Employer of Record vs Subsidiary in India for Foreign Companies (2026)

Written by Nihal Srivastava, Krystal7 Consultants. Last updated 2 October 2026.

An employer of record (EOR) in India is an Indian company that employs staff on its own payroll for a foreign company. It is legal, and no Indian law names it. The EOR runs PF, salary TDS under section 392 of the Income Tax Act, 2025 and the labour codes in force since 21 Nov 2025. The foreign company still carries permanent establishment risk under section 9(9) and its treaty, and it owns staff IP only through a written assignment.

This page is a decision guide for a foreign company that wants Indian staff. It covers the legal position, tax and FEMA risks, the labour codes and IP. It ends with an illustrative cost model at 5, 15 and 40 employees and the move to your own subsidiary.

What is an employer of record in India?

An employer of record is an Indian company that becomes the legal employer of people who work for a foreign company. The EOR signs the employment contract, pays salary in rupees, deducts tax and runs statutory benefits. The foreign company directs the daily work and pays the EOR a service fee. No Indian statute uses the term.

In practice, three parties sit in the arrangement:

1. The foreign company (the client). It chooses the hire, sets the work and pays the fee. It has no Indian entity.
2. The EOR. It is an Indian company with its own registrations. It issues the appointment letter and carries every employer duty under Indian law.
3. The employee. The employee works in India, usually from home or a shared workspace, and takes direction from the client.

The model suits a foreign company that wants a small team quickly, or wants to test India before it invests. It also suits a single senior hire, such as a country manager, while the company decides on structure.

The legal employer is the EOR. Courts and tax officers, however, look at substance. Who directs the work, who benefits from it and who can end it all matter. The rest of this page follows from that tension.

Point	Employer of record	Own subsidiary (Private Limited)	Direct contractor from abroad
Legal employer in India	EOR	Your subsidiary	None; a services contract
Indian entity needed	No	Yes, incorporated under the Companies Act, 2013	No
Statutory benefits (PF, ESI, gratuity)	EOR runs them	Subsidiary runs them	Not applicable if a true contractor
Salary TDS under section 392	EOR deducts	Subsidiary deducts	None; the contractor pays its own tax
Who owns work product at law	EOR first, for copyright made in employment	Subsidiary first	The contractor, unless assigned
PE risk for the foreign company	Present; depends on what staff do	Lower; the subsidiary is a separate taxpayer	Present; depends on what the contractor does
Can sign Indian customer contracts	No, not in the client's name without PE risk	Yes	No
Exit	End the EOR contract	Strike off or wind up the company	End the contract
Main hidden risk	PE, IP chain, ESOP route	Fixed compliance cost	Misclassification as an employee

Is using an employer of record legal in India?

Yes. No Indian law prohibits a company from employing staff who do work for a foreign client. The EOR must comply with every labour, tax and social security law as the employer. The foreign company has three risks to manage. They are a permanent establishment, an unapproved place of business and a contract labour set up it cannot defend.

We found no Indian statute or rule that defines an employer of record or licenses one as such. Legality therefore rests on general law. Four tests decide whether a particular arrangement holds.

The EOR must be a real employer. It needs registrations under the Shops and Establishments Act of each state where staff work. It needs EPFO and ESIC codes once the thresholds apply, a TAN for salary TDS and professional tax registration where the state levies it. It must issue appointment letters under section 6(1)(f) of the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code).

The contract labour rules may apply. Two definitions decide it. The OSH Code's contractor definition, section 2(1)(n), includes one who "supplies contract labour for any work of the establishment as mere human resource". Chapter XI applies to an establishment with 50 or more contract labour on any day in the previous 12 months (section 45). A contractor with 50 or more contract workers needs a licence under section 47, valid for five years under section 48. The ministry's Compliance Handbook for Employers lists these figures.

Section 2(1)(m) defines contract labour and carves out some workers. They are workers regularly employed by the contractor on mutually accepted terms, with periodical increments and social security cover. Most EOR staff are permanent employees of the EOR with PF and increments. On our reading, that exclusion usually takes them outside "contract labour". A foreign client with no establishment in India also has no Indian establishment for Chapter XI to attach to. Both points depend on facts, so ask your EOR how it classifies its staff.

The foreign company needs approval for any place of business. Regulation 3 of FEMA 22(R)/2016-RB binds every person resident outside India. It bars a branch, liaison or project office "or any other place of business by whatever name called" without prior RBI approval. The only exceptions are those the regulations lay down. The place of business section below explains when EOR staff come close.

The tax position must hold. The EOR fee is the EOR's income. The foreign company's own income stays outside India only if it has no business connection or PE here. The PE section below covers that test.

Requirement	Who is responsible	Source
Shops and Establishments registration in each state	EOR	State Shops and Establishments Acts
Registration of the establishment at 10 or more workers	EOR	OSH Code, section 3
Appointment letter for every employee	EOR	OSH Code, section 6(1)(f)
PF at 20 employees; ESI at 10 employees	EOR	Code on Social Security, 2020, First Schedule
Salary TDS and quarterly Form 138	EOR	Income Tax Act, 2025, sections 392 and 397
Contractor licence at 50 or more contract labour	EOR, if it is a contractor	OSH Code, sections 45, 47 and 48
Approval for any place of business in India	Foreign company	FEMA 22(R)/2016-RB, regulation 3
Registration of a place of business (Form FC-1)	Foreign company, if it has one	Companies Act, 2013, section 380

What does the EOR do and what stays with the foreign company?

The EOR runs payroll, tax deduction, PF, ESI, gratuity, leave, final settlement and labour registrations. The foreign company keeps everything about the work itself and its own tax position. That includes PE exposure, IP ownership, data protection, equity grants and the commercial relationship with Indian customers.

A good EOR contract makes the split explicit. We read four clauses first in any EOR agreement a client sends us.

