For many medium-sized companies and providers of niche technologies, the Indian market is often (still) too small to justify setting up their own local sales structure. The costs of having your own subsidiary can hardly be amortized. And the headquarters often do not have sufficient human resources to support India from Europe. On the other hand, in the long term you cannot afford to ignore the Indian market. So what could be better than working with an Indian dealer, agent or distributor?
To be too good to be true…
This path involves significantly fewer risks and liabilities than setting up your own local company, managing it and, above all, financing it. Being able to sell your own products to India without having to be present is particularly interesting for medium-sized companies.
It seems to be a wonderful solution: an Indian with his own company relieves the foreign company of the burden of market development and also bears part of the economic risk. He also takes care of the already unpopular topics of tax law and customs. And quite ideal: the representative also works exclusively for the parent company in Germany...
And that's exactly where the (tax) problems begin!
In practice, the majority of Indian agents only work for a single (European) company in India. However, if a representative works exclusively or almost exclusively for a foreign client, Indian tax law speaks of a “dependent representative” and his activity automatically leads to a so-called “representative permanent establishment”.
Attention: The authorities in India suspect the existence of an agent permanent establishment much more quickly than is usual internationally!
A representative does not even have to have closing authority or operate a distribution warehouse. It is enough if he “works” for the foreign company “regularly” and not just occasionally.
It doesn't help if a consultant or representative contract specifically defines the independence of the representative. Even companies that work with a seemingly “non-dependent” agent have been rudely surprised by reality when the Indian Revenue Authority argued that the agent actually achieved 95% of sales with just one principal.
Unfortunately, few European companies working with an agent in India are aware of this real problem. This can have very unpleasant consequences, as you can see in our article Tax liability and jurisdiction through representatives (India permanent establishment) can read.
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