Quick answer: Permanent establishment risk is the chance that your activity in India gives your foreign company a taxable presence under a tax treaty. If India finds one, attributable profits are taxed here at 35% plus surcharge and cess. Treaties test a fixed place, services delivered by staff and agents who conclude contracts.
- India has over 90 comprehensive tax treaties, and the PE definition usually sits in Article 5.
- On 24 July 2025 the Supreme Court held that Hyatt’s continuous and substantive control over Indian hotels created a fixed-place PE under the India-UAE treaty.
- The same ruling said profits attributable to a PE stay taxable in India even if the foreign enterprise made an overall loss.
- Treaty relief now runs through section 159 of the Income-tax Act, 2025 (formerly section 90) and needs a Tax Residency Certificate.
Which activities create a PE in India?
Three patterns cause most PE findings. A place you control, staff delivering your services here, and people signing deals for you.
| PE type | What triggers it | Typical India example |
|---|---|---|
| Fixed place PE | A place at your disposal through which your business is carried on | A Pune office your managers run day to day |
| Service PE | Staff furnishing services in India beyond a treaty’s day count | Engineers deputed from head office for long stretches |
| Dependent agent PE | Someone in India habitually concluding contracts for you | A sales lead who signs customer deals in your name |
The Supreme Court drew a useful line in its 2007 Morgan Stanley ruling. Nishith Desai’s analysis of Morgan Stanley explains that deputing employees may create a service PE, while stewardship visits by head-office staff do not.
What did the Hyatt ruling change?
It moved the test from paperwork to control. In EY’s alert on the Hyatt judgment, a Dubai company supplying strategic oversight to hotels run by an Indian company was held to have a fixed-place PE in India.
No single formula applies. Facts decide. The Court weighed disposal over the premises, the depth of supervision and operational authority.
Hence the common mistake. Foreign companies assume that no lease and no Indian entity means no PE. Wrong. If head-office staff direct an Indian operation’s core work on the ground, the facts can outweigh the contract.
How does an EOR lower PE risk in India?
It removes the most obvious trigger, because the Indian employer is the EOR’s own entity, not yours. Your team sits on the EOR’s payroll. You pay a fee.
That said, an employer of record cannot cure every risk. Keep India staff from negotiating and signing contracts in your name. Avoid running a dedicated office at your disposal, and watch long secondments from head office.
Our guide on how to avoid permanent establishment risk in India covers the controls in detail. Read your own double taxation avoidance agreement with India too, because clauses and day counts differ by treaty.
How does Remunance structure India hiring to limit PE exposure?
Remunance employs your team through its own Indian entity, Remunance Services Pvt Ltd in Kothrud, Pune, so the employment relationship sits with us. When your India headcount and revenue justify it, we handle India subsidiary formation and move EOR staff across to your new entity. To test today’s set-up against your treaty, map your PE exposure with our team.
What else do people ask about PE risk in India?
Does hiring one employee in India create a PE?
Not automatically. The risk turns on what the person does. Signing contracts for you or running a place at your disposal raises it, while routine work through an EOR keeps it lower.
What tax applies if India finds a PE?
Profits attributable to the PE are taxed under corporate tax in India at 35% plus surcharge and cess. Claiming a lower treaty rate needs a Tax Residency Certificate and Form 41.
Is a PE the same as an Indian subsidiary?
They differ. A subsidiary is a separate Indian company taxed at 22% under section 200, about 25.17% effective, and its dealings with you fall under transfer pricing. A PE means your foreign company itself is taxed in India.