Yes. A foreign company can, in appropriate circumstances, hire or engage people in India without first incorporating an Indian subsidiary. However, that does not mean it can ignore Indian employment, tax, social-security, foreign-exchange and corporate-registration rules.
The legally safer structure depends on what the Indian worker will actually do, who will employ and pay them, how much authority they will have, and whether the foreign company’s activities create a taxable or corporate presence in India.
In practice, the main options are:
direct employment by the foreign company;
hiring through an Indian Employer of Record (EOR);
engaging a genuine independent contractor; or
establishing an Indian subsidiary, branch or another permitted presence where the scale of operations justifies it.
The important question is therefore not simply, “Do we need a subsidiary?” It is: “What legal presence and compliance obligations will our proposed India hiring model create?”
Is an Indian subsidiary legally compulsory before hiring employees in India?
No general provision of Indian law says that every foreign company must incorporate an Indian subsidiary before it can have personnel working in India.
But having employees in India can create separate obligations under company law, income-tax law, employment laws, social-security legislation and FEMA.
The Companies Act, 2013 is particularly important. Section 2(42) defines a “foreign company” by reference to, among other things, having a place of business in India—whether directly or through an agent, physically or through electronic mode—and conducting business activity in India.
Foreign companies falling within Chapter XXII of the Companies Act may become subject to the registration and filing requirements contained in Sections 379 onwards.
The fact that a company has one remote worker in India does not automatically answer whether these provisions apply. The real activities and manner in which the foreign enterprise operates in India must be examined.
Official source: Companies Act, 2013 — Ministry of Corporate Affairs
What are the main ways a foreign company can hire people in India?
1. Hire through an Employer of Record
An Employer of Record, commonly called an EOR, is often used where a foreign company wants employees in India but does not yet want to establish its own Indian company.
Under this structure, an Indian entity generally becomes the formal employer and handles matters such as:
employment documentation;
Indian payroll;
salary payments;
applicable tax deductions;
statutory benefits;
social-security compliance;
leave and employment records; and
termination-related formalities.
The foreign company normally directs the employee's commercial work under its agreement with the EOR.
There is no standalone Indian statute called an “Employer of Record Act”. The legality of the structure therefore depends on how the arrangement actually operates and compliance with the applicable employment, tax and corporate laws.
An EOR arrangement also does not automatically eliminate permanent-establishment risk for the overseas company. The actual functions and authority exercised by personnel in India still matter.
When is an EOR useful?
An EOR can be particularly useful where a foreign company:
is testing the Indian market;
wants one or a small number of employees initially;
does not yet require a full Indian operating company;
wants local payroll administration; or
expects to establish an Indian entity later but needs employees sooner.
However, the EOR agreement should clearly address intellectual property, confidentiality, employee supervision, indemnities, termination and responsibility for statutory compliance.
For related contract precautions, see: NDA for Businesses: Which 10 Clauses Should You Check Before Signing in India?
Before engaging an EOR, a foreign company should be clear about what the provider will actually handle and what will remain its own responsibility. For example, the agreement should specify who will issue employment letters, manage payroll, deposit statutory contributions, handle employee grievances and deal with termination. It should also explain how the company’s confidential information and intellectual property will be protected.
An EOR arrangement may simplify hiring, but it does not automatically remove every legal or compliance risk for the foreign company. Before signing, the company should check whether the provider can meet its obligations under Indian employment laws and whether the agreement clearly allocates responsibility if something goes wrong. Getting these points right at the outset can help avoid disputes and make it easier to move employees to an Indian entity if the business expands later.
Can the foreign company employ an Indian employee directly?
Potentially, yes—but direct overseas employment can create substantially more compliance questions than an EOR structure.
For example, the parties need to determine:
whether salary earned for services performed in India is taxable in India;
whether tax must be deducted from salary;
whether the employer requires Indian tax registrations;
whether social-security obligations apply;
whether state-level employment requirements apply;
whether the foreign company becomes registrable under the Companies Act;
how salary will lawfully be remitted;
and whether the employee's activities create a permanent establishment for the foreign company.
