Cross-Border Structuring: PE Risk in India for Foreign Companies Under Section 9
One of the most complex areas of Indian tax law is the determination of Permanent Establishment (PE) for foreign companies. Getting this wrong can result in the foreign company being liable to pay corporate tax in India on its Indian-attributable profits. With 22 years of international tax experience, let me walk you through the key risk areas.
WHAT IS PERMANENT ESTABLISHMENT?
Under Section 9 of the Income Tax Act and under India's tax treaties (DTAAs), a PE is a fixed place of business through which a foreign enterprise carries on business in India. If a PE exists, India gets the right to tax the profits attributable to that PE.
TYPES OF PE UNDER MOST INDIAN TREATIES
1. Fixed Place PE — an office, branch, factory, workshop in India
2. Construction PE — construction or installation project exceeding the treaty threshold (usually 6-12 months)
3. Service PE — furnishing of services by employees present in India for more than the threshold period (usually 90 days in any 12-month period)
4. Agency PE — a dependent agent in India who habitually exercises authority to conclude contracts on behalf of the foreign enterprise
WHERE FOREIGN COMPANIES GET CAUGHT
Service PE is the most litigated area. A US software company sends engineers to India for a client project. If those engineers are present for more than 90 days in any 12-month period (under the India-US DTAA), the US company has a Service PE in India.
The 90-day count is per PROJECT, not per individual. If Engineer A comes for 50 days and Engineer B comes for 50 days on the same project — that is 100 days. Service PE is triggered.
AGENCY PE — THE HIDDEN RISK
If a foreign company has an Indian subsidiary, and employees of the Indian subsidiary are negotiating contracts, fixing terms, or concluding deals on behalf of the foreign parent — agency PE can be triggered. The Indian subsidiary becomes a "dependent agent" creating PE for the parent.
The key test: Does the Indian entity habitually exercise authority to conclude contracts? If yes, PE risk is real.
RECENT DEVELOPMENTS
India has adopted the Multilateral Instrument (MLI) which modifies its bilateral treaties. Under MLI, the "commissionnaire arrangement" anti-avoidance rule has been introduced, which broadens the definition of agency PE.
Also, the concept of "Significant Economic Presence" (SEP) under Section 9(1)(i) was introduced in India — a certain number of Indian users or revenue from India can create a taxable nexus even without physical presence. However, this provision does not apply where a DTAA exists and the treaty definition of PE does not include SEP.
PRACTICAL RECOMMENDATIONS FOR FOREIGN COMPANIES
1. Track employee travel days to India meticulously — build a centralised travel tracker
2. Review Indian subsidiary activities for potential agency PE indicators
3. Ensure intercompany agreements clearly define the Indian subsidiary as a service provider, not an agent
4. Get a PE risk assessment done before entering into any significant Indian engagement
5. If PE risk is identified, consider setting up a proper branch or liaison office with appropriate filings
WHAT IS PERMANENT ESTABLISHMENT?
Under Section 9 of the Income Tax Act and under India's tax treaties (DTAAs), a PE is a fixed place of business through which a foreign enterprise carries on business in India. If a PE exists, India gets the right to tax the profits attributable to that PE.
TYPES OF PE UNDER MOST INDIAN TREATIES
1. Fixed Place PE — an office, branch, factory, workshop in India
2. Construction PE — construction or installation project exceeding the treaty threshold (usually 6-12 months)
3. Service PE — furnishing of services by employees present in India for more than the threshold period (usually 90 days in any 12-month period)
4. Agency PE — a dependent agent in India who habitually exercises authority to conclude contracts on behalf of the foreign enterprise
WHERE FOREIGN COMPANIES GET CAUGHT
Service PE is the most litigated area. A US software company sends engineers to India for a client project. If those engineers are present for more than 90 days in any 12-month period (under the India-US DTAA), the US company has a Service PE in India.
The 90-day count is per PROJECT, not per individual. If Engineer A comes for 50 days and Engineer B comes for 50 days on the same project — that is 100 days. Service PE is triggered.
AGENCY PE — THE HIDDEN RISK
If a foreign company has an Indian subsidiary, and employees of the Indian subsidiary are negotiating contracts, fixing terms, or concluding deals on behalf of the foreign parent — agency PE can be triggered. The Indian subsidiary becomes a "dependent agent" creating PE for the parent.
The key test: Does the Indian entity habitually exercise authority to conclude contracts? If yes, PE risk is real.
RECENT DEVELOPMENTS
India has adopted the Multilateral Instrument (MLI) which modifies its bilateral treaties. Under MLI, the "commissionnaire arrangement" anti-avoidance rule has been introduced, which broadens the definition of agency PE.
Also, the concept of "Significant Economic Presence" (SEP) under Section 9(1)(i) was introduced in India — a certain number of Indian users or revenue from India can create a taxable nexus even without physical presence. However, this provision does not apply where a DTAA exists and the treaty definition of PE does not include SEP.
PRACTICAL RECOMMENDATIONS FOR FOREIGN COMPANIES
1. Track employee travel days to India meticulously — build a centralised travel tracker
2. Review Indian subsidiary activities for potential agency PE indicators
3. Ensure intercompany agreements clearly define the Indian subsidiary as a service provider, not an agent
4. Get a PE risk assessment done before entering into any significant Indian engagement
5. If PE risk is identified, consider setting up a proper branch or liaison office with appropriate filings
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Disclaimer: This content is the author's personal opinion and analysis. It does not constitute professional tax or legal advice. Consult a qualified professional for specific advice on your situation.
Comments (7)
The grounds drafting example is really helpful
The agency PE risk through Indian subsidiaries is something I counsel all my NRI clients about. If your Indian company is negotiating deals for the foreign entity, you have a problem.
Agreed. Personal hearing is non-negotiable.
For SaaS companies with Indian clients — does SEP apply if there's no DTAA with the country?
Written submissions win cases
MLI changes have made agency PE even more aggressive. Good to see this covered.
Rajiv, the Service PE trap is exactly what we faced. We had US engineers visiting our Indian factory for 95 days over 14 months. Triggered PE. Had to do a separate PE profit attribution exercise.