1. Termination and the cost of exit. The labour codes require final wages within two working days of exit (Code on Wages, section 17(2)). Check who funds notice pay, leave encashment and gratuity on termination.
2. IP assignment. The EOR owns copyright first under the Copyright Act, 1957. The contract must assign it onward to you. The IP section below gives the wording points.
3. Conversion terms. Many EOR contracts set conditions or charges when you move staff to your own entity. Know them before you sign.
4. Indemnity for PE and misclassification. Few EORs give one. Price the risk yourself.

Function	EOR	Foreign company
Offer letter and employment contract	Issues and signs	Approves terms
Monthly salary, payslips and wage registers	Runs	Funds through the fee
Salary TDS under section 392, Forms 138 and 130	Deducts, files and issues	None
PF, ESI, gratuity, bonus	Registers, deposits and pays	Funds
Leave, overtime and final settlement under the labour codes	Administers	Approves terminations
Daily direction of work	Should not interfere	Directs
Signing customer contracts in India	Never for the client	Keeps outside India
IP in work product	Assigns onward under contract	Takes assignment and registers rights
Equity awards	Usually no role	Grants under its own plan
PE, place of business and FEMA position	No responsibility	Owns the risk

For an EOR that hires expats, PF works differently. An expat who is an international worker joins PF from day one, usually on full pay, unless a social security agreement exempts the person. Our guide to PF and ESI for expat staff covers that rule. The visa side is in our guide to the employment visa for foreign employees.

Can an EOR create a permanent establishment risk?

Yes. A foreign company can have a permanent establishment (PE) in India through people on an EOR payroll. The EOR is the legal employer, but treaties look at whose business the staff carry on. Triggers are a fixed place at the company's disposal, staff who conclude or negotiate contracts, and services in India beyond the treaty's day limit.

India taxes a foreign company's business income only if it accrues in India. Section 9(2)(c) of the Income Tax Act, 2025 deems income through "any business connection in India" to accrue in India. Section 9(9) defines business connection. It covers a person acting in India for the non resident. Section 9(9)(b)(i)(A) catches one who "habitually concludes contracts or habitually plays the principal role leading to conclusion of contracts".

Where a treaty applies, the treaty's PE article decides whether India can tax business profits. Section 159 applies the Act only where it is more beneficial. India taxes profit attributed to a PE at the foreign company rate of 35 percent, plus surcharge and cess. Our guide on how to avoid permanent establishment risk in India covers the general controls.

The India US treaty shows the three tests an EOR team can trip.

PE test	India US treaty text	How EOR staff can trigger it	Lower risk set up
Fixed place of business	Article 5(1)	The client rents or controls an office the staff use for its business	Staff work from the EOR's premises or their homes; the client holds no lease or key
Service PE	Article 5(2)(l): services through employees or other personnel for more than 90 days in any 12 months, or for a related enterprise	Staff deliver the client's services to Indian customers	Staff support the client's own internal work, not its Indian customers
Dependent agent PE	Article 5(4): habitually concludes contracts, keeps stock, or habitually secures orders wholly or almost wholly for the enterprise	A sales lead on EOR payroll negotiates and closes Indian deals	Contracts negotiated and signed outside India; sales staff generate leads only
Domestic business connection	Section 9(9)(b)(i)(A), Income Tax Act, 2025	Staff habitually play the principal role leading to contracts	Written authority limits and real approval abroad

Article 5(2)(l) excludes "included services" under Article 12. Other treaties use different day counts and exclusions. The India Singapore treaty, for example, uses 90 days in a fiscal year, and 30 days for a related enterprise.

The Supreme Court has looked at staff placed in India for a foreign company. In DIT v Morgan Stanley and Co. Inc. (2007) 292 ITR 416, it held that employees deputed to an Indian entity, who stayed on the foreign company's lien, created a service PE. Stewardship staff checking quality for the parent did not. In Formula One World Championship Ltd v CIT (2017) 394 ITR 80, the Court found a fixed place PE. The place was at the foreign company's disposal for its business.

Neither case involved an EOR. Both show the method a tax officer will use. Officers look at who controls the people and the place, and whose business the people carry on. A payroll label does not settle it.

A related indirect tax ruling points the same way. The case is CC, CE and ST, Bangalore (Adj.) v Northern Operating Systems Private Limited, a service tax matter. The Supreme Court decided Civil Appeals 2289 to 2293 of 2021 on 19 May 2022. It held that an overseas group company seconding staff to its Indian affiliate made a taxable supply of manpower.

CBIC's Instruction No. 05/2023-GST of 13 Dec 2023 tells officers not to apply the ruling mechanically. They must examine the facts and terms of each contract. Substance over form runs through Indian tax law.

Role by role, the risk looks like this in our practice:

• Engineers, designers and analysts building the client's product. Low risk, if they serve the client and not its Indian customers.
• Customer support for global customers. Low to moderate. Watch any work delivered to Indian customers on site.
• Business development staff who find leads. Moderate. Keep pricing and contract approval outside India, in writing.
• A country manager or sales head who negotiates and signs. High. This is the classic dependent agent case.
• Consultants delivering projects for Indian clients. High. Count days against the service PE limit in your treaty.

Can EOR staff give the foreign company a place of business in India?

They can. A foreign company that uses EOR staff to run an Indian operation from a fixed location may have a "place of business" in India. That needs RBI approval under FEMA 22(R)/2016-RB and registration with the Registrar under section 380 of the Companies Act, 2013. Neither the EOR nor its contract changes that test.

Section 2(42) of the Companies Act, 2013 defines a foreign company as a body incorporated outside India with two features. It "has a place of business in India whether by itself or through an agent, physically or through electronic mode". It also "conducts any business activity in India in any other manner". The definition says "through an agent". An EOR team that acts as the client's Indian office can fit those words.

Once a foreign company has a place of business, section 380 requires Form FC-1 within 30 days. Sections 381 and 384 then apply accounts and annual return duties. FEMA asks a separate question. Regulation 3 of FEMA 22(R)/2016-RB requires prior RBI approval for "any other place of business by whatever name called".

In our practice, the risk rises with three facts together:

1. The client leases or controls the premises, or pays for a dedicated office in its own name.
2. The team presents itself to Indian customers or suppliers as the client's Indian office.
3. Staff carry on the client's business in India, rather than supporting it from India.

