Many thousands of European companies are now active on the Indian market. However, most of them do not operate there with their own subsidiary, but with the help of Indian sales representatives. There are numerous constellations as to how this model is implemented:
The spectrum here ranges from individuals who take on a range of marketing tasks as representatives, to commercial dealers, distributors or importers with extensive tasks and powers.
This model has numerous advantages over starting your own company in India. For many niche players, the initially accessible part of the Indian market is simply too small to justify setting up their own local structure. Therefore, it is understandable that a smaller company would prefer to choose a path that involves significantly fewer risks and liabilities when entering the market.
If you're not careful, you'll have a tax permanent establishment in India overnight
In practice, you sometimes find yourself in such a situation very quickly. For example, a German or Austrian entrepreneur meets a person who appears trustworthy at a trade fair or event in India. They offer their help and also signal a serious interest in building up the market in India for the European company. This person can be a dealer as well as a private individual - in any case, they will soon work very closely for the company in India - almost like an “own employee”. This can actually develop into a very good business opportunity, because often enough this model works so well that the planned “get started phase” turns into several years.
However, very few companies are aware of the inherent risks of such models. We are NOT talking about the risk of having chosen the wrong partner (see article Beware of the “Super Indian”) and also not about the general problems in working with Indian sales partners (see article Sales representatives: suboptimal sales form for India!?)! Rather, we want to concentrate on a very specific tax risk: the permanent establishment risk.
Many sales models for India used in practice lead to the (unintentional!) establishment of a taxable permanent establishment - without the European headquarters being aware of this.
Examples of a permanent establishment founded unintentionally:
- Exclusive sales representative: If a local agent (company or individual) works exclusively for one client, he or she is considered a “dependent representative” of the European company in India, which immediately results in a so-called representative permanent establishment. Read our specialist article Tax considerations when working with agents, representatives and distributors in India
- Individual/Representative: Many foreign companies employ an Indian individual to act as a local contact or representative, without any other structure such as a subsidiary or any other registered company. Please refer My sales representative (takes me in front of the manager)
- Assembly: For example, if a system is sold to India and the European company provides assembly services directly or indirectly to the buyer for a period of more than 6 months, this results in a so-called assembly facility. Please refer Assembly facility – increased risk for mechanical and plant manufacturers in India
- Own subsidiary: Even if a foreign company already operates its own local subsidiary, the permanent establishment risk may still remain.
The corresponding constellations can be:- A posting: A seconded employee from the European headquarters stays in the country for longer than 180 days. More on this topic in the blog post Posting to India – Increased permanent establishment risk for foreign companies.
- Apparent independence of the Indian subsidiary: This can be seen, for example, in the fact that it accepts contracts from the European parent company that an independent third party would never accept.
Why the permanent establishment problem is such an important topic.
The problem of unintentionally established permanent establishments in India often concerns us in our daily work. The Indian authorities continue to surprise us and our customers with new interpretations of regulations and circumstances and force us to take action.
When we speak of “problematics”, we do so for various reasons:
- An Indian tax liability arises - without you being aware of it.
- There may be a tax liability for income that was already taxed in Germany years ago.
- This results in an unplanned administrative effort that quickly gets out of control.
- The foreign company is suddenly subjected to Indian jurisdiction with all its excesses, unpredictability, covetousness and the typical “inflationary” claims for damages.
- From such a “Permanent establishmentThis also results in problems with all follow-up orders and payments in the future. Due to the extreme documentation effort required to obtain a payment from India (keyword “no PE declaration”), any further payment from there will be infinitely delayed or will only be subject to extreme advance deductions of 20-40%! so that a deal may no longer be worthwhile.
Need for action & legal protection in all phases
It is therefore all the more important to examine every sales model envisaged for India with regard to the permanent establishment tax risk. Through precise contract design, critical areas of attack can be avoided, which could allow the Indian tax authorities to interpret the contract in an unfavorable way for you.
Make provisions contractually.
Of course, it's best to avoid the business premises risk right from the start. And even if such risks have only existed for a short time, they are generally still “well controllable” and can be eliminated without significant effort. In addition, the likelihood of (high) penalties is rather low in the early stages
However, if a constellation has existed for several years without being discovered and reported, the worst possible strategy is to simply continue as usual. Due to increasing digitalization, the risk of detection has increased significantly. So waiting and “drinking chai” is extremely risky!
Apart from everything, you have also made yourself extremely vulnerable and blackmailed over the years. A dissatisfied former employee or even a competitor can start the entire investigation in an uncontrolled manner with a small, anonymous tip to the authorities.
Our department WB finance & compliance® will help you with all questions regarding tax permanent establishments in India.