Section 192 of the Income-tax Act imposes tax-deduction obligations on a person responsible for paying income chargeable under the head “Salaries”, subject to the statutory requirements.
The tax position of the employee must also be considered independently. For example, Section 10(6)(vi) contains a limited exemption for remuneration received by an employee of a foreign enterprise for services rendered during a short stay in India, but only where the statutory conditions are satisfied, including a stay not exceeding 90 days and other specified requirements. It should not be treated as a general exemption for foreign-company employees working from India.
For someone living and working in India on an ongoing basis, Indian salary-tax obligations therefore require proper review.
Will hiring an employee in India create a Permanent Establishment?
It can, but hiring one employee in India does not automatically create a Permanent Establishment (“PE”) in every case.
PE analysis is heavily fact-specific and depends on:
Indian domestic tax law;
the relevant Double Taxation Avoidance Agreement (DTAA), where applicable; and
what the employee actually does in India.
A typical tax treaty may recognise several possible forms of PE, including:
a fixed-place PE;
a service PE;
a dependent-agent PE; and
specialised construction or project PEs.
For example, Article 5 of the India–US DTAA contains fixed-place, service and agency PE provisions. A person in India who habitually exercises authority to conclude contracts on behalf of the foreign enterprise can be particularly relevant to the agency-PE analysis.
Treaties differ, however. A threshold appearing in one DTAA should never simply be applied to another country.
What employee activities create greater PE risk?
Risk generally deserves closer examination where an employee in India:
negotiates major customer contracts;
habitually concludes contracts;
secures orders for the foreign company;
manages significant Indian operations;
performs the core revenue-generating functions of the overseas business;
works from premises effectively available to the foreign enterprise; or
provides services in India for a duration that crosses a relevant treaty threshold.
The Supreme Court's decision in Director of Income Tax v. Morgan Stanley & Co. Inc., (2007) 7 SCC 1 remains important in understanding PE questions involving employees and deputation arrangements. The Court explained, among other things, that PE analysis depends upon the actual functions and factual arrangement.
This means businesses should not assume that using an EOR or calling someone a “remote employee” automatically prevents PE exposure.
Before hiring an employee in India, a foreign company should look beyond the employment contract and consider what the employee will actually do on its behalf. A person hired only for internal support may present a different level of risk from someone who negotiates customer contracts, secures business or makes key decisions for the overseas company.
It is also important to review the arrangement periodically, as the employee’s role may expand over time. Companies should consider where the employee works, what authority they have, and whether their activities could bring the business within the PE provisions of the applicable tax treaty. Using an EOR does not, by itself, eliminate this risk. Where the employee will play a significant role in the company's Indian business, taking tax advice before hiring can help identify potential exposure and avoid unexpected tax liabilities later.
Can the company simply call the worker an independent contractor?
Only if the relationship is genuinely one of independent contracting.
Calling someone a “consultant” in an agreement does not necessarily decide the legal character of the relationship.
A genuine contractor would ordinarily operate with greater independence over how services are provided. By contrast, indicators such as extensive employer control, fixed working hours, exclusivity, integration into the organisation and an employer-like reporting structure can make the arrangement look more like employment.
The exact legal test can depend on the statute and issue involved.
Therefore, businesses should avoid using a contractor agreement merely as a device to bypass employment or payroll obligations.
The written agreement should accurately reflect the commercial relationship.
For contractual drafting issues generally, see: 10 Contract Clauses Every MSME Should Review Before Supplying Goods
Do India's labour laws apply when the employer is foreign?
The fact that the parent company is incorporated outside India does not, by itself, remove Indian employment protections where the employment relationship and work are situated in India.
India brought its four consolidated Labour Codes into effect from 21 November 2025:
Code on Wages, 2019;
Industrial Relations Code, 2020;
Code on Social Security, 2020; and
Occupational Safety, Health and Working Conditions Code, 2020.
The Ministry of Labour and Employment officially confirmed their implementation from that date.
The precise obligations applicable to a particular employee or establishment still depend on matters such as employee category, establishment size, location, wages and the relevant central and state rules.