A team of developers working from home for a foreign software company rarely meets these. A branded sales office with a country manager often does. At that point, the cleaner answer is a subsidiary.

How is an EOR different from contractors, secondment and direct hiring?

An EOR gives the worker an Indian employer with full statutory benefits. An independent contractor is self employed and invoices the foreign company directly. A secondment sends the parent's own employee to an Indian entity. Direct hiring from abroad makes the foreign company the employer, with no Indian payroll. Each carries a different risk.

Independent contractors. Many foreign companies start by paying Indian freelancers through an invoice. That works for real independent work. The risk is misclassification. Suppose the company sets hours, provides tools and controls the work, and the person works only for it. Indian authorities may then treat the person as an employee. Social security dues, gratuity and labour claims can follow. The PE risk also stays with the foreign company, because the contractor acts for it.

Secondment. A secondment fits only where an Indian entity already exists. Northern Operating Systems treats it as a supply of manpower. The income tax cases treat it as a possible service PE. It needs a written agreement, a clear host employer and transfer pricing support.

Direct hiring from abroad. A foreign company can put an Indian resident on its own foreign payroll. It then has no Indian TAN, PF code or ESIC code. The employee pays tax through advance tax. This exposes the company to every risk above, with no Indian intermediary to run compliance.

Model	Indian employer	Statutory benefits	Main legal risk	Fits when
EOR	The EOR	Yes, through the EOR	PE; IP chain; place of business	1 to a handful of staff, or testing India
Independent contractor	None	No	Misclassification; PE	Real freelance work for several clients
Secondment to an Indian entity	The host entity, or a split arrangement	Yes, with international worker PF rules	Service PE; GST on manpower supply	An Indian entity already exists
Direct foreign payroll	None in India	No Indian PF or ESI	PE; place of business; employee tax gaps	Rarely advisable
Own subsidiary	The subsidiary	Yes	Fixed compliance cost	A team that will stay and grow

How do the new labour codes affect EOR arrangements?

The four labour codes took effect on 21 Nov 2025. They bind the EOR as employer, so their cost reaches the foreign company through the fee. The main changes are one wage definition with a 50 percent rule, gratuity on the new wages and final pay within two working days. The PF wage ceiling also rose to INR 25,000 from 17 Sep 2026.

The government announced the start date in a press release of 21 Nov 2025. Central rules under all four codes came into force on 8 May 2026 (G.S.R. 342(E) to 345(E)). States run their own rules for private offices. Our guide to the new labour codes gives the full detail and salary arithmetic.

For an EOR client, eight changes matter:

Change	Rule	Effect on an EOR arrangement	Source
One wage definition	Basic pay, DA and retaining allowance; excluded items above 50% of pay count as wages	Gratuity and PF bases rise; EOR quotes built on a low basic are out of date	Code on Wages, section 2(y); Code on Social Security, section 2(88)
Gratuity on Code wages	15 days' wages a year; paid on last drawn Code wages for all service	Higher accrual; the client usually funds it	Code on Social Security, section 53; Additional FAQ 17
Fixed term staff	Parity with permanent staff; gratuity after one year	Short contracts no longer avoid gratuity	IR Code, section 2(o); Additional FAQ 14
Final wages	Within two working days of exit, for all employees	The EOR needs funds before the last day	Code on Wages, section 17(2)
PF wage ceiling	INR 25,000 a month from 17 Sep 2026	Employer PF at the ceiling rises from INR 1,800 to INR 3,000 a month	S.O. 5109(E); EPFO FAQs
Contract labour threshold	Chapter XI at 50 contract labour; contractor licence at 50	Large EOR teams raise the licensing question	OSH Code, sections 45 and 47
Principal employer liability	The principal employer pays wages if the contractor does not	Relevant where the client has an Indian establishment	OSH Code, section 55
Gratuity for contract labour	The contractor pays after five years of continuous service	A staffing model does not shift gratuity to the client by default	Additional FAQ 16

Wage definition. If excluded items such as HRA and conveyance exceed half of total remuneration, the excess counts as wages. A salary template with a low basic now produces higher Code wages. The ministry's Additional FAQs of 16 Mar 2026 count employer PF inside total remuneration for the test (FAQ 1). Ask your EOR for a revised cost per employee under the new definition.

PF ceiling. The ministry's release of 23 Sep 2026 confirms S.O. 5109(E) and the INR 25,000 ceiling. EPFO's FAQs on the revised ceiling split September 2026 at 17 Sep in one return. Employees earning up to INR 25,000 now join PF compulsorily, so lower paid support staff cost more.

Contract labour. The PIB release on the OSH Code of 22 Nov 2025 says the threshold rose from 20 to 50 workers. It also records the core activity rule in section 57. Contract labour is barred in core activities, with three exceptions. The activity is ordinarily done through contractors, needs no full time workers, or faces a sudden rise in volume. That rule binds an Indian establishment. It matters if a client with an Indian subsidiary also keeps EOR staff doing the subsidiary's core work.

Final settlement. Section 17(2) of the Code on Wages makes final wages due within two working days. The OSH Code gives leave encashment on separation (Additional FAQ 26). When you move staff from an EOR to your subsidiary, the EOR settles each person on these terms.

Who owns the IP created by EOR employees?

The EOR does, at first. Under section 17(c) of the Copyright Act, 1957, the employer first owns copyright in work made in the course of employment. An agreement can change that. The EOR is the employer, so the foreign company gets ownership only through a written assignment from the EOR. Inventions need separate treatment under the Patents Act, 1970.

The chain therefore has two links. The employee's contract with the EOR must confirm that the EOR owns the work and must assign inventions to it. The EOR's contract with you must assign everything onward. A gap in either link leaves the IP in India with the wrong owner.

Section 19 of the Copyright Act sets the form of an assignment, and three of its defaults catch foreign companies out.

