.22% including surcharge and cess; the base rate was cut from 40% to 35% with effect from 1 April 2024, i.e. FY 2024-25 / AY 2025-26, under the Finance (No.2) Act, 2024).

Decision 1: Hiring a Country Manager on Indian Payroll

The company's first hire in India was a "Country Manager" based in Mumbai. He was hired as a full-time employee of the US parent company — there was no Indian entity to employ him. His compensation (approximately USD 120,000 annually) was paid from the US entity's bank account directly to his Indian bank account. His responsibilities included:

• Identifying and qualifying enterprise prospects in India
• Conducting product demonstrations and proof-of-concept engagements
• Negotiating contract terms, pricing, and service-level agreements
• Signing contracts on behalf of the US company using a power of attorney
• Managing the post-sale relationship with Indian clients

This single hire triggered a Dependent Agent PE under Article 5(4) of the India-US DTAA. The DTAA defines a dependent agent PE as arising when a person — other than an agent of independent status — is acting on behalf of an enterprise and has, and habitually exercises, an authority to conclude contracts in the name of the enterprise.

The Country Manager satisfied every element of this definition:

• Authority to conclude contracts: He had a power of attorney authorising him to sign subscription agreements on behalf of the US entity
• Habitual exercise: He signed 4 contracts in 12 months, establishing a pattern of habitual contract conclusion
• Dependent status: He worked exclusively for the US company (100% of his income came from this single employer), making him economically dependent — not an independent agent
• Acting in India: All his activities were conducted from India, for Indian clients

The Indian tax authorities discovered this arrangement through a routine examination of the Country Manager's personal income tax return. His Form 16 equivalent showed salary income from a foreign employer, which triggered a flag in the department's database. The department cross-referenced this with the SaaS company's Indian clients, who had reported payments to the US entity in their own tax filings — payments that matched the contracts signed by the Country Manager.

Decision 2: Sending Engineers for Implementation

The SaaS platform required on-site implementation for enterprise clients. This involved configuring the software, integrating with the client's ERP system, training users, and providing go-live support. The US company sent a rotating team of engineers to India for these implementations.

Over a 12-month period (April 2024 to March 2025), the aggregate employee days spent in India were:

Under Article 5(2)(l) of the India-US DTAA, a Service PE arises when an enterprise furnishes services through employees or other personnel, where activities of that nature continue within India for a period or periods aggregating more than 90 days within any 12-month period. With 143 aggregate employee-days, the company exceeded the 90-day threshold by 53 days.

A critical mistake the company made was failing to track aggregate employee days across all personnel. Each individual engineer spent fewer than 90 days in India, which gave the company a false sense of compliance. But the DTAA explicitly aggregates days across all employees — it is the enterprise's total presence, not any individual's presence, that matters.

Decision 3: Using a Co-Working Space as a De Facto Office

The Country Manager worked from a dedicated desk at a co-working space in Mumbai's Bandra Kurla Complex. The company had signed a 12-month membership agreement with the co-working provider, giving the Country Manager a fixed desk, a meeting room allocation, and a mailing address. Visiting engineers also used this space during their India trips.

While a co-working space does not automatically constitute a Fixed Place PE, the arrangement in this case had characteristics that tipped it over the line:

• The desk was dedicated (not hot-desked) — the same physical location was at the company's disposal throughout the year
• The membership was for 12 months — establishing permanence
• The company's business was conducted from this location — the Country Manager negotiated contracts, conducted product demonstrations, and managed client relationships from this desk
• Visiting engineers used the same space — reinforcing it as a fixed place of business for the enterprise

The tax authorities argued — and the facts supported — that this constituted a Fixed Place PE under Article 5(1) of the India-US DTAA. The company had a fixed place of business in India through which its business was wholly or partly carried on.

The Tax Assessment: What the Authorities Demanded

The Indian tax authorities issued an assessment order covering AY 2025-26 (FY 2024-25). The assessment proceeded on the basis that the US company had a PE in India through all three mechanisms — dependent agent PE, service PE, and fixed place PE. The profit attribution followed the arm's-length principle under transfer pricing rules:

Revenue Attribution

The TPO attributed revenue from the company's Indian clients to the PE. The total subscription revenue from Indian clients during FY 2024-25 was approximately USD 1.2 million (INR 10 crore at prevailing exchange rates). The authorities also attributed a portion of the implementation and consulting revenue earned from Indian engagements.

Profit Attribution

Using the Profit Split Method, the TPO attributed 35% of the India-sourced revenue to the Indian PE, recognising that significant product development and platform maintenance occurred in the US. The attributed revenue was approximately INR 3.85 crore, with attributed operating costs of INR 1.90 crore (including the Country Manager's compensation, travel costs, co-working space charges, and an allocation of US-based engineering costs for Indian implementations).