Official source: Ministry of Labour & Employment — Labour Codes
What about provident fund and social-security contributions?
Social-security obligations need to be examined separately for every hiring structure.
The Code on Social Security, 2020, now in force, consolidates important areas of Indian social-security law.
Special rules can also arise where foreign nationals work in India or Indian employees are covered by international social-security arrangements.
Historically, EPFO has maintained specific rules and administrative mechanisms for “international workers”, including Social Security Agreement arrangements.
Accordingly, a foreign employer should not assume that simply paying an employee from a foreign bank account removes Indian social-security obligations.
Does FEMA prohibit a foreign company from paying an Indian employee?
FEMA does not establish a general rule saying that a foreign company can never remunerate someone working in India.
However, foreign-exchange flows and the nature of the foreign company's India presence must comply with India's FEMA framework.
A separate issue arises if the foreign company establishes a Branch Office, Liaison Office, Project Office or another place of business in India.
The RBI's framework for establishing BOs, LOs and POs is issued under FEMA. A foreign company proposing such a presence must comply with the prescribed approval or permitted-route requirements, depending on the circumstances.
A Liaison Office, for example, is restricted to specified liaison activities and cannot simply carry on unrestricted commercial operations in India.
Official source: RBI Master Direction on Branch, Liaison and Project Offices
When should a foreign company set up an Indian subsidiary instead?
A subsidiary becomes increasingly attractive when India is moving from being a limited hiring location to becoming a significant operating market.
A subsidiary may be preferable where the foreign business intends to:
employ a substantial Indian workforce;
execute Indian customer contracts;
invoice customers locally;
maintain a permanent office;
build a sales team;
hold significant assets in India;
conduct long-term Indian operations; or
exercise substantial management functions from India.
An Indian subsidiary is a separate Indian legal entity. This can make payroll, contracts, GST, banking and employment administration more straightforward from an operational perspective, although it also creates continuing corporate, tax and regulatory obligations.
Whether a subsidiary is preferable to an EOR should therefore be based on the planned Indian business model rather than simply the number of employees.
What should a foreign company check before making its first India hire?
Before issuing an employment or consultancy agreement, the company should determine:
Who will legally employ the person?
Foreign company, EOR or Indian group entity?Where will the employee work?
Home, coworking space, customer premises or company-controlled office?What authority will the employee have?
Particularly whether they can negotiate or conclude contracts.Who will pay the salary?
Who will handle Indian payroll tax and reporting?
Which social-security requirements apply?
Could the arrangement constitute a place of business under company law?
Could the employee create a PE under the relevant DTAA?
Who owns the intellectual property created by the employee?
What confidentiality and data-access protections are required?
How can the employment legally be terminated?
Which dispute-resolution mechanism will apply?
For businesses preparing employment, EOR or consultancy agreements, the dispute clause should also be reviewed carefully. See: What Happens If a Business Signs a Contract Without a Proper Dispute-Resolution Clause?
EOR vs Contractor vs Indian Subsidiary: Which structure is suitable?
Structure
Typical use
Main advantage
Main legal concern
EOR
Small or initial India team
No immediate subsidiary incorporation
EOR contract, PE and actual-control issues still need review
Direct foreign employment
Limited situations
Direct relationship with employee
Payroll, tax, social-security, company-law and PE compliance
Independent contractor
Genuine independent specialist/project work
Flexible commercial arrangement
Misclassification if relationship is actually employment
Indian subsidiary
Significant long-term India operations
Local entity controls employment and operations
Incorporation and continuing regulatory compliance
Branch Office
Permitted foreign-company operations
Direct extension of foreign company
FEMA approval framework, tax and permitted activities
There is no universally correct structure. The answer depends on what the business intends to do in India.
Can hiring through an EOR completely remove Indian tax risk?
No.
An EOR can solve many local employment and payroll issues, but it cannot guarantee that the foreign enterprise has no Indian taxable presence.
Tax authorities can examine the substance of the business activities carried out in India.