Rule	What the Copyright Act says	Drafting fix
Writing	An assignment is valid only in writing, signed by the assignor (section 19(1))	Signed assignment in the EOR contract, plus confirmatory deeds when needed
Content	It must identify the work, the rights, the duration and the territory (section 19(2))	Describe the work by project and period; list all rights
Lapse	Rights not exercised within one year lapse, unless the deed says otherwise (section 19(4))	State expressly that non exercise does not cause a lapse
Duration	If not stated, five years from the assignment (section 19(5))	State the full term of copyright
Territory	If not stated, presumed to extend within India only (section 19(6))	State "worldwide"
First owner for employees	Employer, absent contrary agreement (section 17(c))	Make the EOR the first owner and the assignor to you

Patents. Indian patent law has no rule that an employer owns an employee's invention. Ownership passes by assignment, so the employee's contract must assign inventions to the EOR, and the EOR to you. Section 39 of the Patents Act, 1970 adds a filing rule. A person resident in India cannot file a patent application abroad without a written permit from the Controller. The exception is where an Indian application for the same invention was filed at least six weeks earlier, with no secrecy direction.

Under section 40, a breach means the Indian application is deemed abandoned. Any patent already granted can be revoked under section 64. Section 118 adds imprisonment of up to two years, a fine, or both. If your Indian EOR engineer is a named inventor, plan the filing route before the first filing in the US or Europe.

Moral rights and confidentiality. Section 57 of the Copyright Act keeps the author's right to claim authorship after assignment. Confidentiality depends on contract, so the EOR contract and the employee contract both need it. Post employment non compete clauses are generally unenforceable under section 27 of the Indian Contract Act, 1872. Rely on confidentiality and non solicitation instead.

Can EOR employees receive ESOPs or RSUs from the foreign company?

Often not on the easy route. Schedule III of the Foreign Exchange Management (Overseas Investment) Rules, 2022 lets a resident employee take parent shares "without limit". The employee must work for the foreign company's Indian office, branch or subsidiary, or an Indian entity it holds equity in. An EOR is none of these, so grants need a FEMA check first.

Paragraph 3 of Schedule III to the OI Rules (G.S.R. 646(E) of 22 Aug 2022) covers employees and directors of three kinds of Indian entity. They are an Indian office or branch of the overseas entity, its Indian subsidiary, and an Indian entity in which it holds equity. That holding can be direct or indirect. The scheme must be offered globally on a uniform basis. An EOR employee works for an Indian company in which the client holds no equity.

Two practical consequences follow:

1. FEMA. The employee may have to buy the shares under the general route in paragraph 1 of Schedule III. That route sits within the Liberalised Remittance Scheme limit of USD 2,50,000 a year. Ask the employee's AD bank before you grant, not at exercise.
2. Tax. Section 17(1)(d) of the Income Tax Act, 2025 covers shares allotted or transferred by the current or former employer. The transfer can be direct or indirect. Their value is a salary perquisite when they come free or at a concessional rate. The client is not the legal employer, so the head of income and the EOR's duty to include it under section 392 need review. We agree the treatment with the EOR in writing before the first vest.

Equity is one of the strongest reasons to move a growing team into a subsidiary. Employees of your own subsidiary fit paragraph 3 directly.

How much does an EOR cost compared with a subsidiary?

Salary and statutory costs are the same in both models, because Indian law sets them. The difference is the EOR fee per employee against the subsidiary's fixed overhead, set up cost and Indian tax on its cost plus margin. On the illustrative assumptions below, a subsidiary costs less from about four employees at a fee of INR 50,000 a month. At INR 25,000, the figure is about ten.

These figures are illustrative. We built them from the stated assumptions, not from any provider's price list. Replace each assumption with your own quotes before you decide. Every amount is in INR a year unless the table says otherwise.

Assumption	Value used	Why
Fixed pay per employee	INR 24,00,000 a year (INR 2,00,000 a month)	A mid level engineer; change to your own band
Code wages per employee	INR 1,00,000 a month	Pay designed to the 50% line
Employer PF	12% of INR 25,000 = INR 3,000 a month, INR 36,000 a year	Restricted to the ceiling from 17 Sep 2026
Gratuity accrual	INR 1,00,000 x 15 / 26 = INR 57,692 a year	Code on Social Security, section 53(2)
ESI and statutory bonus	Nil	Pay is above INR 21,000 a month
EDLI, PF administration, professional tax	Excluded	Small, and the same in both models
EOR fee	INR 50,000 per employee a month (INR 6,00,000 a year)	Our modelling figure, not a quote
GST on the EOR fee	Nil	Assumes the fee qualifies as an export of services
Subsidiary fixed overhead	INR 15,00,000 a year, plus INR 30,000 per employee	Accounting, payroll, audits, transfer pricing report, secretarial, resident director, registered office
Subsidiary set up	INR 4,00,000, spread over three years	Incorporation, FEMA filings, registrations and bank account
Cost plus mark up	15.5% on total cost	IT services safe harbour margin under rule 89 of the Income Tax Rules, 2026
Indian tax on the mark up	25.168%	Section 200 rate: 22% plus 10% surcharge plus 4% cess

Employment cost per employee is INR 24,93,692 (24,00,000 + 36,000 + 57,692). It is the same under both models.

The subsidiary invoices the parent at cost plus 15.5 percent. The mark up stays in the group as Indian profit, so it is not a cost. The Indian tax on it is. The parent can usually deduct the whole service fee at home, which this model ignores.

Annual cost (INR)	5 employees	15 employees	40 employees
Employment cost (salary, PF, gratuity)	1,24,68,462	3,74,05,385	9,97,47,692
EOR fee	30,00,000	90,00,000	2,40,00,000
Total under EOR	1,54,68,462	4,64,05,385	12,37,47,692
Subsidiary overhead	16,50,000	19,50,000	27,00,000
Set up, one third	1,33,333	1,33,333	1,33,333
Mark up at 15.5% (stays in the group)	21,88,362	61,00,085	1,58,79,392
Indian tax on the mark up at 25.168%	5,50,767	15,35,269	39,96,525
Total under subsidiary (excluding the mark up)	1,48,02,562	4,10,23,987	10,65,77,551
Saving with a subsidiary	6,65,900	53,81,397	1,71,70,141
Cost per employee, EOR	30,93,692	30,93,692	30,93,692
Cost per employee, subsidiary	29,60,512	27,34,932	26,64,439

The break even headcount moves with the fee. We solved fixed cost divided by the per head saving for three fee levels.

