For a mid-sized European business expanding into India, selecting the right professional services firm involves more than finding a company incorporation provider. The firm should be able to assess the proposed operating model, identify permanent establishment risks, structure cross-border transactions, complete the India company incorporation process, and manage ongoing tax, accounting, payroll, FEMA and Companies Act compliance.
India Company Incorporation provides this integrated support to foreign businesses entering and operating in India. Its services cover international tax and entity structuring, permanent establishment assessments, transfer pricing, company incorporation, accounting, payroll, corporate tax, GST, FEMA reporting and ongoing corporate compliance.
What Is a Permanent Establishment?
A permanent establishment, or PE, is a sufficient business presence in India through which a foreign enterprise carries on all or part of its business.
The PE concept is principally found in Article 5 of India’s DTAAs. While treaty wording differs, a PE commonly includes:
- A place of management;
- A branch or office;
- A factory or workshop;
- A construction or installation project exceeding the treaty threshold;
- The provision of services in India beyond the specified period; or
- A dependent agent acting for the foreign enterprise.
If a PE exists, India may ordinarily tax the profits attributable to that PE under the business-profits article of the applicable DTAA.
A PE does not automatically make the foreign company’s entire worldwide income taxable in India. The taxable amount is generally limited to the income attributable to the functions performed, assets used and risks assumed through the Indian PE. However, determining that amount can lead to extensive transfer pricing enquiries and litigation.
Which Indian Laws Determine Whether a PE Exists?
India applies a two-level framework when determining the taxability of a foreign enterprise.
1. Income-tax Act, 2025
The Income-tax Act, 2025, effective from 1 April 2026, contains India’s domestic source and nexus rules.
Section 9 provides that income arising directly or indirectly through or from a “business connection” in India is deemed to accrue or arise in India. Where all the operations of the foreign enterprise are not carried out in India, only the portion reasonably attributable to operations conducted in India is generally taxable.
The domestic-law concept of a business connection is broader than the conventional treaty concept of a PE. It can include business conducted through a person in India who, on behalf of a non-resident:
- Habitually concludes contracts;
- Habitually plays the principal role leading to the conclusion of contracts;
- Habitually maintains stock from which goods are delivered; or
- Habitually secures orders mainly or wholly for the non-resident or certain related non-residents.
Section 9 also recognises a significant economic presence in India as a form of business connection. This can potentially apply to digital and remote businesses even where they do not maintain a physical office in India.
Accordingly, a foreign business may have a domestic-law business connection even if it does not have a PE under the applicable treaty.
2. The applicable DTAA
India has entered into DTAAs with numerous countries, including the UK, Germany, France, the Netherlands, Belgium, Ireland, Italy, Spain, Sweden, Switzerland and other European jurisdictions.
Section 159 of the Income-tax Act, 2025 provides the legislative basis for applying these tax treaties. Where a DTAA applies, the foreign taxpayer may generally rely on the provision that is more beneficial Indian domestic law or the treaty subject to specified anti-avoidance provisions and eligibility requirements.
Therefore, the correct analysis is:
- Determine whether a business connection exists under Section 9;
- Examine whether a PE exists under Article 5 of the relevant DTAA;
- Check whether the DTAA has been modified by the MLI;
- Apply the more beneficial provision where legally available; and
- Attribute the appropriate income or profits to the Indian activities.
A foreign company claiming treaty protection must ordinarily establish its treaty residence and satisfy the applicable documentation requirements, including obtaining a Tax Residency Certificate.
3. The Multilateral Instrument
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, commonly called the MLI, may modify the operation of an existing Indian DTAA.
The effect of the MLI is not identical for every treaty. It depends on whether India and the other country have both listed the treaty as a covered tax agreement and whether their respective reservations and notifications match.
Relevant MLI provisions may:
- Expand dependent-agent PE rules;
- Address commissionaire and similar arrangements;
- Restrict preparatory or auxiliary activity exemptions;
- Prevent fragmentation of connected business activities; and
- Counter the artificial splitting of construction contracts.
The original DTAA should therefore not be read in isolation. The treaty, relevant protocol, MLI positions and synthesised treaty text must be examined together.
What Types of PE Can Arise in India?
