Quick answer: Payroll for a Spanish company's Indian subsidiary takes 3-6 weeks to set up, covering EPF, ESI, TDS, and professional tax registrations. Under the India-Spain DTAA (in force since January 1995), dividend withholding is capped at 15% and royalties/fees for technical services at 10%, both below India's 20% domestic rate, while a Spanish employee working in India for fewer than 183 days may be exempt from Indian income tax if paid by a non-PE Spanish employer. Under the new Labour Codes, basic pay plus dearness allowance must equal at least 50% of CTC, and total annual payroll costs for a 50-100 employee Spanish subsidiary typically range from INR 5,00,000 to INR 15,00,000.
Key takeaways:
- Setup takes 3-6 weeks; the India-Spain DTAA has been in force since January 1995.
- Dividend withholding is capped at 15%, royalties/FTS at 10% — both below the 20% domestic rate.
- Spanish employees in India under 183 days may be exempt from Indian income tax.
- Basic pay plus DA must equal at least 50% of CTC under the new Labour Codes.
- Annual payroll costs run INR 5,00,000-15,00,000 for a 50-100 employee subsidiary.
Payroll Services for Spanish Companies in India
Spanish companies operating in India through subsidiaries, branch offices, or liaison offices must navigate one of the world's most compliance-intensive payroll landscapes. India's payroll framework requires strict adherence to the Employees' Provident Fund (EPF), Employees' State Insurance (ESI), Tax Deducted at Source (TDS), professional tax, gratuity, and bonus regulations, all governed by both central and state-level legislation.
Spain is a major European trade partner with India, with bilateral trade exceeding USD 8 billion annually. Spanish companies in infrastructure, renewable energy, telecommunications, and FMCG have substantial Indian workforces. Whether you employ five staff in a Private Limited Company subsidiary or 500 across multiple offices, every salary payment must comply with the four Labour Codes that came into force in November 2025.
Under the new Labour Codes, the basic pay plus dearness allowance component must equal at least 50% of the Cost to Company (CTC), fundamentally altering how salary structures are designed. For Spanish companies accustomed to European payroll norms, this shift increases employer contributions to EPF and gratuity and demands expert guidance from the outset.
How Spain's DTAA Affects Payroll
The India-Spain Double Taxation Avoidance Agreement (DTAA), effective since January 1995, directly impacts how Spanish companies structure compensation for employees deployed between the two countries. Under Article 16 of the treaty (dependent personal services), employment income is generally taxable in the country where the work is performed, but several exceptions apply.
Key DTAA Provisions for Payroll
- Short-Stay Exemption: A Spanish employee present in India for not more than 183 days in the relevant fiscal year, paid by a Spanish employer without a Permanent Establishment (PE) in India, may be exempt from Indian income tax on salary
- Withholding on Salary: If the employee is liable to Indian income tax, the Indian entity must deduct TDS under Section 192 based on the applicable income tax slab rates
- Dividends: 15% withholding (reduced from 20% domestic rate)
- Royalties and FTS: 10% withholding, relevant when Spanish parent companies charge management or technical service fees that include seconded employee costs
To claim treaty benefits, the Spanish entity or employee must provide a Tax Residency Certificate (TRC) issued by Spain's Agencia Tributaria and submit Form 10F electronically on India's income tax portal. Without these documents, TDS must be deducted at the higher domestic rate.
Permanent Establishment Risk from Employee Secondments
Spanish companies frequently second employees to Indian subsidiaries. If these seconded employees exercise authority to conclude contracts, or if the secondment arrangement is structured as a service provision rather than a genuine deputation, the Spanish parent may trigger a PE in India. This would expose the parent's business profits to Indian corporate tax at 35% plus surcharge and cess.
Document Requirements from Spain
Both Spain and India are members of the Hague Apostille Convention, which simplifies cross-border document authentication. Spanish companies setting up payroll in India must prepare the following:
- Certificate of Incorporation: Apostilled copy of the Spanish company's Escritura de Constitucion
- Board Resolution: Apostilled resolution authorising the establishment of the Indian entity and appointment of directors
- Tax Residency Certificate (TRC): Issued by the Agencia Tributaria for DTAA benefits on cross-border payments
- Employment Contracts: Bilingual contracts (Spanish and English) detailing salary components, benefits, and Indian statutory compliance terms
- Secondment Agreements: Apostilled agreements for employees deployed from Spain to India, specifying reimbursement terms and PE safeguards
- Power of Attorney: Apostilled PoA for authorised signatories managing payroll and compliance in India
- PAN and TAN Applications: The Indian entity needs a Permanent Account Number (PAN) and Tax Deduction Account Number (TAN) before processing the first payroll
Since both countries recognise apostille, there is no need for embassy attestation. Documents apostilled by Spain's Ministry of Justice are directly accepted by Indian authorities.
Step-by-Step Payroll Setup Process
Setting up payroll for a Spanish company's Indian operations involves the following steps:
Step 1: Entity Registration and Statutory Enrolments
Register the Indian entity with the Employees' Provident Fund Organisation (EPFO), Employees' State Insurance Corporation (ESIC), and obtain a GST registration if applicable. Register under the relevant state's Shops and Establishments Act within 30 days of commencing operations.