EOR fee per employee a month (assumption)	Break even headcount on this model
INR 50,000	About 4
INR 25,000	About 10
INR 15,000	About 33

Four costs sit outside the model, and each can move the answer:

1. PE exposure. A PE assessment on an EOR team can exceed several years of fees. A subsidiary reduces this risk but does not remove it.
2. GST. The model assumes the EOR's fee is a zero rated export of services. That depends on the conditions in section 2(6) of the IGST Act, 2017. An officer may also test whether the EOR is an intermediary under section 2(13). If it is, section 13(8)(b) puts the place of supply in India and GST applies. If the EOR charges 18 percent GST that the client cannot recover, add it to the EOR column. Our note on GST on export of services sets out the conditions.
3. Exit cost. Closing a subsidiary takes a strike off or winding up, with its own fees and time. Ending an EOR contract usually does not.
4. Management time. A subsidiary needs board meetings, a resident director and annual filings. The compliance calendar lists them.

When should a foreign company switch from EOR to its own entity?

Switch when cost, risk or control tips the balance, whichever comes first. On cost, our illustrative model breaks even between 4 and 33 employees, depending on the fee. On risk, switch as soon as Indian staff negotiate or sign customer contracts, run a branded office, or need ESOPs. Many companies hit a risk trigger before the cost trigger.

Trigger	Why it matters	Act
Headcount passes your break even point	The EOR fee scales per head; subsidiary overhead mostly does not	Run the model with real quotes
A sales head or country manager joins	Dependent agent PE under the treaty and section 9(9)	Move before the hire, or hold contract authority abroad
Indian customers need contracts or invoices from an Indian company	The client cannot sign without PE and place of business risk	Form a subsidiary to contract locally
You want an office in your own name	Place of business under FEMA 22(R) and section 2(42)	Lease through a subsidiary
Staff should receive parent ESOPs or RSUs	Schedule III paragraph 3 of the OI Rules needs an Indian subsidiary, branch or office	Move staff before the grant
Patentable work starts in India	Section 39 filing permits and a two link IP chain	Hold IP through a subsidiary with direct assignment
Investors or acquirers run due diligence	They look for direct ownership of people and IP	Clean up before the round
The EOR has 50 or more contract labour	Licensing and principal employer questions	Ask how the EOR classifies staff
You need Indian incentives or registrations	Schemes such as DPIIT recognition need an Indian entity	Form the entity first

The subsidiary route itself is well tested. A wholly owned Private Limited company under the automatic route needs two directors. At least one must stay in India for 182 days in the financial year (section 149(3) of the Companies Act, 2013). It reports the share issue in Form FC-GPR within 30 days and files the commencement declaration within 180 days of incorporation. Our guide to setting up a Private Limited subsidiary gives each step.

A captive subsidiary also needs a transfer pricing policy from day one. Form 48 (old Form 3CEB) is due each year under section 172 of the Income Tax Act, 2025. Our guide to safe harbour rules explains the 15.5 percent IT services margin.

How do you move employees from an EOR to your Indian subsidiary?

Treat it as a new hire by the subsidiary and a clean exit from the EOR on the same day. The EOR settles final wages within two working days and encashes leave. The subsidiary issues new appointment letters and registers for PF and ESI. Agree in writing how earlier service counts for gratuity before anyone signs.

Gratuity is the point most transfers miss. Under section 53 of the Code on Social Security, a permanent employee qualifies after five years of continuous service. A change of employer from the EOR to your subsidiary breaks that service unless someone agrees otherwise. In our practice, the subsidiary recognises EOR service in the new offer letter, and the EOR contract says who funds the accrued amount.

Step	Owner	Timing	Source
Incorporate the subsidiary and open a bank account	Foreign company	Before the transfer date	Companies Act, 2013; SPICe+
Report the share allotment in Form FC-GPR	Subsidiary	Within 30 days of allotment	FEMA 395/2019-RB, regulation 4(1)
Obtain a TAN for salary TDS	Subsidiary	Before the first payroll	Income Tax Act, 2025, section 392
Register under the Shops and Establishments Act and professional tax	Subsidiary	Before staff join	State laws
Register with EPFO and ESIC	Subsidiary	At 20 and 10 employees	Code on Social Security, 2020
Give notice to the EOR under its contract	Foreign company	As the contract requires	EOR agreement
Final wages and leave encashment by the EOR	EOR	Within 2 working days of exit	Code on Wages, section 17(2); Additional FAQ 26
Issue new appointment letters with service recognition	Subsidiary	On joining	OSH Code, section 6(1)(f)
Transfer PF balances through each member's UAN	Employees, with both employers	After joining	EPF Scheme, 2026
Take a confirmatory IP assignment from the EOR	EOR and foreign company	On the transfer date	Copyright Act, section 19
Sign the intercompany service agreement	Parent and subsidiary	Before the first invoice	Section 172; rule 84

For salary TDS, the EOR issues Form 130 for its part of the year, and the subsidiary deducts on the full year's estimate. Ask each employee to declare the EOR salary to the subsidiary, so the year's TDS is right. Our payroll management team handles that handover.

What changed in 2026

For an EOR or a subsidiary, 2026 brought a new Income Tax Act, final labour code rules and a higher PF ceiling. The table lists each change, its date and its instrument.