The attributed profit: INR 1.95 crore.

Tax Computation

Penalties and Interest

On top of the tax demand, the authorities levied:

• Penalty under Section 270A: The company had not filed an income tax return in India (it did not believe it had a taxable presence). This was classified as underreporting, attracting a penalty of 50% of the tax payable — approximately INR 41 lakh
• Interest under Sections 234A/234B/234C: Interest for non-filing, non-payment of advance tax, and delayed payment — approximately INR 18 lakh (calculated from the original due date of the return)
• Penalty under Section 271F: INR 10,000 for failure to file the income tax return

Total tax, penalties, and interest: approximately INR 1.42 crore (roughly USD 170,000). For a company that believed it had zero tax obligation in India, this was a severe shock.

Why This Happens to SaaS Companies Specifically

SaaS companies are particularly vulnerable to accidental PE creation because their business model blurs the traditional boundaries that PE rules were designed around:

The "No Entity, No Tax" Misconception

Many US SaaS founders believe that without a legal entity in India, they have no tax obligation there. This is fundamentally incorrect. PE is a tax concept, not a corporate law concept. A PE can exist without any registered entity, any corporate filing, or any formal business registration in India. The PE concept operates independently of company registration — it looks at the substance of economic activity, not the form of legal presence.

The Implementation Requirement

Unlike pure B2C SaaS where the product is self-served, enterprise SaaS typically requires implementation services — configuration, integration, data migration, training, and go-live support. These implementation activities require physical presence in India, which triggers service PE risk. The more enterprise-oriented the SaaS product, the higher the PE risk.

The Country Manager Trap

SaaS companies expanding into India frequently hire a "Country Manager" or "Sales Director" as their first local hire. If this person has any authority to negotiate or conclude contracts on behalf of the US entity, they create a dependent agent PE. The common workaround — hiring the person as a "contractor" — does not eliminate PE risk if the person works exclusively for the company and is subject to its detailed control.

Customer Success and Account Management

Ongoing customer success activities — quarterly business reviews, escalation handling, upselling, renewal negotiations — conducted from India by local personnel further strengthen the PE argument. These are not preparatory or auxiliary activities; they are core revenue-generating functions that directly contribute to the enterprise's business in India.

The Remediation: How the Company Fixed It

After receiving the assessment order, the company engaged Indian tax counsel and developed a two-track remediation strategy:

Track 1: Establish a Legal Entity (Immediate)

The company incorporated a Private Limited Company in India as a wholly owned subsidiary. The subsidiary was incorporated under the SPICe+ process in February 2026 with:

• Authorised share capital of INR 10 lakh
• The Country Manager transferred to the subsidiary's payroll as a full-time employee
• The co-working desk membership transferred to the subsidiary
• All Indian client contracts novated to the subsidiary through a distribution agreement

Going forward, the subsidiary would operate as a limited-risk distributor — it would earn a cost-plus margin for sales, implementation, and support services provided to Indian clients, while the US parent would retain ownership of the IP, platform, and global client relationships. This structure ensures the subsidiary is appropriately compensated at arm's-length, and the parent's profits are not attributable to an Indian PE because the subsidiary — not the parent — now conducts business in India.

Track 2: Contest the Assessment (Parallel)

The company filed an appeal with the Commissioner of Income Tax (Appeals) challenging three aspects of the assessment:

• Fixed Place PE: Argued that a shared co-working desk does not constitute a fixed place at the enterprise's "disposal" under OECD Commentary on Article 5, citing the co-working provider's terms that the desk could be reassigned
• Profit attribution quantum: Argued that the 35% revenue attribution was excessive given that the core product (platform, IP, R&D) resided entirely in the US
• Penalty classification: Argued that the non-filing was due to a bona fide belief that no PE existed, not misreporting — seeking reduction from 200% to 50% penalty under Section 270A

The appeal is ongoing. However, the company accepted the dependent agent PE and service PE findings as factually difficult to contest.

How to Avoid This: A SaaS Company Playbook

For US SaaS companies selling to Indian enterprise clients, here is the playbook to avoid accidental PE creation:

1. Incorporate an Indian Subsidiary Before Hiring Locally

If you need a person in India — whether for sales, implementation, or customer success — incorporate an Indian entity first. A Private Limited Company can be incorporated through the SPICe+ process in 10-15 business days. The cost is INR 30,000-60,000. This is trivial compared to the PE risk. All local hires should be employed by the Indian entity, not the US parent.

