Understanding Permanent Establishment (PE) risks while hiring Indian team as contractors

Building a remote team in India can be a game-changer for your business. The talent is exceptional, and the opportunities are immense. But before diving in, it’s crucial to understand something called Permanent Establishment (PE) and how it could impact you if you're hiring contractors. Let’s break it down in simple terms.

What Is Permanent Establishment (PE), and Why Should You Care?

Imagine you’ve hired a contractor in India. The law expects contractors to be independent, juggling multiple clients and delivering work without much interference from you. But what happens if you’re calling the shots on everything? You set their hours, control their tasks, and even dictate how they should work. At that point, they’re not really independent anymore.

That’s where PE comes in. If it looks like you’re running operations in India through these contractors, the government could say, “Hey, you’ve got a Permanent Establishment here,” which means you might owe taxes on your global profits.

How Does PE Affect Your Taxes?

Here’s where it gets tricky. If you’re deemed to have a PE in India, you’ll need to figure out how much of your global profit comes from the work your Indian team is doing. Let’s say your global profit is $1 million, and you have a team of 10 people worldwide, with one person in India. On paper, you might allocate $100,000 as their share.

But it’s rarely that simple. Not everyone’s contributions are equal, and tax authorities may not agree with your calculations. You’ll need to justify every number with solid reasoning, which can quickly become a headache.

Why “Just Using a Platform” Isn’t Enough

You might think, “I’m paying my contractors through a platform, so I’m safe.” Unfortunately, that’s not the case. Those platforms often act as middlemen for payments. The legal relationship still exists between you and the contractor. So, if something goes wrong—like misclassifying your contractor or triggering PE—the responsibility lands squarely on you.

A Safer Path: The Employer of Record (EOR) Model

Here’s a solution that simplifies things: using an Employer of Record (EOR). When you hire through an EOR, your Indian team members are technically employed by the EOR, not you. This means the EOR takes care of local taxes, compliance, and paperwork, while you get to work with the team without worrying about PE risks. It’s a win-win: no extra taxes on your global profits, and you stay compliant.

Make the Right Choice

Tapping into India’s talent pool is exciting, but PE risks can complicate things if you’re not prepared. Hiring contractors directly might seem cost-effective, but it could come with hidden liabilities. Taking the safer route with an EOR model can save you from unnecessary stress and financial surprises.

Want to learn more? We’ve got you covered! Check out our YouTube video, where we dive deeper into PE risks and smart hiring strategies for India. Don’t miss it—your business will thank you!