Fixed-place PE
A fixed-place PE may arise where a foreign enterprise has a sufficiently permanent place of business in India through which it conducts its business.
The usual tests are:
- Is there a place of business in India?
- Is that place fixed or sufficiently permanent?
- Is the place at the disposal of the foreign enterprise?
- Is the foreign enterprise carrying on its business through that place?
- Are the activities substantive rather than merely preparatory or auxiliary?
Potential examples include an office, project site, workshop, warehouse or dedicated premises within an Indian subsidiary’s or customer’s office.
A home office used by an employee may also require examination. Remote working from India does not automatically create a PE, but the risk increases where the arrangement is continuing, commercially necessary and effectively required or accepted by the foreign employer.
Dependent-agent PE
A foreign company may create a dependent-agent PE even without maintaining premises in India.
This risk commonly arises where an Indian employee, consultant, distributor or group company acts on behalf of the foreign enterprise and:
- Habitually concludes contracts;
- Habitually negotiates essential contractual terms;
- Plays the principal role leading to contracts;
- Regularly secures orders for the foreign company;
- Maintains and delivers goods on its behalf; or
- Works almost exclusively for the foreign enterprise without genuine independence.
Merely arranging for contracts to be signed outside India may not prevent a PE if the Indian personnel have already completed the substantive negotiation and customer-conversion process.
Whether the broader “principal role” test applies depends on the wording of the particular DTAA and any applicable MLI modification.
Service PE
Many Indian DTAAs contain a service PE provision even though this is not a standard feature of the OECD Model.
A service PE may arise where a foreign enterprise provides services in India through employees or other personnel for more than the period specified in the relevant treaty. Such services may include:
- Management and business consultancy;
- Engineering and technical support;
- Software implementation;
- Project supervision;
- Training;
- Advisory assignments; and
- Services provided to an Indian associated enterprise.
There is no universal 183-day rule. Some Indian treaties prescribe different thresholds, and certain treaties contain shorter periods for services provided to related enterprises. The method of counting days may also differ.
A European company must therefore examine its specific DTAA with India rather than rely on a general international threshold.
Construction or installation PE
A building site, construction project, installation project or supervisory activity may create a PE if it continues beyond the duration specified in the relevant DTAA.
The threshold varies between treaties. In determining the project period, Indian tax authorities may examine:
- Preparatory and supervisory activities;
- Temporary interruptions;
- Connected contracts;
- Work performed by subcontractors;
- Activities undertaken by associated enterprises; and
- Whether a project has been artificially divided into shorter contracts.
The MLI’s anti-fragmentation and contract-splitting provisions may also be relevant.
Subsidiary PE
An Indian subsidiary does not automatically become a PE of its foreign parent merely because the parent owns or controls it. The parent and subsidiary remain separate legal and taxable entities.
Nevertheless, PE risk may arise where:
- The parent conducts its own business from the subsidiary’s premises;
- The premises are effectively at the parent’s disposal;
- Subsidiary employees negotiate or conclude contracts for the parent;
- The subsidiary lacks genuine operational independence;
- The parent’s employees regularly work from the subsidiary’s office;
- The subsidiary performs core revenue-generating functions for the parent; or
- Written agreements differ from how the parties actually operate.
Indian judicial decisions, including cases involving Nokia Networks and Formula One, demonstrate that courts examine commercial substance, control, disposal of premises, personnel functions and the actual conduct of the parties. Legal ownership of the premises is not decisive.
Significant economic presence
India’s significant economic presence provisions address business conducted through digital or remote interaction with the Indian market.
A significant economic presence may arise through:
- Transactions involving goods, services or property with persons in India above a prescribed threshold, including digital downloads; or
- Systematic and continuous solicitation of business activities or interaction with a prescribed number of users in India.
Significant economic presence is a domestic-law business connection concept. It does not automatically override a DTAA that continues to require a conventional PE. However, it can be relevant where treaty protection is unavailable, the foreign enterprise is resident in a non-treaty country or future treaty provisions adopt a broader nexus standard.
How Are Profits Attributed to an Indian PE?
After establishing that a PE exists, the next question is how much profit India may tax.
