"We'll just use an EOR until we incorporate": What FEMA and Indian tax law actually require before you hire in India

The decision usually arrives in the same form. A foreign company has found two or three good candidates in Bengaluru or Pune, wants them working within six weeks, and does not want to wait three months for an Indian subsidiary to be incorporated and banked. Someone suggests an Employer of Record. The engagement starts, the first invoices are paid, and nobody revisits the structure for eighteen months.

The problem is not that using an EOR is wrong. It is often the correct answer. The problem is that the EOR decision is usually made as a hiring decision when it is actually a permanent establishment and FEMA decision — and the three available structures (EOR, branch office, subsidiary) sit in completely different places under Indian exchange control and tax law. Choosing on speed alone is how foreign companies end up with an unintended taxable presence in India and no clean way to unwind it.

What the regulation actually says

An EOR is not a recognised FEMA entry route. This is the first thing most founders miss. The Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 govern how a non-resident establishes a presence in India — through a company, an LLP, or a place of business. An EOR arrangement establishes none of those. Legally, you are buying a service from an Indian company that employs staff on its own books and seconds their output to you. There is no FDI, no FC-GPR, no entity of yours in India. That is precisely its appeal, and precisely its risk.

Branch, liaison and project offices are governed by FEMA 22(R) — the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016, read with the RBI Master Direction on Establishment of Branch/Liaison/Project Offices. Approval is routed through an AD Category-I bank under the RBI route for most applicants, and through the Government route (RBI in consultation with MHA) where the applicant is from Pakistan, Bangladesh, China, Iran, Afghanistan, Hong Kong or Macau, or where the activity falls in defence, telecom, private security or information & broadcasting. A branch office requires the foreign parent to have a profitable track record in the immediately preceding five financial years and net worth of at least USD 100,000. A liaison office requires three profitable years and net worth of at least USD 50,000 — and, critically, a liaison office may not earn income in India at all. It can market, liaise and gather information. It cannot invoice.

A subsidiary — a private limited company with foreign shareholding — is the FDI route proper. Under the NDI Rules, most sectors permit 100% FDI under the automatic route, meaning no prior government approval. You incorporate through the MCA's SPICe+ form, receive the CIN, open a bank account, and remit share subscription money. Two RBI filings follow: Form FC-GPR within 30 days of allotting shares against the inward remittance, filed on the RBI FIRMS portal (SMF module) through your AD bank, and later Form FC-TRS within 60 days if shares are transferred between a resident and non-resident. Sectors on the government approval route — multi-brand retail, most of defence beyond the automatic cap, print media, and any investment from a land-border country under Press Note 3 — require prior DPIIT approval through the FIF/NSWS portal before any of this begins. The 2026 SOP dated 4 May 2026, issued alongside Press Note 2 of 2026, now governs how those approval applications are processed.

The tax question sits on top of all three. Section 9 of the Income-tax Act, 1961 and the Permanent Establishment article (usually Article 5) of the applicable Double Taxation Avoidance Agreement determine whether the foreign parent has a taxable presence in India. A branch office is a PE by definition and is taxed at the non-resident corporate rate — presently 35% plus surcharge and cess for foreign companies — on income attributable to it. A subsidiary is a separate Indian taxpayer at 25% (or 22% under section 115BAA, or 15% under 115BAB for eligible new manufacturers) and does not automatically create a PE for the parent. An EOR arrangement is intended to create no PE — but it can, and that is where the risk lives.

Practical implications: what goes wrong

EOR staff can create a PE for you. The EOR is the employer on paper. If the person you are paying for is negotiating contracts on your behalf, habitually concluding sales, or acting as your Indian sales manager in substance, Article 5 of most Indian DTAAs treats them as a dependent agent PE — regardless of whose payroll they are on. India has also adopted the wider dependent-agent test under the Multilateral Instrument in respect of several treaty partners, which catches people who habitually play the principal role leading to contract conclusion, even without formal signing authority. The moment a dependent agent PE is asserted, the foreign parent is assessable in India on profits attributable to that agent, with interest and penalty running from the year the presence began.