Date	Old position	New position	Instrument
21 Nov 2025	29 central labour Acts	Four labour codes in force; contract labour threshold 50	S.O. 5319(E) to S.O. 5322(E)
16 Mar 2026	Open questions on the 50% test and gratuity	Employer PF inside the test; gratuity at last drawn Code wages	Ministry Additional FAQs
1 Apr 2026	Income Tax Act, 1961	Income Tax Act, 2025 and Income Tax Rules, 2026	Act 30 of 2025; G.S.R. 198(E)
8 May 2026	Old central labour rules	Central rules under all four codes	G.S.R. 342(E) to 345(E)
29 Jun 2026	EPF Scheme, 1952	Employees' Provident Funds Scheme, 2026	Notified under the Code on Social Security
Tax year 2026-27	Earlier IT services safe harbour	15.5% margin on operating expense, up to INR 2,000 crore	Rule 89, Income Tax Rules, 2026
17 Sep 2026	PF ceiling INR 15,000 a month	PF ceiling INR 25,000 a month	S.O. 5109(E)
1 Oct 2026	SOFTEX for software exports	Export Declaration Form for services under the new export regulations	FEMA 23(R)/2026-RB

The last row matters to the EOR, not the client. An EOR that exports its services to you now reports them under FEMA 23(R)/2026-RB.

The new Act renumbered every provision an EOR or a subsidiary touches. The form mapping on incometaxindia.gov.in gives the new numbers.

Item	Income Tax Act, 1961	Income Tax Act, 2025
Income deemed to accrue through a business connection	Section 9(1)(i)	Section 9(2)(c)
Meaning of business connection, including dependent agents	Explanation 2 to section 9(1)(i)	Section 9(9)
Treaty relief	Section 90	Section 159
TDS on salary	Section 192	Section 392
Salary perquisite for ESOPs and RSUs	Section 17(2)(vi)	Section 17(1)(d)
Concessional company tax rate	Section 115BAA	Section 200
Quarterly TDS statement on salary	Form 24Q	Form 138
Salary TDS certificate	Form 16	Form 130
Transfer pricing report	Form 3CEB, section 92E	Form 48, section 172

Worked example

A US software company wants six engineers and one sales lead in Bengaluru. It has no Indian entity. It compares an EOR with a subsidiary, using the assumptions in the cost section.

Step 1. Employment cost. Seven employees at INR 24,93,692 each cost INR 1,74,55,846 a year under either model. The sales lead's higher pay would change this, but we keep one band for clarity.

Step 2. EOR fee. At INR 50,000 per employee a month, the fee is 7 x 6,00,000 = INR 42,00,000 a year. Total EOR cost is INR 2,16,55,846.

Step 3. Subsidiary cost. Overhead is 15,00,000 + (7 x 30,000) = INR 17,10,000. The cost base is 1,74,55,846 + 17,10,000 = INR 1,91,65,846. The mark up at 15.5 percent is INR 29,70,706. Indian tax on it at 25.168 percent is INR 7,47,667. Adding one third of set up (INR 1,33,333) gives INR 2,00,46,846.

Step 4. Compare. The subsidiary saves INR 16,09,000 a year on these assumptions. At a fee of INR 15,000 a month, the EOR would cost INR 1,87,15,846. It would then win by INR 13,31,000.

Step 5. Price the PE risk. Now suppose the sales lead negotiates and signs Indian contracts on EOR payroll. A tax officer attributes INR 80,00,000 of profit to a dependent agent PE. Tax at 35 percent plus 4 percent cess is 36.4 percent, or INR 29,12,000. No surcharge applies at that income. Interest and the cost of contesting come on top.

That single exposure exceeds the yearly saving from either model. On these facts, we would hire the sales lead into a subsidiary, or keep contract authority firmly in the US. The six engineers alone carry little PE risk on an EOR.

Step 6. Check the IP chain. The engineers write code. The EOR owns the copyright first under section 17(c). The EOR contract must assign it worldwide, for the full term, with no lapse for non use. Without those words, section 19(5) and (6) cut the assignment to five years and to India.

Item (INR a year)	EOR	Subsidiary
Employment cost, 7 staff	1,74,55,846	1,74,55,846
EOR fee or overhead	42,00,000	17,10,000
Indian tax on the 15.5% mark up	Nil	7,47,667
Set up, one third	Nil	1,33,333
Total	2,16,55,846	2,00,46,846
Illustrative PE exposure if the sales lead closes deals	29,12,000 plus interest	Much lower if the subsidiary contracts in its own name

Common mistakes

1. Giving an EOR sales lead authority to sign. That is the textbook dependent agent PE. Fix: keep approval and signature outside India, in writing, or hire the role into a subsidiary.
2. Accepting the EOR's standard IP clause unread. Section 19(5) and (6) default an unclear assignment to five years and India only. Fix: require a worldwide, full term assignment with no lapse for non use.
3. Filing a patent abroad first. Section 39 of the Patents Act needs a permit or an Indian filing six weeks earlier. Fix: plan the filing route with patent counsel before the first filing.
4. Leasing an office in the client's name for EOR staff. It points to a place of business under FEMA 22(R) and section 2(42). Fix: use the EOR's premises, home working, or a subsidiary lease.
5. Granting parent RSUs to EOR staff without a FEMA check. Schedule III paragraph 3 of the OI Rules does not cover them on its face. Fix: confirm the route with the AD bank and agree the tax treatment with the EOR.
6. Comparing quotes built on the old wage definition. Gratuity and PF now use Code wages and the INR 25,000 ceiling. Fix: ask for a 2026 cost sheet under the labour codes.
7. Ignoring gratuity on transfer. Five years of service restarts with a new employer unless someone agrees otherwise. Fix: recognise EOR service in the new offer letter and fund it.
8. Calling freelancers "contractors" while managing them as staff. Control and exclusivity point to employment. Fix: move them to the EOR or your subsidiary.
9. Assuming GST is nil on the EOR fee. Zero rating needs every condition of section 2(6) of the IGST Act. Fix: confirm the EOR's GST treatment in the contract.
10. Leaving the switch until a funding round. Investors check the people and IP chain. Fix: run the switch test every quarter as headcount grows.

