Hiring in India without a local entity: EOR vs entity

The quickest way to start hiring in India without a local entity is usually an Employer of Record (EOR), which employs the worker through an Indian company and runs payroll and employment compliance. A foreign company that has found its first Indian hire wants that person working within weeks, and an Indian company takes longer than that to set up and staff. The choice of route decides who employs the hire, what the India team may legally do, and how much administration the company takes on.

An EOR suits a small team testing the market. A wholly owned private limited subsidiary suits a company that expects sustained headcount, Indian customers or local assets. A liaison office or branch office fits narrow purposes that the Reserve Bank of India (RBI), which regulates foreign exchange, approves in advance. Direct contracting suits genuinely independent work.

Each route differs in who the legal employer is and what the India presence may do.

In India, the Employer of Record (EOR) model allows foreign companies to hire employees through a local employer, with the arrangement governed by Indian company, labour, tax and contract laws. These laws apply to the employment agreement, the service contract between the EOR and the foreign company, IP assignment and termination terms.

Responsibilities are divided between the two parties:

• Foreign company: Directs the employee’s work, deliverables and business priorities.
• EOR: Manages employer responsibilities, including payroll, statutory deductions, employment documentation, disciplinary procedures and termination.

The Supreme Court distinguishes day-to-day direction from the “ultimate supervision and control” that the actual employer retains. An arrangement where the EOR only signs the paperwork raises labour-law and tax questions.

Choose it if: the team is small, the India plan is a time-limited market or talent test, and the company needs no Indian invoice, lease, licence, or bank account.

Rule it out if: the India team will sell to Indian customers in the company’s name, the operation needs local assets or a regulated licence, or the company wants direct employment and its own benefits design.

A wholly owned private limited company can sign local customer contracts, invoice, open bank accounts, lease premises and own operating assets, and it employs staff in its own name. It needs at least two directors. Companies Act section 149(3) also requires at least one director who stays in India for at least 182 days during the financial year, counted proportionately in the year of incorporation. Foreign ownership must fit the sector’s foreign direct investment (FDI) route and conditions.

Incorporation follows six steps:

1. Confirm the business objects, foreign shareholder, capital, registered office, directors and any sector caps.
2. Prepare the foreign documents, such as constitutional documents and board authorisations, with notarisation or apostille as required. This step, not the Registrar’s processing, often takes longest.
3. Obtain digital signatures and director identification numbers (DINs).
4. Reserve the company name through SPICe+ Part A, the Ministry of Corporate Affairs (MCA) online name application.
5. File SPICe+ Part B with the electronic memorandum and articles of association and registered-office evidence. The same filing registers the company for PAN and TAN (India’s tax and withholding numbers) and for the provident fund and state insurance schemes, and can apply for a bank account and GST.
6. Appoint the first auditor, fund the company, issue shares, file the RBI foreign-investment reports and activate payroll and state registrations.

The MCA’s service standard says a complete application should receive approval or a deficiency notice within two working days. In practice, legalising the foreign documents, completing bank checks, and bringing in the capital take longer. Commercial providers commonly quote four to eight weeks end to end, which is a vendor estimate.

Once registered, the company takes on recurring corporate duties:

• Appoint an auditor under section 139.
• File its financial statements with the Registrar within 30 days of the annual general meeting (AGM), under section 137.
• File its annual return within 60 days of the AGM, under section 92.
• Price intercompany services, royalties, and cost recharges at arm’s length, and document them before transactions begin.

Choose it if: India will be a continuing operating location, the team will sell, invoice or lease space in India, or senior managers and customer-delivery teams will exercise authority there.

Rule it out if: The plan is one or two hires on a short pilot, where the fixed accounting, audit and filing costs outweigh what the hires are testing.

A liaison office represents the foreign parent. Under the RBI’s Master Direction, it may represent the parent or group companies, promote import and export and technical or financial collaboration, collect market information and act as a communication channel. It may not carry on business activity or earn income in India, and inward remittances from the parent fund its expenses.

A liaison office needs a three-year profit-making record and net worth of at least USD 50,000. RBI ordinarily grants permission for three years at first, subject to extension. The office may employ the personnel its permitted functions need, but hiring staff does not widen what the office may do.

That makes a liaison office a fit for market research, promotion, and relationship groundwork that earns no revenue. Once anyone in the plan is expected to negotiate, sell, deliver services, or invoice, it is the wrong structure.

A branch office is the foreign company’s own establishment in India, not a separate legal person, so the parent bears the branch’s liabilities. RBI permits specified activities, including wholesale import and export, consultancy, research, buying and selling agency, software and IT services, and technical support. A branch may not carry on retail trading or manufacture or process goods outside a Special Economic Zone, and it ordinarily stays within the parent’s line of business. The parent needs a profit-making record for the five preceding financial years and a net worth of at least USD 1000,000.

