The EU-India Free Trade Agreement: an opportunity for German companies in India

The Indian employment visa is the key to carrying out operational assignments. In practice, the following points are relevant:

• An Indian employment or sponsorship contract is often required,
• with a minimum gross annual salary currently set at 16.25 lakh INR (roughly 17,000–19,000 euros, depending on the exchange rate),
• and the Indian employer is designated as the ‘single employer’ on the visa.

Point to note regarding accompanying persons: In practice, dependent visas are only granted to heterosexual spouses. Same-sex marriages or registered partnerships recognised under German law are often not accepted for Indian dependent visas. For companies, this can – particularly in the case of key personnel – become a very practical deal-breaker.

Point to note: Even before tax optimisation comes into play, the visa and family situation often determines whether an assignment is even feasible.

In discussions about potential tax liability in India, the 183-day rule from the double taxation treaty quickly comes up. In practice, however, it is only part of the picture:

• Under national law, remuneration for work carried out in India may be subject to Indian taxation from the very first day of employment.
• The DTA can only limit this right of taxation if certain conditions (including length of stay, no Indian employer, and no permanent establishment) are cumulatively met.

Regardless of this, Indian authorities expect withholding tax (TDS) to be withheld for work performed in India. Small and medium-sized enterprises, in particular, often underestimate the fact that they need an Indian shadow payroll for this purpose—even if the salary technically continues to be paid from Germany.

A common pitfall: “Our people aren’t there that long; it’ll definitely be less than 183 days”—while, at the same time, individual employees actually spend several months a year in India and are engaged in operational activities there.

The deployment of German executives to India may inadvertently give rise to a permanent establishment of the German company – for example, if:

• more than just preparatory activities are carried out in India,
• a de facto ‘Head of India’ makes decisions on the ground,
• contracts are negotiated or concluded.

Indian tax authorities no longer focus solely on contracts, but are increasingly looking at publicly available information – such as LinkedIn profiles and website content. Anyone listed there as ‘Country Manager India’ will find it difficult to maintain the argument that they are ‘only on site for a short-term project’.

A quick reminder: permanent establishment planning is not an abstract tax issue, but begins with job titles, role descriptions and internal/external communication patterns.

One issue that often gives rise to much discussion in practice is the structure of the salary package – particularly in the case of local contracts or long-term secondments:

• For several years now, Indian income tax law has operated under both an old and a new tax regime.
  • The old regime offers numerous benefits (e.g. House Rent Allowance/HRA), but applies higher tax rates.
  • The new regime has lower tax rates but does away with most allowances – HRA is, in principle, fully taxable under this regime.
• Many companies continue to operate with ‘traditional’ allowance structures:
  • HRA, special allowances, children’s education allowance, transport allowance, etc.
  • Under the old regime, HRA – if structured correctly – could provide a significant tax allowance.
  • Under the new regime, the same structure often simply results in higher tax on the same gross salary, because the supposed benefits come to nothing.
• In addition:
  • The tax treatment of salary components such as HRA depends on the region or city in India where the employees are based.

Risks:
An expat package that is “attractively put together” in Germany can turn out to be a net disappointment in India if:

• the scheme (old/new) is not chosen deliberately,
• the remuneration package consists of allowances that no longer offer any benefit under the new scheme,
• HRA allowances are calculated incorrectly or do not apply at all,
• foreign components (e.g. RSUs, bonuses from previous countries of assignment) are not correctly reflected in the Indian payroll.

How businesses can make the most of this:

• When drawing up local contracts or expatriate packages, it is important to assess
  • which regime (old/new) is most appropriate for the employee in question,
  • which components actually have tax implications,
  • and how housing allowances, tenancy agreements and places of residence are properly documented.
• A ‘one-size-fits-all’ package rarely achieves the desired outcome in India – neither for the company nor for the employees.

Aside from visas and tax, small and medium-sized enterprises in particular are finding that India is challenging even on closer inspection:

• Foreign Exchange Law & TCS:
  • International money transfers (e.g. to settle foreign taxes or to support relatives) are subject to limits, documentation requirements and a Tax Collection at Source (TCS) of up to 20 per cent.
  • Although TCS is tax-deductible, it ties up liquidity – particularly in the case of larger one-off payments.
• Social Security (EPF):
  • Local contracts or longer-term assignments often entail an obligation to contribute to the Employees’ Provident Fund.
  • Parallel contributions in Germany and India are possible; whilst refunds from the EPF are feasible, they involve a great deal of administrative effort.

A quick note: These factors do not determine whether an initiative ‘works or not’ – but they do have a significant impact on costs, net position and staff satisfaction.