Checklist

1. List each Indian role with its tasks, its contact with Indian customers and any authority to negotiate or sign.
2. Rate each role for PE risk against your treaty's PE article and section 9(9) of the Income Tax Act, 2025.
3. Decide whether any role, place or brand would give you a place of business in India.
4. Obtain EOR quotes that apply the labour code wage definition and the INR 25,000 PF ceiling.
5. Build the cost model with your own salary bands, fees, overhead and GST position.
6. Review the EOR contract for IP assignment, confidentiality, termination funding, conversion terms and indemnities.
7. Require the EOR's employee contracts to assign inventions and confirm copyright ownership.
8. Plan patent filings to comply with section 39 of the Patents Act, 1970.
9. Check the FEMA route and the tax treatment before granting any equity to EOR staff.
10. Write down the trigger that will move you to a subsidiary, such as a headcount, a sales hire or an equity grant.
11. Incorporate the subsidiary, file Form FC-GPR within 30 days of allotment and register for TAN, PF and ESI.
12. Transfer staff with final settlement by the EOR, new appointment letters and recognition of past service.
13. Sign an intercompany service agreement and set the transfer pricing policy before the first invoice.
14. Add the subsidiary's filings to a compliance calendar from the first month.

To have us run this model on your own salary bands and EOR quotes, send them through our contact page.

Frequently Asked Questions

Can a foreign company hire employees in India without an entity?+

Yes, through an employer of record or as contractors. An EOR becomes the legal employer and runs payroll, PF, ESI and salary TDS under section 392 of the Income Tax Act, 2025. The foreign company avoids incorporation, but it still carries permanent establishment risk under section 9(9) and its treaty, based on what the staff do.

Is an employer of record a contractor under the OSH Code?+

It can be. The OSH Code defines a contractor to include a person who supplies contract labour "as mere human resource". Workers regularly employed by the contractor on accepted terms, with increments and social security, are excluded from contract labour. Most EOR employees fit that exclusion. Licensing applies to a contractor with 50 or more contract workers under section 47.

Does the EOR need a licence to supply staff to foreign companies?+

Only if it is a contractor employing 50 or more contract labour, under section 47 of the OSH Code. The licence is valid for five years under section 48, and an all India licence is available. An EOR whose staff are its own regular employees may fall outside the contract labour definition. Ask your EOR for its legal position in writing.

Does an EOR remove permanent establishment risk?+

No. The EOR becomes the legal employer, but a PE depends on what the people do for the foreign company. Staff who habitually conclude contracts or play the principal role in concluding them create a business connection under section 9(9)(b)(i)(A). Treaties add fixed place and service PE tests, such as Article 5(2)(l) of the India US treaty.

How many days create a service PE through EOR staff?+

It depends on the treaty. Article 5(2)(l) of the India US treaty sets more than 90 days within any 12 months, or any services for a related enterprise. The India Singapore treaty uses 90 days in a fiscal year, and 30 days for a related enterprise. Services classed as fees for technical or included services are excluded under each treaty.

Do EOR employees count towards PF and ESI thresholds?+

They count for the EOR, not for you. The EOR is the employer, so its whole Indian headcount counts. PF applies at 20 employees and ESI at 10 under the Code on Social Security, 2020. Most EORs are already registered with EPFO and ESIC. From 17 Sep 2026, PF applies to wages up to INR 25,000 a month.

Who pays gratuity to EOR employees?+

The EOR pays it as employer under section 53 of the Code on Social Security, 2020, and passes the cost to you through the fee. A permanent employee qualifies after five years of continuous service, and a fixed term employee after one year. Gratuity uses last drawn Code wages, up to the ceiling the Central Government notifies. That ceiling stood at INR 20,00,000 under the Payment of Gratuity Act, 1972.

Does a foreign company own code written by EOR engineers?+

Only after a written assignment. Section 17(c) of the Copyright Act, 1957 makes the EOR, as employer, the first owner. Section 19 then requires a signed assignment that names the work, rights, duration and territory. Without stated terms, the assignment lasts five years and covers only India under sections 19(5) and 19(6).

Can an EOR employee file a US patent for our invention?+

Not first, without permission. Section 39 of the Patents Act, 1970 bars a person resident in India from filing abroad without a written permit from the Controller. The exception is an Indian application filed at least six weeks earlier. A breach risks the Indian application being treated as abandoned and penalties under section 118.

Is the EOR fee subject to GST?+

It depends on the place of supply. An EOR serving a client outside India usually treats its fee as an export of services, zero rated under the IGST Act, 2017. Every condition in section 2(6) must hold, including payment in convertible foreign exchange, or in rupees where the RBI permits. If the EOR charges 18 percent GST, a foreign client without Indian registration cannot usually recover it.

Who deducts tax on salaries paid through an EOR?+

The EOR does. Section 392 of the Income Tax Act, 2025 binds the person responsible for paying salary. The EOR deposits tax monthly, files the quarterly statement in Form 138 (old Form 24Q) and issues Form 130 (old Form 16). The foreign company has no Indian TDS duty on the salary.

Can an EOR hire a foreign national to work in India?+

Yes, if the EOR sponsors the right visa as the Indian employer. The expat usually needs an employment visa. The EOR must cover the person for PF as an international worker, unless a social security agreement gives an exemption. PF then runs on full pay from day one under the EPF rules for international workers.

Do post employment non compete clauses work for EOR staff?+

Generally not. Section 27 of the Indian Contract Act, 1872 makes agreements in restraint of trade void, and courts apply it to post employment non competes. Restraints during employment are usually enforced. Protect the business through confidentiality, non solicitation and a clear IP assignment in both the employee contract and the EOR contract.

What happens to accrued leave when staff move from an EOR to our subsidiary?+

The EOR encashes it. The OSH Code gives encashment of leave to the worker's credit on separation, as the ministry's Additional FAQ 26 confirms. The Code on Wages requires final wages within two working days of exit under section 17(2).

Does an Indian subsidiary avoid PE completely?+

It reduces the risk. The subsidiary is a separate taxpayer, and under most treaties control alone does not make it the parent's PE. A PE can still arise if the subsidiary habitually concludes contracts for the parent. It can also arise if parent staff work in India beyond the treaty's service PE limit. Arm's length pricing under section 172 supports the position.

