Tax Advantages of Switching a Cost-Center Subsidiary to EOR

What would you do with the money and time you’d save if you didn’t have to pay taxes on your cost-center subsidiary in India? You could reallocate it or reinvest it in your business. You will save time required in filing taxes and returns and spend it to focus on revenue-generating operations.

In addition to the tax advantages, you could lift off the burden of managing a subsidiary by making the EOR switch. And yes, this option will allow you to continue working with your employees, even without your subsidiary.

Through this blog, you’ll learn of the taxes you can save and gain better control over your resources. And how saving taxes will trickle down to saving your time. I will be covering this blog on four main fronts:

• Tax savings
• Cost savings
• Time savings
• Risk mitigation

Why Transition From a Cost Center Subsidiary to EOR?

Before we dive into the tax advantages and other aspects, I want to make sure, we’re all on the same page with the basics. So let’s quickly understand why you should transition from a cost-center and what are the EOR benefits..

Why switch to an EOR provider?

Paying taxes and investing proper time in being accurate and compliant with all tax-related laws is necessary, yes. But it makes better sense for subsidiaries that generate revenue in India. If your Indian entity is incurring expenses but is not directly generating revenue, you have a cost-center subsidiary.

And if you have a cost-center, you can choose a more cost, time, and tax-efficient option to set up your cost-center teams. This option is an employer of record (EOR).

With an EOR, you basically shift your employees to the payroll and administration of your EOR partners, so you can continue working with them. This allows you to close your subsidiary and save on significant taxes and filing procedures.

This move offers great tax and cost advantages, especially for businesses that want to allocate limited resources to their cost-center operations. These could be small and medium entities, startups, or just businesses planning strategic resource allocation.

What is an employer of record (EOR)?

An employer of record (EOR) is a company that acts as a legal employer for global companies helping them hire employees in countries like India. In simple words, the EOR benefits allow you to hire employees outside your country without setting up your legal entity in that country.

For companies that have set up subsidiaries in India as cost centers or back offices, switching from a subsidiary to an EOR model can change the game for you. It offers considerable business advantages. But here in this blog, we will discuss the tax and other advantages.

Let’s get into the first of the four fronts I’ll be covering in this blog – taxes that you save by switching from your entity to an EOR.

 

How Subsidiary to EOR Transition Provide Tax Advantages?

By the way, do you know which superhero pays no tax?

Spiderman, cause all his income is net!

Yes, I know you can’t say no to all taxes and no, you’re not Spiderman. But EOR is your way to free yourself of those hefty tax bills. If you’ve been managing a subsidiary in India, you know that the tax obligations can pile up real quickly. Let’s take a look at what these taxes are.

• Corporate income tax

Even if your subsidiary is a cost-center for you, it is still an independent entity for the Indian government. And it is still subject to corporate tax. This tax can become a burden for a cost-center.

With an EOR transition, this burden goes away as you shut down your subsidiary. And yes, you need to transition to EOR for that to happen. Once you transition to EOR, one of the biggest tax advantages is you needn’t worry about paying corporate tax.

• Goods and services taxes (GST)

Despite being a cost-center, you’re still very much required to comply with GST. This includes everything from GST registration to timely filings. In your transition to EOR, you get a zero-rated GST in India.

The only GST that might need to be paid is to your EOR partner for their services. Which is again a part of the EOR fee, not tax filed with the government. As a business, you don’t need to do the GST filings and annual audits when you shut down your entity.

• Withholding taxes on cross-border payments

Non-revenue-generating subsidiaries may still incur indirect taxes on cross-border transactions like royalty payments, management fees, or dividends sent between parent companies and subsidiaries.

If you’re running a subsidiary, you’re required to pay withholding tax on cross-border payments. With EOR, this tax goes out of question as you do not have any direct local/on-ground monetary dealings.

• Transfer pricing

When running a foreign subsidiary, transfer pricing often becomes a major concern. These rules require all transactions to reflect market conditions, just as they would between unrelated parties. To ensure compliance, this pricing must be certified by a chartered accountant, confirming it follows arm’s length principles.

The challenge arises when the advice from the chartered accountant doesn’t align with the perspective of the tax auditor. This mismatch can lead to disputes or litigation, potentially resulting in additional taxes or penalties in2 India.

What Additional Costs Are Saved Beyond Tax Advantages in the EOR Switch?

Saving taxes with an EOR switch is a big win, yes, but why stop at that? When you don’t have to pay taxes for a non-revenue-generating subsidiary, you save a whole bunch of related expenses as well. And these savings add up faster than you might think. Mentioned below are the expenses you can save post-EOR transition.

• Accounting and compliance costs

Filing taxes isn’t just about the absolute taxed amounts. You need tax consultants, auditors, and legal advisors, trained staff to ensure everything’s accurate and compliant. Cost-center or not, you still have to pay the hefty fees for professional advice and expertise.

With an EOR? All above mentioned are eliminated. You’re only left with compliance related to managing employees. And it’s not you who needs to take care of it either. Your EOR partner does.