Step 2: Salary Structure Design
Design India-compliant salary structures where basic pay plus dearness allowance equals at least 50% of CTC. Key components include basic salary, house rent allowance (HRA), special allowance, employer EPF contribution (12% of basic), and employer ESI contribution (3.25% of gross salary for employees earning up to INR 21,000 per month).
Step 3: Employee Onboarding and KYC
Collect PAN, Aadhaar, bank account details, and Form 12BB (investment declaration) from each employee. Link employee Aadhaar with their Universal Account Number (UAN) for EPF. Enrol employees in ESI where applicable.
Step 4: Monthly Payroll Processing
Process payroll by the last working day of each month. Calculate gross salary, deduct employee EPF (12% of basic), employee ESI (0.75% of gross for eligible employees), TDS under Section 192, and professional tax as per the applicable state schedule. Generate payslips and disburse net salary via bank transfer.
Step 5: Statutory Deposits and Returns
Deposit TDS by the 7th of the following month through the e-Pay Tax facility on the income tax portal, and manage TDS statements and Form 16 downloads on the TRACES portal. Deposit EPF and ESI contributions by the 15th of the following month. File quarterly TDS returns (Form 24Q) by July 31, October 31, January 31, and May 31. File monthly ESI returns and EPF Electronic Challan cum Return (ECR).
Step 6: Annual Compliance
Issue Form 16 (TDS certificate) to all employees by June 15. File the annual income tax return for the entity. Compute and pay bonus under the Payment of Bonus Act (minimum 8.33%, maximum 20% of basic plus dearness allowance). Calculate gratuity liability for employees completing five or more years of service.
Timeline and Costs
The payroll setup and processing timeline for Spanish companies follows India's April-to-March financial year:
Setup Timeline
- EPFO and ESIC registration: 7-14 days
- TAN registration: 7-10 days
- Shops and Establishments registration: 7-15 days (varies by state)
- Full payroll setup: 3-6 weeks from entity incorporation
Monthly Deadlines
- Salary disbursement: Last working day of the month
- TDS deposit: 7th of the following month
- EPF deposit: 15th of the following month
- ESI deposit: 15th of the following month
- Professional tax: Varies by state (typically monthly or half-yearly)
Estimated Costs
- Payroll processing (per employee per month): INR 500 - 1,500
- Statutory compliance management: INR 15,000 - 40,000 per month
- Annual TDS return filing: INR 10,000 - 25,000
- Form 16 generation: INR 200 - 500 per employee
- Payroll software and setup: INR 25,000 - 1,00,000 one-time
Total annual payroll management costs for a mid-sized Spanish subsidiary with 50-100 employees typically range from INR 5,00,000 to INR 15,00,000.
Common Challenges for Spanish Companies
Spanish companies managing payroll in India frequently encounter the following challenges:
Salary Structuring Under New Labour Codes
The new Labour Codes mandate that basic pay plus dearness allowance must be at least 50% of CTC. Spanish companies accustomed to allocating large portions of salary to allowances must restructure compensation, which increases EPF and gratuity costs. A salary of INR 12,00,000 CTC now requires at least INR 6,00,000 as basic plus DA, significantly raising employer EPF contributions.
Multi-State Compliance
If the Spanish company has offices in multiple Indian states, each state has its own professional tax rates, Shops and Establishments Act requirements, and labour welfare fund contributions. Maharashtra, Karnataka, Tamil Nadu, and Delhi each have distinct compliance calendars and rate structures.
Secondment vs. Employment Classification
Spanish companies must carefully distinguish between genuine secondments (where the employee remains on the Spanish payroll) and shadow employment arrangements. Indian tax authorities scrutinise secondment agreements to determine whether the Indian entity is the economic employer, which affects TDS obligations, EPF applicability, and PE risk for the Spanish parent.
Currency and Cross-Border Payments
Reimbursing the Spanish parent for seconded employee costs requires compliance with FEMA regulations and RBI guidelines on cross-border payments. Each remittance for salary reimbursement must be reported through authorised dealer banks with proper documentation, including Form 15CA and 15CB certification.
Gratuity and Bonus Provisions
Indian labour law requires employers to pay gratuity (15 days of last-drawn salary for each year of service) to employees completing five years, and a statutory bonus (8.33% to 20% of basic plus DA) annually. These provisions, unfamiliar to most Spanish companies, require careful provisioning in financial statements.
Why Choose Beacon Filing
Beacon Filing provides end-to-end payroll services for foreign companies operating in India. Our team of payroll specialists and Chartered Accountants handles every aspect of Indian payroll compliance, from salary structuring under the new Labour Codes and EPF/ESI registration to monthly TDS deposits, quarterly returns, and annual Form 16 issuance. We specialise in DTAA advisory for European companies, ensuring that your Spanish employees and cross-border compensation arrangements are optimised for treaty benefits.
Contact us today for a free consultation on setting up payroll and compliance for your Spanish business in India.