Setting up and maintaining a branch involves four forms:

• Form FNC, filed through a designated AD Category-I bank (a bank authorised to deal in foreign exchange), with authenticated formation documents and the latest audited balance sheet.
• Form FC-1, which registers the foreign company with the MCA.
• Form FC-3 each year, for the branch’s annual accounts.
• Form FC-4 each year, for its annual return.

A branch suits a foreign company that wants to operate in India in its own name within a permitted activity, and that accepts direct liability and branch taxation. It is the wrong structure when the aim is to keep liability away from the parent, or when the business involves retail or manufacturing.

A genuine independent contractor can serve a foreign company directly, subject to the contract, foreign-exchange and tax rules. The Supreme Court assesses the whole relationship: selection, dismissal, pay, discipline, continuity, integration into the business, tools and control over how the work is done. No single factor decides it, and courts can disregard a contractor label that does not match how the work happens. A first hire on indefinite full-time service, with fixed hours, a line manager and company equipment, calls for an employment-route review first.

Tax references changed on 1 April 2026, when the Income-tax Act, 2025 took effect. Contractor withholding now falls under section 393(1), which replaced old section 194C, according to the Central Board of Direct Taxes (CBDT) transition FAQ. A foreign payer should check whether it has an Indian withholding obligation, whether the income has an Indian source, and whether a tax treaty changes the result. An Agent of Record (AOR), which contracts and pays contractors for a client, keeps genuine contractors on contractor terms with the engagement documented.

A contractor arrangement holds up when the contractor:

• works on a defined project
• controls how the work is done
• serves other clients
• invoices for deliverables

It does not hold up where the role is continuous, exclusive, and managed like a job.

A permanent establishment (PE) is a presence that makes a foreign company taxable in a country on the profits linked to it. Under the Income-tax Act, 2025, section 9(2)(c) treats income arising through a “business connection in India” as arising in India. Section 9(9) extends this to operations carried out partly in India and to significant economic presence. Section 173(c) defines a PE as including a fixed place of business through which the enterprise’s business is wholly or partly carried on.

A foreign company entitled to treaty benefits should also review its double taxation avoidance agreement (DTAA). Article 5 of each treaty sets the PE tests, and the wording varies between treaties:

Day thresholds depend on the treaty. The India-UK treaty sets a service PE at more than 90 days in a 12-month period, or more than 30 days for services to an associated enterprise. Other treaties use 182- or 183-day tests or have no service PE.

Indian courts decide PE on facts. In Formula One World Championship Ltd v CIT (2017), the Supreme Court found a fixed-place PE at a circuit at the company’s disposal even though it held no lease. In ADIT v E-Funds IT Solution Inc (2017), it held that a subsidiary’s premises are not automatically at the parent’s disposal. In DIT v Morgan Stanley & Co Inc (2007), staff seconded to India, for whose work the foreign company remained responsible, created a service PE.

An EOR does not eliminate PE risk. It changes who employs and pays the individual, while the PE question depends on what the foreign company does in India through its people and premises. A branch office is ordinarily a PE, and forming a subsidiary later does not undo a PE that already existed. Clients should consult their own tax and legal advisors for a permanent establishment risk assessment.

The Indian legal employer bears the statutory employment costs, and the route decides who that is. Contracting avoids these costs where the arrangement is genuine. If the relationship proves to be employment, the company faces back-dated social security, leave and termination costs and penalties.

The wage ceiling for mandatory coverage under the Employees’ Provident Fund (EPF), India’s retirement savings scheme, rose from ₹15,000 to ₹25,000 a month from 17 September 2026. At the ceiling, the employer’s 12% share is up to ₹3,000 a month. The other India employer taxes, including state insurance, gratuity and professional tax, depend on pay and work location. Published EOR fees vary widely and are vendor prices, not regulated tariffs, so compare deposits, FX spread and termination charges as well as the monthly fee.

No Indian law sets a headcount at which an EOR arrangement must end. The decision depends on the company’s plans for India:

1. Model 12 to 24 months of EOR fees, statutory employment costs, entity fixed costs and exit costs before the first hire.
2. Start incorporation once India revenue, local contracts, dedicated premises, regulated activity or local management becomes likely, so the entity is ready when needed.
3. Review headcount, EOR spend, functions, authority, data and IP, and duration every quarter at board level.
4. Plan the transfer: obtain each worker’s consent where required, carry over accrued leave and gratuity by contract, re-sign IP and confidentiality terms, and align the EOR end date with the subsidiary start date.

Boundless employs workers in India on behalf of foreign companies, and these questions apply to any provider on a shortlist:

• Which Indian company will employ the worker, and does the provider employ directly or through a subcontractor?
• Is the company registered for EPF, state insurance (ESI), professional tax and shops and establishments in each employee’s state?
• What are the deposit, FX spread, benefit markup, termination and transfer charges?
• How do the employment agreement and IP assignment pass the worker’s inventions to the foreign company?