Read: Significance of Quick and Compliant Market Entry with EOR

• Administrative overheads

The administrative overheads include the cost allocations related to keeping records, preparing documentation, coordinating with tax authorities, etc. This demands additional resources who can manage these activities for you. With an EOR in the picture – no tax, no paperwork, no resources, no administrative overheads – cost savings, check!

Because you will have no entity of yours to manage all this.

• Penalty and interest charges

Bruce Lee says, “Mistakes are always forgivable if one has the courage to admit them.” Except, in this case, admitting the mistakes is not going to keep away the heavy penalties, increased interest rates, or even legal action. 

Now these mistakes can be like,

• PF contributions missed out for a month
• Insurance not renewed
• Query raised by tax departments that was not responded to

When you shut down your entity, tax-related compliance is not what you have to worry about. It becomes the responsibility of the EOR.

• Tax systems and software overheads

Managing taxes means investing in software for tax filings, payroll management, and compliance tracking. and so on. Plus, the ongoing overhead cost of maintaining and updating all this tech.

When you transition to EOR, even these aspects are managed on your behalf, hence, taking off the overheads of these.

What Are the Tax-Related Time Savings in an EOR Transition?

Let’s now speak about how these tax advantages can help you save time by closing your Indian entity and switching to EOR.

• Tax management across time zones

Managing taxes across time zones between your home office and your Indian entity can be time-consuming, from learning local tax laws to coordinating with authorities and handling documentation.

The need for cross-time-zone communication and extensive research compounds these delays. With an EOR, you eliminate the need to learn Indian taxation, avoid time zone delays, and offload all research, compliance, and documentation tasks to local experts, saving your team significant time and effort.

• Tax filing and documentation

Dealing with taxes is a real hassle. You need to face the endless back-and-forth with tax departments, chasing forms, and double-checking everything to make sure it’s right. Not to mention the complex compliance with various laws. Any errors in compliance lead to further time being taken. The main laws you need to be compliant with for taxation are:

• FEMA (Foreign Exchange Management Act), 1999
• RBI compliances
• GST, 2017
• SEBI rules and regulations
• Companies Act, 2013
• Income Tax Act, 1961

But when you switch to an EOR, they take all that off your plate. Your EOR partners handle the tax compliance, the paperwork, and even the deadlines. You can straight skip the stress and focus on business activities at hand.

• Payroll and employee tax reporting

A subsidiary must manage employee payroll, which includes calculating income tax deductions, submitting tax payments to respective authorities, and ensuring compliance with local labor laws.

With the EOR model, these responsibilities are transferred to the EOR provider, saving the company from the administrative burden, further saving time.

• Handling tax and transfer pricing audits

If a tax audit is required, a subsidiary must spend considerable time gathering documents, preparing responses, and working with auditors. Your EOR, on the other hand, assumes all responsibility for audits, reducing the time spent managing this process. 

• RBI compliance for cross-border payments

When you operate a subsidiary in India, every cross-border payment you receive requires meticulous compliance with Reserve Bank of India (RBI) regulations. This includes documentation, reporting, and approvals, which can be time-consuming.

With an EOR, you no longer need to worry about these regulatory obligations. This saves you valuable time and ensures smooth operations.

How Are Tax Risks Mitigated with the EOR Switch?

Walking on a tightrope is what mitigating risks related to taxes is like. One misstep causes the person to trip. One slight error in compliance results in substantial financial repercussions, including hefty fines, penalties, even legal action.

These compliance errors can also occur when there have been certain changes in tax regulations, and if your legal team isn’t caught up to it. One of the biggest tax advantages you can get is switching your employees to EOR.

How EOR helps?

Shutting down your Indian entity and switching to an EOR takes the possibility of any potential tax risks away.

There’s still compliance related to your employees, but your EOR partner takes care of it for you. At Remunance, for instance, we pride ourselves on our strong compliance.

How Remunance helps in mitigating tax risks and providing tax advantages?

We know the local tax laws inside out. And we ensure everything is done by the book. No missed filings, no compliance gaps, and no surprises from the tax authorities. This makes an EOR way safer in managing your teams without the risks hanging over your head.

At Remunance, we always stay ahead of all tax regulations. Our teams are proactive in monitoring any changes in tax laws. We make sure your business stays compliant with any and all changes in regulations related to the employees.

Remunance has helped multiple clients transition from their subsidiaries to EOR. Our expertise goes well beyond just paperwork. We understand the challenges of cost-center operations and work to minimize your tax burdens, reduce compliance overheads, and save you valuable time.

Conclusion

Transitioning to an EOR with Remunance isn’t just about gaining tax advantages. It’s about gaining control over your resources.

Mainly because, with an EOR you don’t have locked funds anymore. With an EOR as you strike off your subsidiary, you’re free of all tax and tax-related expenses. An EOR provides 100% compliance relief.

When all of this is piled together, it is evidently noticeable that you free up a lot of financial resources and time. This now creates an opportunity to allot these resources to business operations that help expand your business.