The integration of multinational corporations into emerging economies has led to a marked increase in the cross-border movement of people. The individuals involved in such movements are referred to as expatriates, viz., persons residing and working temporarily in a foreign country while retaining citizenship of their home country.
When these people are temporarily assigned from a foreign parent/group company to an Indian subsidiary or associated entity, the process is termed as a secondment.
The movement of people can be inbound—i.e., a person based in a home country (say Denmark) working in a host country (say India)—or outbound, i.e., a person based in a home country (say India) working in a host country (say Denmark). These assignments are usually driven by business needs, knowledge transfer, or cost efficiency, and can be short-term or long-term.
The seconded employee generally remains on the payroll of their original employer throughout the secondment period. However, in certain situations, MNCs follow a split payroll—part of the payment is done by the host entity and the balance is paid by the home entity.
Regardless of the duration, such international movement brings with it a complex web of legal and regulatory obligations in the host country.
In the hands of employees
Personal income tax: The taxability of the salary received by the expatriate, whether paid in India or abroad, hinges on their residential status—resident or non-resident, as defined by Indian tax law, and, where applicable, the Double Taxation Avoidance Agreement (DTAA) between India and the home country.
In case of dual residency, i.e., where the expatriate qualifies as a resident of the home as well as the host country, tie-breaker rules under DTAA help determine final tax residency. Where the expatriate qualifies as an Indian tax resident, the entire salary is taxable in India, irrespective of whether or not received in India.
Salary structures often include cash allowances and non-cash components like social security contributions, stock options (ESOPs), tax equalisation, and hypothetical taxes. While Indian courts generally exclude contingent payments such as social security contributions from taxable income, the tax treatment of hypothetical taxes and ESOPs varies and is often subject to legal interpretation.
In the hands of employers
Corporate income tax: The presence of expatriates may result in the creation of a permanent establishment (PE) in India in the form of Service PE or Agency PE. This exposes the foreign employer to Indian tax liability, specifically if the expatriate has come to India on a business visa or if the exemption from social security contribution in India is taken on the premise that the expatriate is an employee of the foreign group entity.
Even in the absence of a permanent establishment, income may be taxable in India under the source rule, especially as fees for technical services.
Social security contributions: India’s social security laws mandate that expatriates working for Indian establishments contribute 12% of their salary towards the employees’ provident fund (EPF) regardless of their salary level. An equal contribution is mandated by the Indian employer also.
To avoid contributions in two countries (home country as well as host country), India has entered into social security agreements (SSAs). Under this, an exemption from contribution in the host country can be claimed subject to the employee’s compliance with the social security schemes of their home country and furnishing of certificate of coverage (COC) to Indian authorities.
Social security contributions are withdrawable only on completion of Indian employment, provided an SSA exists between India and the expatriate’s home country. If no SSA exists, the contributions are withdrawable only upon retirement from service at any time after attainment of 58 years of age or on account of permanent or total incapacity.
Exchange control regulations: Indian exchange control laws require that an employee (including a secondee) of an overseas entity receive the whole salary payable towards services rendered in India in a bank outside India. However, if the secondee is in direct employment with an Indian entity, the entire salary is required to be received in India.
The amount can be remitted outside India after paying appropriate income tax, social security contributions, etc. It is therefore imperative to identify whether the overseas entity or the Indian entity is the employer to ensure the remittances comply with exchange control laws.
Ashish Karundia is founder of Ashish Karundia & Co., Chartered Accountants.