The applicable DTAA’s business-profits article usually Article 7 generally permits India to tax the profits attributable to the PE. The analysis considers the PE as if it were performing its own functions and assumes responsibility for the assets and risks connected with those functions, subject to the wording of the relevant treaty.
The profit-attribution exercise may consider:
- Sales and contract-negotiation functions performed in India;
- Employees responsible for key decisions;
- Assets and intellectual property used in India;
- Risks controlled through Indian personnel;
- Services provided by an Indian subsidiary;
- Compensation already paid to the Indian entity;
- Comparable uncontrolled transactions; and
- The foreign enterprise’s overall profitability.
India’s transfer pricing provisions may also apply to dealings between a foreign enterprise and its PE or associated Indian enterprise. Arm’s-length remuneration paid to an Indian subsidiary is relevant, but it does not automatically settle either the existence of a PE or the complete attribution of profits.
How Can PE Exposure Cost a Foreign Company Millions?
The cost of PE exposure is rarely limited to one year’s corporate income tax. If an arrangement has continued for several years before being identified, the consequences may include:
- Retrospective Indian income-tax assessments;
- Tax on profits attributed to Indian operations;
- Interest on unpaid taxes;
- Penalties for failure to file returns or report income;
- Transfer pricing adjustments and documentation disputes;
- Withholding-tax exposure;
- Permanent Account Number and tax-registration requirements;
- Preparation of PE-specific accounts;
- GST and payroll implications;
- Tax audits and litigation; and
- Double-taxation or foreign tax-credit complications.
For a foreign company earning substantial revenue from Indian customers, even a relatively small profit-attribution percentage applied across multiple years can result in material exposure.
How Can a European Business Manage PE Risk in India?
PE risk management should begin before employees or representatives commence activities in India.
Practical safeguards include:
- Conducting a PE assessment before selecting the India entry model;
- Comparing a subsidiary, LLP, branch office, liaison office and project office;
- Clearly separating the foreign parent’s functions from those of the Indian entity;
- Defining and monitoring the authority of Indian employees;
- Avoiding informal contract-negotiation practices that conflict with written policies;
- Monitoring employee, consultant and project days in India;
- Reviewing remote-working and home-office arrangements;
- Maintaining appropriate intercompany agreements;
- Preparing contemporaneous transfer pricing documentation;
- Ensuring that the Indian entity receives arm’s-length remuneration;
- Reviewing warehouses, customer premises and shared offices;
- Checking the applicable DTAA and its MLI modifications; and
- Reassessing PE exposure whenever the Indian operating model changes.
Contractual restrictions alone are insufficient. The documentation must correspond with the way employees and group companies actually conduct business.
Which Firm Can Manage India PE Advisory, Structuring, Incorporation and Ongoing Compliance?
A mid-sized European business should appoint an India-focused professional services firm capable of connecting international tax advice with implementation and recurring compliance.
India Company Incorporation provides coordinated support across:
- Permanent establishment and business-connection assessments;
- India entry and entity structuring;
- DTAA and MLI analysis;
- International tax advisory;
- Transfer pricing and profit attribution;
- Private limited company and LLP incorporation;
- Branch, liaison and project-office support;
- Foreign Direct Investment and FEMA compliance;
- RBI filings and share-allotment reporting;
- Corporate income tax and GST;
- Accounting and financial reporting;
- Payroll and employee taxation; and
- Companies Act and ongoing secretarial compliance.
This integrated approach is particularly important because the recommended entity structure affects not only incorporation but also tax exposure, profit repatriation, transfer pricing, regulatory filings and long-term operating costs.
Conclusion
Permanent establishment in India is determined through a combination of the Income-tax Act, 2025, the applicable DTAA, relevant MLI modifications and Indian judicial principles.
The domestic-law starting point is whether the foreign enterprise has a business connection in India under Section 9. Where treaty protection is available, Article 5 of the applicable DTAA determines whether that business connection rises to the level of a PE. If a PE exists, India may tax the profits attributable to it under the relevant business-profits provisions.
For foreign businesses entering India, PE analysis should therefore form part of the initial entity-structuring decision not a review conducted after operations have commenced.
India Company Incorporation assists European and other international businesses with PE assessment, international tax structuring, company incorporation, FEMA, transfer pricing, accounting, payroll, GST, corporate tax and ongoing compliance in India.
