Tax Implications of Cross-Border Remote Employment
Introduction
With remote work becoming globally accepted, many Indian companies now hire employees located overseas — and foreign companies increasingly hire remote workers from India. But these cross-border work arrangements come with complex tax consequences.
From tax residency to payroll withholding, social security, DTAA relief, and PE (Permanent Establishment) risks, both employers and employees must understand the rules to avoid penalties and ensure compliance.
This blog explains the tax implications of cross-border remote employment from both perspectives — Indian companies hiring foreign employees, and foreign companies hiring remote workers in India.
What Is Cross-Border Remote Employment?
Cross-border remote employment occurs when:
- An Indian company hires an employee located outside India, OR
- A foreign company hires an employee who works remotely from India
The employment relationship exists, but the employee physically works in another country — which creates tax implications in both jurisdictions.
Tax Residency Rules — The Foundation
Tax obligations primarily depend on residency, not nationality.
Indian Tax Residency (for individuals):
An individual is a tax resident in India if:
- They stay 182+ days in India in a financial year, OR
- They meet the 120+ days rule combined with income thresholds, OR
- They are classified as RNOR or NRI based on stay history.
Residency determines:
- Whether global income is taxable
- If DTAA applies
- Payroll withholding responsibilities
For cross-border employment, residency usually decides which country has taxation rights over salary income.
Indian Company Hiring a Remote Employee Abroad {#indian-company-hiring-abroad}
When an Indian business hires a full-time employee who sits outside India, the following rules apply:
1. Salary Taxation
- Salary is taxable in the country where services are physically rendered.
- Therefore, if an employee works from Dubai, Singapore, Canada, etc., salary is usually taxable in that country, not in India.
2. TDS / Withholding by Indian Company
- Indian employer generally does NOT deduct TDS if the employee is a non-resident and services are rendered outside India.
- Payments from India do not automatically create taxable income in India.
3. Social Security & Local Payroll Rules
Indian employers may need to comply with local:
- Payroll laws
- Minimum wages
- Social security contributions
- Local employment registration
- Employer obligations under that country’s labour laws
This may require hiring via:
- EOR (Employer of Record)
- PEO services abroad
- Local payroll consultants
4. Permanent Establishment (PE) Risk
A foreign-located employee can unintentionally create a PE for the Indian company in that country if:
- They negotiate or conclude contracts
- They operate as a dependent agent
- They manage core business functions
If a PE is created, the Indian company may owe corporate tax abroad on attributed profits.
Foreign Company Hiring a Remote Employee in India
When a foreign business hires someone working from India:
1. Salary Taxation
- If the employee is a tax resident of India, salary is taxable only in India, even if employer is foreign.
- Employer must follow Indian TDS rules under Section 192.
2. TDS Requirement for Foreign Company
Foreign companies must:
- Register for a PAN in India
- Deduct TDS on salary paid to the employee
- File TDS returns, issue Form 16
- Failure to do so may trigger interest and penalties.
3. PE Risk for Foreign Employer
A remote worker in India can create a PE for the foreign company if:
- They habitually finalize contracts
- They manage core management functions
- They act as a representative office
If PE is created, the foreign employer may owe corporate tax in India.
4. Social Security
If India has a Social Security Agreement (SSA) with the employer’s country (e.g., Germany), employees may qualify for exemptions from EPF.
Payroll, TDS & Withholding Requirements
| Scenario | TDS Required? | Payroll Location | Taxable Country |
|---|---|---|---|
| Indian company → Employee abroad | ❌ No TDS if employee non-resident | Local country payroll | Country of work |
| Foreign company → Employee in India | ✔️ TDS under Sec 192 | India payroll | India |
| Employee is NRI but working in India | ✔️ TDS | India | India |
| Employee is Indian resident but works abroad | Depends on DTAA | Varies | Usually India + foreign tax credit |
DTAA Relief (Double Taxation Avoidance Agreement)
If both countries tax the salary, employee can claim:
- Tax relief under DTAA
- Foreign Tax Credit via Form 67
Social Security Contributions (EPF, SSA Agreements)
For Indian employers hiring abroad:
- Must comply with local social security rules (Europe, US, Canada etc.).
- Exemptions apply under Social Security Agreements.
For foreign employers hiring in India:
-
If employee is Indian resident, EPF rules may apply unless exempt under SSA.
Permanent Establishment (PE) Risks
A cross-border employee may create tax presence in the other country if:
- They perform core revenue-generating activities
- They negotiate or close deals
- They act as agents for the company
PE risk must be evaluated carefully to avoid international tax liabilities.
Case Studies {#case-studies}
Case 1: Indian Company Hiring Designer in Philippines
- Employee is non-resident.
- Work done entirely outside India.
- Salary taxable only in Philippines.
- No TDS in India.
- But Indian company must check if Philippines payroll/EOR is required.
Case 2: US Startup Hiring Developer Working from Kolhapur
- Developer is resident in India.
- Salary taxable in India.
- Foreign employer must deduct Indian TDS + issue Form 16.
- Risk of creating PE in India if developer negotiates contracts.
Best Practices for Cross-Border Remote Hiring
- Assess tax residency every year.
- Use EOR / PEO partners for overseas employment compliance.
- Evaluate PE risk before hiring abroad.
- Foreign companies should obtain PAN + TAN if hiring in India.
- Maintain clear contracts specifying work location, reporting structure & limitations.
- Use DTAA to avoid double taxation.
- File Form 67 for foreign tax credit.
FAQs
Q1. Does an Indian company need to deduct TDS for employees working abroad?
No, if the employee is non-resident and services are rendered outside India.
Q2. Do foreign companies have to deduct TDS for employees in India?
Yes — salary paid to Indian residents is taxable in India.
Q3. Is PE risk real for remote employees?
Yes. Even one employee abroad can create a PE if they perform core business activities.
Q4. Can double taxation occur?
Yes. DTAA + Form 67 provide relief.
Q5. Can foreign companies avoid Indian payroll compliance?
Not if the worker is a tax resident of India receiving salary income.
Conclusion & CTA
Cross-border remote hiring offers talent flexibility — but comes with significant tax and compliance obligations.
Understanding residency, DTAA rules, TDS requirements, payroll obligations, and PE risks is essential to avoid international tax disputes.
At Verotus LLP, we help businesses in India and abroad manage:
- International payroll & TDS compliance
- DTAA planning & foreign tax credit
- PE risk evaluation
- Cross-border employment structuring
📞 Contact us for expert advisory on international employment taxation and compliance.
🌐 www.verotusllp.com