What does a captive subsidiary pay in Indian tax?+

It pays tax on its profit, usually the cost plus mark up it earns from the parent. Section 200 of the Income Tax Act, 2025 (old section 115BAA) sets a 22 percent rate. With 10 percent surcharge and 4 percent cess, the effective rate is 25.168 percent. Rule 89 offers a 15.5 percent safe harbour margin for IT services.

Can we switch from an EOR to a subsidiary without losing staff?+

Yes, if you plan the dates. Incorporate the subsidiary, obtain its TAN and registrations, and agree the transfer date with the EOR under its contract. The EOR settles final wages within two working days. The subsidiary issues new appointment letters that recognise past service for gratuity. Employees transfer their PF balance online through their UAN.

Sources

• Income Tax Department, Income Tax Act, 2025, section 9 (income deemed to accrue or arise in India; business connection in section 9(9)), https://www.incometaxindia.gov.in/w/section-9-1
• Income Tax Department, Income Tax Act, 2025, section 392 (salary), https://www.incometaxindia.gov.in/w/section-392-5
• Income Tax Department, Income Tax Act, 2025, section 200, https://www.incometaxindia.gov.in/w/section-200-75
• Income Tax Department, FAQs and Guidance Notes on Forms as per Income Tax Rules, 2026 (form mapping), https://www.incometaxindia.gov.in/faqs-and-guidance-notes-on-forms-as-per-income-tax-rules-2026
• Internal Revenue Service, Convention between India and the United States for the avoidance of double taxation, Article 5, https://www.irs.gov/pub/irs-trty/india.pdf
• Reserve Bank of India, 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, FEMA 22(R)/2016-RB, 31 Mar 2016 (text hosted by the Income Tax Department), https://incometaxindia.gov.in/Documents/Provisions%20for%20NR/FEM-Establishment-in-India-of-a-Branch-Office-Regulations-2016.htm
• Reserve Bank of India, Foreign Exchange Management (Overseas Investment) Rules, 2022, Schedule III, https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=5087
• Indian Economic Service, Arthapedia, Foreign company (section 2(42) of the Companies Act, 2013), https://ies.gov.in/arthapedia/concept/foreign-company
• Ministry of Labour and Employment, The Occupational Safety, Health and Working Conditions Code, 2020 (Act 37 of 2020), https://www.labour.gov.in/static/uploads/2025/07/36fcfa5d8e6b9145e282bf7b950d6c47.pdf
• Ministry of Labour and Employment, The Code on Social Security, 2020 (Act 36 of 2020), https://www.labour.gov.in/static/uploads/2025/07/b0620548445580767b5c0d18c95c26f7.pdf
• Ministry of Labour and Employment, The Code on Wages, 2019 (Act 29 of 2019), https://www.labour.gov.in/static/uploads/2025/06/c328da14bbb15fc4ad571dc33e7a4ab3.pdf
• Ministry of Labour and Employment, The Industrial Relations Code, 2020 (Act 35 of 2020), https://www.labour.gov.in/static/uploads/2025/07/682a44b5426bff2c1f4943ee1b2fd566.pdf
• Ministry of Labour and Employment, Compliance Handbook for Employers under the Four Labour Codes, February 2026, https://www.labour.gov.in/static/uploads/2026/02/83978455025732b99b0165def80ab171.pdf
• Ministry of Labour and Employment, FAQs on Labour Codes, 30 Dec 2025, https://www.labour.gov.in/static/uploads/2026/01/de4758d5bfeffc456d7de97a801891b0.pdf
• Ministry of Labour and Employment, Additional FAQs on Labour Codes (as on 16 Mar 2026), https://www.labour.gov.in/static/uploads/2026/03/a4ccf4c6d97c4f1f36a6d83f8c64213d.pdf
• Press Information Bureau, Government Makes the Four Labour Codes effective, 21 Nov 2025, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192463
• Press Information Bureau, Occupational Safety, Health and Working Conditions (OSH) Code, 2020, 22 Nov 2025, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2192802
• Press Information Bureau, EPFO Raises Wage Ceiling from Rs. 15,000 to Rs. 25,000 (S.O. 5109(E)), 23 Sep 2026, https://www.pib.gov.in/PressReleasePage.aspx?PRID=2313829
• Employees' Provident Fund Organisation, FAQs on Revision of EPFO Statutory Wage Ceiling, September 2026, https://pmvbry-cdn.epfindia.gov.in/wp-content/uploads/2026/09/EPFO_Wage_Ceiling_FAQs.pdf
• Central Board of Indirect Taxes and Customs, Instruction No. 05/2023-GST on the Supreme Court judgment in Northern Operating Systems Private Limited, 13 Dec 2023 (GST Council copy), https://gstcouncil.gov.in/sites/default/files/2024-06/ins-gst-no-05-2023.pdf
• India Code, The Copyright Act, 1957 (Act 14 of 1957), sections 17, 19 and 57, https://www.indiacode.nic.in/handle/123456789/1367
• Copyright Office, Government of India, The Copyright Act, 1957, Chapter IV (ownership of copyright and assignment, sections 17 to 21), https://copyright.gov.in/Copyright_Act_1957/chapter_iv.html
• Office of the Controller General of Patents, Designs and Trade Marks, The Patents Act, 1970 (incorporating amendments till 1 Aug 2024), sections 39, 40 and 118, https://ipindia.gov.in/frontend/pdf/patents/1_113_1_The_Patents_Act__1970___incorporating_all_amendments_till_1-08-2024.pdf
• Income Tax Department, Income Tax Act, 2025, section 17 (perquisite), https://www.incometaxindia.gov.in/w/section-17-225
• Supreme Court of India, DIT (International Taxation) v Morgan Stanley and Co. Inc., 9 Jul 2007, (2007) 292 ITR 416
• Supreme Court of India, Formula One World Championship Ltd v CIT (International Taxation), 24 Apr 2017, (2017) 394 ITR 80
• Supreme Court of India, CC, CE and ST, Bangalore (Adj.) v Northern Operating Systems Private Limited, Civil Appeals 2289 to 2293 of 2021, 19 May 2022