Working through an EOR is comfortable for engineering roles, dangerous for revenue roles. A back-end developer whose entire output is delivered to a foreign product team creates a weak PE argument. A "country manager", "head of India sales" or anyone with a business card carrying your brand creates a strong one. The same contract, the same EOR, entirely different exposure.

Withholding is not optional on EOR invoices. Payments to the Indian EOR are payments to an Indian resident; the EOR handles TDS on salary under section 192 and GST at 18% on its service fee, which is a real cost you should model, not a rounding error. Where an EOR structure is instead run through a foreign entity billing you offshore for Indian workers, you have almost certainly built the worst of both worlds — offshore cost with onshore exposure.

Regularising late is expensive. If you have effectively been operating in India without an approved place of business, you are looking at compounding under section 15 of FEMA before the Reserve Bank, and potentially a show cause notice. Compounding is available and routinely granted, but it is a disclosed proceeding, it is slow, and acquirers find it in diligence. Similarly, a retrospectively asserted PE means filing Indian returns for closed years.

Step-by-step: what to do

• Classify the roles you are hiring, not the headcount. Split them into (a) delivery/engineering/support with no customer-facing authority, and (b) anything commercial — sales, business development, country leadership, contract negotiation. Category (b) should not sit under an EOR for long.
• If category (a) only, and you need speed, use an EOR — with a defined exit date. Contract for 6–12 months. Confirm in writing that the EOR is the legal employer, holds the employment contracts, runs PF and ESI registration, and deposits TDS under section 192. Confirm your people have no authority to bind you.
• If you have any category (b) roles, incorporate the subsidiary now. File SPICe+ (INC-32) with the MCA for name reservation, incorporation, PAN, TAN, EPFO, ESIC and GST in a single application. Expect 2–4 weeks with clean director KYC. Note that at least one director must be resident in India — present in India for 182 days or more in the previous financial year.
• Confirm your sector's route before remitting a rupee. Check whether your activity sits under the automatic route or requires DPIIT approval. If any beneficial owner is situated in or a citizen of a land-border country, Press Note 3 applies regardless of the sector, and you file on the FIF/NSWS portal first.
• Remit capital and file FC-GPR within 30 days of allotment. You will need the FIRC and KYC report from your AD bank, a board resolution, and — where shares are issued to a non-resident — a valuation certificate from a SEBI-registered merchant banker or a chartered accountant confirming the price is not below fair value under internationally accepted pricing methodology.
• Only choose a branch office if you genuinely cannot use a subsidiary. It suits foreign banks, engineering and construction contractors executing a specific Indian project, and companies whose regulators require branch form. Otherwise the subsidiary is simpler to run, cheaper to tax, and far easier to sell or close.
• Migrate EOR staff into the subsidiary deliberately. Novate the employment, do not simply stop paying the EOR. Ensure PF account continuity and transfer accrued leave and gratuity service. Keep the paperwork — it evidences when your Indian presence actually began.

FAQ

Can an EOR handle everything indefinitely so I never need an Indian entity?
Only if your India team never touches revenue and never grows into a real business unit. Most companies cross that line between 5 and 15 people. Beyond that, the per-head EOR fee also usually exceeds the cost of running a subsidiary.

Does hiring a single contractor in India create a permanent establishment?
Not by itself. An independent contractor acting in the ordinary course of their own business is generally excluded under Article 5. Risk arises where the "contractor" works exclusively for you, on your systems, under your direction — Indian tax authorities look at substance, not the label on the agreement.

Is a liaison office a cheap middle path between EOR and subsidiary?
No. A liaison office cannot earn income in India, must be funded entirely by inward remittance, and must file an Annual Activity Certificate from a chartered accountant with the AD bank and the Director General of Income Tax (International Taxation). It is a representative office, not a trading vehicle.

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