For a complete guide to the process, see our guide on company registration in India for foreign companies, or the USA country guide.

2. Track Aggregate Employee Days Rigorously

The India-US DTAA service PE threshold is 90 days in any 12-month period, aggregated across all employees. Implement a centralised travel tracking system. Set alerts at 60 days (warning) and 80 days (critical). The 12-month period is rolling, not calendar-year-based — so you must track continuously. Consider using remote implementation (screen-sharing, video calls) for configurations that do not require physical presence.

3. Never Give Local Personnel Contract-Signing Authority

No individual in India should have authority to conclude contracts on behalf of the US entity. All contracts with Indian clients should be:

• Negotiated and finalised in the US
• Signed by US-based officers
• Executed through electronic signature platforms with the signatory located outside India

If you use a local sales representative, structure them as an independent agent who represents multiple principals, earns commission (not salary), and does not have authority to bind the company contractually.

4. Avoid Fixed Physical Presence

If employees visit India, use hotels or short-term co-working arrangements without dedicated or exclusive desk allocations. Do not sign multi-month memberships that establish permanence. If your Indian subsidiary has an office, ensure parent company employees visiting that office are engaged in the parent's oversight functions (board meetings, audit reviews), not conducting the parent's core business.

5. Structure the Subsidiary as a Limited-Risk Distributor

Once you incorporate an Indian subsidiary, structure the intercompany arrangement so the subsidiary operates as a limited-risk distributor or commissionnaire. The subsidiary earns a cost-plus margin for marketing, sales support, and implementation services. The US parent retains IP ownership, platform risk, and global client relationships. This ensures the subsidiary is the entity conducting business in India — eliminating the PE risk for the parent — while the subsidiary's profits are determined at arm's-length through proper transfer pricing documentation.

6. Understand the Equalisation Levy Is No Longer a Shield

Some SaaS companies previously relied on the 2% Equalisation Levy as an alternative to PE-based taxation. The 2% Equalisation Levy was abolished effective August 1, 2024, and the 6% levy on online advertising was discontinued from April 1, 2025. As of FY 2025-26, the Equalisation Levy framework is fully discontinued. SaaS companies selling to Indian clients must now evaluate their PE exposure independently — there is no levy-based alternative to PE taxation.

7. Get a Form 15CA/15CB Assessment Done

Indian clients paying for your SaaS subscription are required to withhold tax under Section 195 on payments to non-residents. If a PE exists, the withholding tax rate changes from the standard royalty/FTS rate (10-15% under the India-US DTAA) to the applicable business profit rate. Understanding your withholding tax position helps you price correctly for the Indian market and avoid disputes with Indian clients who may face disallowance if they fail to withhold correctly.

The Financial Comparison: PE Risk vs. Subsidiary Cost

The numbers make the case conclusively:

The subsidiary route costs approximately one-third of the PE assessment — and provides legal certainty, avoids penalties, and positions the company for long-term growth in India. The subsidiary also benefits from the lower domestic company tax rate (25.17% under the standard regime, or 22% under Section 115BAA) versus the foreign company rate of 35% (cut from 40% with effect from 1 April 2024) that applies to PE profits.

For help structuring your India operations, explore our foreign subsidiary setup service and FDI advisory services.

Key Takeaways

• A PE can exist without any legal entity in India: The PE concept is a tax concept, not a corporate law concept. Physical presence, agent activities, or service provision can create a taxable PE regardless of whether you have registered a company, filed any forms, or even know that PE rules exist.
• Three common PE triggers for SaaS companies: A local hire with contract-signing authority (dependent agent PE), aggregate employee days exceeding 90 in 12 months (service PE under India-US DTAA), and a dedicated physical workspace (fixed place PE). Any single trigger is sufficient.
• The cost of PE exposure far exceeds the cost of incorporating a subsidiary: In this case, INR 1.42 crore (PE assessment) versus INR 52.50 lakh (subsidiary route) — a 2.7x difference. Factor in the lower corporate tax rate for domestic companies (25.17% vs 35% for foreign companies, the latter cut from 40% effective 1 April 2024), and the subsidiary route is overwhelmingly superior.
• Track aggregate employee days, not individual days: The India-US DTAA aggregates all employee presence in India within any rolling 12-month period. Three engineers each spending 35 days equals 105 days — exceeding the 90-day threshold.
• Incorporate before you hire: If you need any person in India for sales, implementation, or customer success, incorporate an Indian subsidiary first. SPICe+ incorporation takes 10-15 business days and costs INR 30,000-60,000 — a negligible cost relative to PE risk exposure.