How EOR Works Legally in India
In an EOR arrangement, the Indian EOR company (a licensed employer in India) enters into employment contracts with the workers. The worker is on the EOR's payroll, receives their salary from the EOR's bank account, gets EPFO contributions from the EOR, and has their TDS deducted and remitted by the EOR. The EOR files all employment-related returns (Form 24Q, EPFO ECR, ESIC) as the employer.
The foreign company (the 'client') enters into a services agreement with the EOR. The EOR secondes or assigns the workers to the client's work. The foreign client directs the day-to-day work of the workers but is not their legal employer. The foreign client pays the EOR an all-in monthly fee per worker: typically the worker's CTC plus the EOR's markup (8-18%).
Permanent Establishment (PE) risk: if the foreign client exercises too much control over the workers' activities in India, Indian tax authorities may determine that the foreign client has a PE in India, making the foreign client liable for Indian corporate tax on profits attributable to that PE. EOR agreements should be structured to minimize PE risk by ensuring the EOR (not the foreign client) controls HR, termination, and compensation decisions.
When to Use EOR vs Incorporate
Use EOR when: (a) you need workers in India in 30-45 days and cannot wait 90-120 days for incorporation, (b) your India headcount will remain below 30 FTE for at least 12 months, (c) the work is exploratory and you are not yet committed to a permanent India presence, (d) the roles are senior leadership (a single India country head or GCC lead) who needs to start before the entity is incorporated.
Transition to a captive when: (a) headcount exceeds 25-30 FTE, (b) the annual EOR cost exceeds the cost of maintaining a captive entity, (c) IP sensitivity requires direct employment contracts with clear IP assignment chains, (d) state incentive programs require a permanent establishment in the state.
EOR is a legal structure, not a workaround
Some foreign companies use EOR to indefinitely avoid incorporation and the associated compliance burden. This is a viable strategy for small teams but creates long-term risk: the EOR provider's continued operation is a dependency, the PE risk grows with headcount, and transitioning from EOR to captive at 100 FTE is operationally complex. Plan the EOR-to-captive transition from month one.
IP Assignment in EOR Arrangements
This is the most frequently overlooked aspect of EOR arrangements. The worker's employment contract is with the EOR, not the foreign client. Under Indian copyright law, work product belongs to the employer. If the employment contract does not explicitly assign IP created by the worker to the foreign client (as a third-party beneficiary), the IP chain is: worker creates it, it belongs to the EOR as employer.
The correct structure: the worker's employment contract with the EOR must include an IP assignment clause that assigns all work product to the foreign client (named by name). The services agreement between the EOR and the foreign client must also include the same IP assignment. A tripartite acknowledgement by the worker, EOR, and foreign client is the safest approach.
Glossary terms referenced in this guide