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Insights Employer of Record: Tax and Regulatory implications – India Perspective

Employer of Record: Tax and Regulatory implications – India Perspective

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​​​​​​​​​​​​​​​​​​​​​​​​​​­​​​published on 9 April 2024 | reading time approx. 4 minutes

India is fast emerging as a prime destination for Multinational Corporations (MNCs) with its rapidly growing economy and vast consumer base. As more MNCs look to explore the potential of the Indian market, they seek efficient models to engage individuals in their initial preparatory stages. The complexities of the Indian regulatory market require an effective market entry strategy evaluating between ease of imple­men­ta­​-tion and associated tax and legal risks. This is where an “Employer of Record” (‘EoR’) comes into picture. Due to its simplicity, the EoR model has evolved over the years and has gained popularity amongst foreign companies.


EoR is essentially an external agency/third party organisation which is engaged to employ individuals on behalf of its clients. The EoR acts as a legal employer for these individuals. The EoR service provider undertakes all Human Resource (HR) ad­mini­stra­tive and compliance functions pertaining to payroll, tax and labour laws in respect of these employees. Functionally, these individuals have reporting responsibilities towards the foreign company. The concept is not explicitly restricted from an Indian exchange control point of view, however, if employees engaged through EoR are perceived to have a direct employment relationship with the foreign entity, there is a possibility that it may be deemed as a violation of these provisions at some point of time and therefore needs analysis.


Similarly, from tax point of view, this model carries an inherent risk owing to the distinction between “legal” and “economic” employer (substance over form) assess­ment. The economic employer concept determines the real employer based on certain criteria such as supervision, direction and control. In the EoR context, this traces back to the foreign employer. It can be held that such employees are de facto employees of the foreign company and that they are carrying out business for and on behalf of the foreign company in India. ​





Is the concept of EoR known in your country? Is the concept of EoR regulated by law in your country?

The concept of Employer on Record (EOR) is prevalent in India.  It is an external agency/third party organisation which employs individuals on behalf of and under instructions of its clients. The structure is envisaged in a way allowing companies to carry out the operations and projects, while the EoR is undertaking all Human Resource (HR) administrative and compliance functions pertaining to payroll, tax and labour laws in respect of these employees.

Special features of the activity within the framework of the EoR concept or temporary employment

In the present employment structure, the client company, representing the foreign organisation, engages with the EoR through a formal agreement. The EoR, based in India, then takes charge of recruitment, compensation, taxes, and regulatory compliance, managing the HR backend. Despite the EoR being the legal employer, the foreign client company maintains control over day-to-day work and operations.

In a cross-border situation, an EoR could also be responsible for fulfilling visa and immigration requirements.  As the Indian market is expanding and newer companies are looking to invest into India, we have seen this model being commonly used in the initial years by foreign companies, when these companies are still exploring the Indian market and until they see the potential to set up a full-fledged entity. We have come across foreign companies deploying or using this model in their initial years to avoid establishment and compliance costs and as their business activities pick up, they consider setting up an entity in India, hiring out the individuals earlier engaged via the EoR model.

The concept of EoR in Indian context is simple. There are companies who offer this as a service, where the service provider EoR entity becomes the official employer of the foreign company’s workforce in Indian jurisdiction. The EoR enters into a contract with the employees and assumes all responsibilities towards them such as payment of salaries of employees, payroll management, withholding and depositing taxes at source, provident fund (social security) compliances etc.

For all practical purposes as well as legally, the EoR entity is an employer of these individuals.  However, such employees usually report to and work under the supervision, direction and control of the foreign company/principal.  The foreign company would assign day-to-day work and activities to these individuals. Thus, de facto control of these employees would be with the foreign company.

Within the scope of Foreign Exchange Management Act 1999 (FEMA), foreign entities are restricted to conduct business in India only through approved structures (i.e. through a branch office, project office, etc.) or through incorporating a company in India or by entering into a joint venture.  However, in case employees engaged through EoR are perceived to have a direct employment relationship with a foreign entity, it might be deemed a violation of FEMA provisions and therefore needs to be analysed.

The ER service provider is remunerated for its services, usually a cost mark-up. Depending on the nature of services performed by Indian individuals, an additional Goods and Services Tax of 18 percent could apply.

In terms of permissibility the EoR arrangement, as such, is perceived in India as a regular service arrangement between an Indian company and foreign client. This model is therefore not subject to any additional require­ments compared to other companies. Furthermore, from an Indian point of view, no special permits or licenses are required for companies involved in the EoR.

What are the special tax features of the EoR concept in your country?

While there is no restriction on the practical implementation, this model carries inherent tax risks in the form of Permanent Establishment exposures for the foreign company. Permanent Establishment (‘PE’) is a concept found in tax treaties, which could result in taxation of foreign entities in India, i.e. when a foreign entity has a taxable presence in an Indian jurisdiction.  Typically, Fixed Place PE, Agency PE and Service PE risks could be prevalent in the EoR model.
  •  Fixed Place PE risk exists on account of the availability of a fixed place of business for the foreign company for carrying out its business activities (‘Fixed PE’). To elaborate, EoR is the legal employer of the Indian employees/staff. However, the foreign company may be regarded as the economic employer who controls and supervises their activities in India (“de facto employer”). There are decisions and commentaries ​​​ [1]  that formulate the distinction between real and economic employer. Some relevant aspects are, who has the authority to instruct the individual regarding the manner of work, who controls and has responsibility for the place at which the work is performed, who determines the number and qualifications of the individuals performing the work, etc.
  • Foreign companies could be considered as ‘economic employer’ based on the available criteria such as authority to instruct the individual regarding the manner in which work has to be performed, control and supervision, reporting responsibility, direct remuneration charged by the formal employer to the enterprise to which services are provided, determining work schedule, etc.  In the context of EoR, most of these factors point towards the foreign company.
  • Accordingly, there is a risk that tax wise, where these individuals employed through the EoR mechanism are regarded as employees of the foreign company and not of the EoR (‘substance over form’-principle). Employees of a foreign company working in India could in turn create a risk that the office premises/ home offices from where the employees perform their work or activities could be regarded as fixed places of business in India.
  • Indian treaties also have a “so called Service PE” clause which gets attracted when services are rendered and activities performed by employees and other personnel. 
  • There is an eminent risk of PE constitution in the EoR model from an Indian point of view.

​How do you anticipate the concept of EoR evolving in your country from your perspective?

Regarding the above, companies need to evaluate between ease of entering into the Indian market vis-à-vis risk of running a tax risk. Where the foreign company is still to penetrate the Indian market and envisages individu­als engaged in preparatory activities (in terms of the treaty), it could be a short-term solution. I intensive marke­ting efforts on the other hand, could result in considerable risks for the foreign companies, which is why it might be better to establish an Indian entity.


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[1] Organization of Economic Cooperation and Economic Development Model Tax Convention (‘OECD MTC’)

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