Permanent Establishment HR Risk Exposure: Detailed Legal Analysis with Case Laws

1. Introduction

Permanent establishment (PE) HR risk exposure arises when a foreign enterprise's employee-related activities, personnel deployment, remote-working arrangements, secondments, or management functions create a taxable business presence in another country. In India, this issue is particularly important for multinational corporations, foreign parent companies, Indian subsidiaries, employer-of-record arrangements, and international employee assignments.

A PE is primarily a concept under international tax law, rather than a separate category of employment-law liability. However, HR decisions can create tax consequences by determining where employees work, which entity supervises them, who bears responsibility for their services, and whether they negotiate or conclude contracts on behalf of a foreign enterprise.

Under the Income-tax Act, 1961, including Section 90 and applicable treaty provisions, the tax consequences depend on the relevant double taxation avoidance agreement (DTAA), domestic law, and the facts of the arrangement. The Income-tax Act, 2025 has also become relevant from 1 April 2026, so the applicable statutory provisions must be identified for the relevant tax period.

2. Meaning and Nature of HR-Related PE Exposure

HR-related PE exposure arises when personnel activities establish a sufficient business presence under the applicable tax treaty. Principal risk categories include:

Fixed-place PE: Foreign employees regularly conduct the enterprise's business from an Indian office, subsidiary's premises, or another location at its disposal.

Service PE: Employees or other personnel furnish services in India for a foreign enterprise where the applicable treaty contains a service-PE provision and its conditions are met.

Dependent-agent PE: Employees or representatives habitually exercise contract-concluding authority, or otherwise satisfy the relevant treaty's agency-PE test.

Secondment-related exposure: Employees formally remain connected with a foreign employer but perform functions in India under arrangements that may amount to the foreign enterprise furnishing services in India.

Remote-work exposure: Employees working from India for a foreign enterprise may create PE concerns depending on the workplace, business activities, duration, authority, and applicable treaty.

Management and decision-making exposure: Senior personnel in India may perform core business functions or exercise authority that contributes to establishing a taxable business presence.

The presence of an employee in India does not automatically create a PE. The analysis must identify the enterprise conducting the relevant business, the nature of the employee's activities, the applicable treaty, and the conditions specified in that treaty.

3. Legal Framework

A. Domestic tax law and DTAAs

Section 9 of the Income-tax Act, 1961 addresses income deemed to accrue or arise in India. Section 90 provides the framework for agreements with foreign countries, including DTAAs. The applicable treaty provisions ordinarily determine whether a foreign enterprise has a PE in India and how business profits attributable to that PE may be taxed.

A treaty may contain distinct tests for fixed-place, service, construction, and agency PEs. Thresholds and exclusions vary by treaty. Consequently, no universal employee-day threshold or single HR rule applies to every foreign enterprise.

B. HR's role in determining PE risk

HR records can be central evidence in a PE assessment. Relevant documents include:

Employment and secondment agreements.

Payroll and social-security arrangements.

Reporting lines and performance-review records.

Delegations of authority and contract approval matrices.

Travel calendars and physical-presence records.

Remote-working approvals and office-access records.

Intercompany service agreements and cost-recharge arrangements.

Records of client negotiations and management decisions.

Tax authorities may examine the practical arrangement rather than relying solely on the designation of the employer in a written agreement.

4. Major HR Risk Areas

Employee secondment: Risk increases where the foreign enterprise continues to employ personnel in substance, remains responsible for their work, or uses their Indian activities to perform its own business functions. Conversely, genuine employment and operational control by the Indian entity may support a different conclusion.

Contract negotiation: Employees who habitually negotiate essential commercial terms or exercise contract-concluding authority can create agency-PE concerns, depending on the treaty's wording and the actual conduct.

Remote work: A home office is not automatically a PE. The risk depends on whether the location is effectively at the foreign enterprise's disposal, whether business is carried on there, and whether the employee performs substantive business functions.

Senior management: Employees who make strategic decisions, manage Indian operations for a foreign enterprise, or perform revenue-generating functions may require closer scrutiny.

Intercompany arrangements: A subsidiary's separate legal personality does not automatically protect its foreign parent from PE exposure. However, group affiliation, common ownership, and routine support services alone do not necessarily establish a PE.