Permanent establishment risk when hiring in India

A “permanent establishment” (PE) is a tax concept under the India–US and India–UK Double Taxation Avoidance Agreements (DTAAs) that, when triggered, gives India the right to tax part of a foreign company's global profits attributable to its India activity. For founders, the practical question is simpler: does hiring an engineer in India accidentally create a taxable presence for my company in India?

Short answer: employing someone full-time in India through your foreign legal entity can create PE risk. Employing through an EOR significantly reduces permanent-establishment risk — the EOR is the legal employer, so the worker isn't your employee and a well-drafted engagement keeps contract-signing authority out of India. It does not eliminate PE risk on its own: dependent-agent PE still turns on whether someone in India habitually concludes contracts on your behalf (the test from DIT v. Morgan Stanley). Keep that authority at home and the risk stays low.

What triggers PE

The three categories under the DTAAs that matter for hiring:

Fixed-place PE — a place of business at your disposal in India (an office, a rented desk, a registered address).
Agency PE — a dependent agent in India who habitually concludes contracts in your name, or plays the principal role leading to conclusion of contracts.
Service PE — services performed in India by personnel of the foreign enterprise for periods aggregating beyond a threshold (often 90 days in any 12-month period for related-party services under specific treaties).

Hiring an engineer directly on your foreign payroll, who works from their home in Bangalore on your codebase, sits awkwardly across all three depending on facts. The conservative reading is that you are exposed.

Why an EOR removes the exposure

An EOR like TWF Labs employs your hire in India on a compliant local employment contract, with the EOR as the legal employer in India. Operationally, your engineer works on your roadmap and reports to your team. Legally, they hold an Indian employment contract under that arrangement. Payroll, tax withholding, and PF contributions run on the strength of the EOR's Indian registration — not yours. The PE analysis is managed on our side.

This is not theory. It is the structural reason EORs exist: to let companies build teams in markets where they would otherwise need to incorporate.

What an EOR does not fix

An EOR does not paper over:

A salesperson in India closing your contracts — that is still agency PE risk, whoever pays the salary.
A foreign founder spending months at a time working from India — that is still your personal presence.
Long, on-site delivery work for an India client where your team is on the ground — that is still service PE.

If you are hiring engineers to build your product, an EOR sidesteps PE. If you are putting boots on the ground in India for India revenue, get a tax lawyer before anything else.

What founders should ask a tax advisor

Five questions worth running past your tax counsel:

Do my India hires, employed by an EOR, conclude any contracts on my behalf?
Do they have access to a fixed place of business at my disposal in India?
Am I or any director spending material time physically working in India?
Are we generating any India-sourced revenue?
Is the EOR's contracting structure documented in a way that survives a substance-over-form challenge?

If the honest answer is “no” to 1–4 and “yes” to 5, PE risk for product-engineering hiring through an EOR is low.

This guide is general information, not legal or tax advice. Engage qualified counsel before acting.

Sources

Primary (government):

Income Tax Department, Government of India — Tax Treaties / DTAAs (incometaxindia.gov.in)

Supporting (law / advisory firms):

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