Key takeaways
- Employer of record arrangements are lawful in India.
- An EOR does not remove permanent-establishment risk if staff conclude contracts or work from premises at your disposal.
- Most companies move to a cost-plus subsidiary once the team grows past about ten people.
Your three options
| Independent contractor | Employer of record (EOR) | Own subsidiary | |
|---|---|---|---|
| Speed | Days | About 1–2 weeks | 1–2 months |
| Who employs them? | Nobody — a service contract | The EOR, which bills you | Your Indian company |
| Main risk | Misclassification; PE | PE; EOR seen as a sham if you control everything | Compliance workload |
| Usually fits | Genuinely independent specialists | First hires, market testing | Teams of roughly 10+, or long-term plans |
Is an employer of record legal in India?
Yes. India has no specific EOR law; it operates as a staffing arrangement, now within the four Labour Codes in force since 21 November 2025. The EOR runs payroll, provident fund, gratuity and statutory filings. What it can’t do is change how the tax authorities see your business.
Permanent establishment: the real risk
- Dependent agent: India-based staff who habitually conclude contracts or negotiate prices for you can make you taxable in India. Keep signing and pricing authority outside India.
- Service PE: your people providing services in India beyond the treaty’s day threshold (for example 90 days under the India–US treaty) can create a PE.
- Fixed place: after the Supreme Court’s 2025 Hyatt ruling, premises at your disposal can be enough — you needn’t own or lease them.
- If a PE exists, India taxes the profit attributable to it — at foreign-company rates — and expects a return.
How to stay safe
- Write clear role descriptions: support, engineering and research rather than sales closing.
- Keep contracts approved and signed abroad; avoid giving Indian staff authority to bind you.
- Track days of visiting staff against treaty thresholds.
- Move to a subsidiary with a cost-plus transfer-pricing model once the team is growing — the subsidiary then employs everyone and your PE risk falls sharply.
Need a review of your current set-up? See India tax for foreign companies, or set up properly with company setup in India.
Sources
Frequently asked questions
Can a US company hire an employee in India without an entity?
Yes, through an employer of record or, for genuinely independent work, a contractor agreement. Both are lawful, but neither removes permanent establishment risk if Indian staff conclude contracts or the business operates from India.
Does using an EOR in India create a permanent establishment?
It can. An EOR handles employment, but if the workers habitually conclude contracts for you, provide services beyond treaty day limits or work from premises at your disposal, the tax authorities can treat you as having a PE.
When should a foreign company set up a subsidiary instead of using an EOR?
Usually once the team passes roughly ten people, includes sales or leadership roles, or is planned for the long term. A subsidiary with a cost-plus arrangement reduces PE risk and is often cheaper at scale.
Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.