If personnel in India perform core functions, negotiate or conclude contracts, or otherwise satisfy the requirements of the relevant PE provision, the arrangement may require tax analysis irrespective of the name given to the hiring structure.
Can a foreign company hire just one employee in India?
Yes, there is no general rule requiring a minimum number of employees before a foreign business can have a person working in India.
However, even one strategically important employee can create significant legal issues.
For example, one senior salesperson with authority over Indian customer contracts may create a very different tax risk from one software developer who performs internal support work and has no customer-facing or contractual authority.
Function is often more important than headcount.
Does working from the employee's home prevent a Permanent Establishment?
Not automatically.
Whether a home office becomes relevant for fixed-place PE purposes depends on the applicable treaty and the facts, including whether the premises can realistically be regarded as being at the disposal of the foreign enterprise.
The fact that an employee works remotely should therefore not be treated as an automatic PE exemption.
Should the employment contract use foreign law or Indian law?
A foreign company may wish to select the law of its home jurisdiction, but a contractual choice-of-law clause should not be assumed to eliminate mandatory Indian statutory protections that apply to employment performed in India.
The employment contract should therefore be reviewed against the applicable Indian employment framework.
Businesses should also clearly address:
salary and benefits;
probation;
working arrangements;
confidentiality;
intellectual-property ownership;
data protection;
leave;
termination;
restrictive covenants, where legally sustainable;
return of company property; and
dispute resolution.
Frequently Asked Questions
Can a US company hire an employee in India without an Indian company?
Potentially yes. It may use an appropriate direct-employment structure or a local EOR, but Indian payroll, labour, tax and PE implications still need to be reviewed. The India–US DTAA should also be examined when assessing PE exposure.
Is an Employer of Record legal in India?
An EOR structure can be used in India, but there is no single statute specifically authorising or regulating something called an “EOR”. Its legality depends on the actual contractual arrangement and compliance with applicable employment, tax and other laws.
Does an EOR prevent permanent establishment?
No. It may reduce certain operational burdens, but PE is determined from the foreign company's actual activities and the applicable tax treaty.
Can we pay an Indian employee directly from a foreign bank account?
The payment mechanism alone does not determine legality. Tax, employment, foreign-exchange, payroll and social-security obligations need to be examined before implementing direct overseas payroll.
Can an Indian worker simply invoice the foreign company as a consultant?
Yes, where the person is genuinely an independent contractor. Calling an employee a consultant merely to avoid employment obligations creates legal risk.
Does one employee create a foreign-company registration requirement?
Not automatically. The Companies Act analysis depends on whether the foreign enterprise has a qualifying place of business and conducts business activity in India. The employee's functions and operating arrangement therefore matter.
Does one employee create a Permanent Establishment?
Not automatically. One employee can nevertheless create PE exposure depending on their authority, functions, workplace arrangements, duration of activities and the applicable DTAA.
Is an Indian subsidiary safer than an EOR?
For substantial and permanent Indian operations, a subsidiary can provide a clearer operational structure. For a limited initial workforce, an EOR may be commercially simpler. Neither structure should be selected without considering tax and regulatory consequences.
When should a company obtain legal advice before hiring?
Legal and tax review is particularly important where the employee will sell to Indian customers, negotiate contracts, manage Indian operations, hold senior decision-making authority or where several employees will operate permanently from India.
Conclusion
A foreign company does not necessarily need to establish an Indian subsidiary merely because it wants to hire someone in India.
But “no subsidiary” should not be confused with “no Indian compliance”.
A foreign business considering its first India hire should examine five issues before deciding the structure:
employment law, payroll and tax, social security, Companies Act/FEMA compliance, and Permanent Establishment risk.
For a small initial team, an appropriately structured EOR arrangement may often be commercially convenient. Genuine independent contractors may work for project-based engagements. Direct foreign employment requires more careful compliance planning, while businesses developing substantial Indian operations may ultimately find an Indian subsidiary more appropriate.
The safest structure is the one that reflects what the employee and the foreign company will actually be doing in India—not simply the label placed on the agreement.
