US or Indian Entity - How to Make Smarter Cross-Border Payment Decisions as a Startup?

Published on:

April 1, 2025

How to Decide Which Entity Should Pay

Here’s a simple rule to remember when deciding who pays for what:

Pay from the entity that keeps you out of tax trouble, avoids compliance messes, and doesn’t burn unnecessary cash.

It’s not always about convenience. Just because your US holdco has funds doesn’t mean it should pay for everything. Likewise, just because your India entity is operational doesn't mean it should be swiping the card for that new SaaS tool.

Here’s a quick cheat sheet to start with:

Expense Type	Pay From	Why
India-resident contractors	India subsidiary	Avoids PE risk
India-resident employees	India subsidiary	Standard employment, labor law compliance
India office rent	India subsidiary	PE red flag if paid from US
India team laptops	India subsidiary	Tangible asset = PE trigger
India domestic travel	India subsidiary	Local billing, easier GST claim
Global travel	US holdco	Preserves INR cash; no India benefit
Software/SaaS	Depends	US if IP/revenue is US-based; India if the product is built-for-Bharat
Marketing	Depends	Based on customer geography—US or India

This framework helps most companies stay compliant while optimizing tax outcomes. But if applied without care, especially on team payments or rent, it can backfire.

Let’s now look at one of the biggest risks that founders often underestimate: Permanent Establishment.

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Why Permanent Establishment (PE) Risk Matters

Permanent Establishment, or PE, is one of the biggest compliance risks for US companies operating in India. It’s a tax concept that determines whether your US entity has a taxable presence in India. If it does, things can get complicated quickly.

PE can be triggered more easily than most founders expect. Here are some common triggers:

Signing an office lease under the US entity’s name
Having contractors in India for extended periods
A founder managing operations from India
Sales activity happening in India on behalf of the US entity

Once PE is triggered, the Indian government may require your US company to:

Register for an Indian PAN (tax ID)
File regular income tax returns in India
Pay taxes on any income linked to your Indian presence

This adds not only cost but also significant operational and legal complexity. And unlike other risks, you can’t easily undo PE status once it’s been established.

The bottom line: If you're working with contractors, running ops from India, or paying for assets or rent through your US entity, you may already be at risk. It’s critical to talk to a CA in India early and set things up correctly.

Next, let’s look at how tax rules like transfer pricing and GST add another layer to this decision.

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How Tax Rules Change Based on Who Pays

Once you’ve figured out who’s getting paid, whether it’s your India team, a SaaS vendor, or a landlord, the next question is which entity should make the payment. That decision affects how much tax you owe and how complicated your compliance becomes.

Two rules to understand here: Transfer Pricing and GST under Reverse Charge.

i) Transfer Pricing Applies When India Bills the US

If your India entity provides services to your US parent like engineering, design, or support, it is expected to invoice the US with a markup, typically 15 to 20 percent.

This markup is taxable in India, and that tax is a cost to your group.

This doesn’t apply in all cases. If your IP, product, and revenue are all India-based, and your India team isn’t working for the US parent, you may not need to worry about transfer pricing.

ii) GST Reverse Charge Can Add Hidden Costs

If your Indian entity pays for software or services from foreign vendors, GST may apply through the Reverse Charge Mechanism (RCM).

The India entity pays 18% GST to the government.
If it doesn’t generate revenue, it cannot offset this with input credits.
That 18% becomes a permanent expense.

This often catches early-stage subsidiaries by surprise, especially when they’re not billing customers yet.

To avoid this, many companies choose to pay for global software tools from the US entity, especially when the product, IP, and team are US-focused.

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Paying Your India Team: Contractor or Employee?

If your team lives and works in India, one of the first payment decisions you’ll face is whether to run compensation through your US company or set up an India entity and hire locally.

In the early days, it’s tempting to just pay from the US. Platforms like Deel or Remote make it easy to onboard contractors or run EOR arrangements without dealing with India’s payroll systems. You also avoid the setup costs of incorporating locally.

But that simplicity comes with trade-offs - some visible, others that show up later.

Paying Through the US: Works Early, Fails Later

For small teams of 1 to 4 people, paying directly from the US can save time and overhead. Contractors may even benefit from lower personal income tax if they qualify under India’s presumptive tax regime.

But as soon as your team grows or you begin talking to investors, the cracks show:

You can’t issue proper ESOPs to India-based contractors. RSUs or phantom plans exist, but they are tax-inefficient and hard to explain.
Founders acting as contractors to their own US company raise red flags for both Indian tax authorities and US CPAs.
Loan approvals, insurance, and long-term planning become harder for your team when they don’t have formal employment.
And if your contractors are working long-term, taking direction from you, or operating like employees, you may be risking misclassification under both Indian and US law.

Worse, keeping your India team as contractors while they build and ship your core product increases your exposure to Permanent Establishment (PE). If a founder is based in India or if long-term decisions are being made from here, the Indian government can treat the US entity as operating locally and begin taxing it.

Why Most Teams Shift to an India Subsidiary

Once you’re beyond 4–5 people, or you're preparing for an institutional funding round, the case for a proper India subsidiary becomes stronger.

Hiring through the local entity gives your team employment security, lets you issue ESOPs cleanly, and keeps you compliant with local tax and labor laws. VCs expect it. Auditors prefer it. And it reduces long-term complexity.

It also turns out to be more cost-effective than contractor or EOR setups, especially once you factor in forex loss, platform fees, and tax leakage through transfer pricing.

In short: Start with contractors if you need to move fast. But build a plan to transition key team members to the India entity as you grow.

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How You Pay for Office Space Can Trigger PE

Leasing office space in India is more than just a facilities decision. It directly impacts your risk of triggering Permanent Establishment (PE) if you're not careful about who signs the lease and makes the payments.

The Risk with Paying Rent from the US Entity

Some early-stage founders try to keep things simple by paying rent directly from the US company. Sometimes landlords are okay with it. Some even offer workarounds like invoicing it as a “consulting fee” to avoid GST.

But here’s the problem:

If your US company is paying for a physical space in India, the Indian tax authorities may view that as having a fixed place of business.
That’s one of the clearest triggers for Permanent Establishment.

Once PE is triggered, your US company is expected to register in India, file returns, and pay taxes locally. That’s a serious compliance burden and not something you can ignore once it starts.

The Safer Option: Let the India Entity Lease and Pay

If you already have an India subsidiary, this is simple. The lease should be signed by the India entity, the rent should be paid locally, and utilities and maintenance costs should also run through it.

This approach:

Keeps the PE risk low
Makes it easier to handle GST, TDS, and local registrations
Shows a clear separation between your US and India operations

If you don’t yet have an India entity but need a physical space, it’s worth slowing down to get proper guidance. Even a co-working desk can raise questions if paid for by the wrong entity.

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Who Should Pay for Software and SaaS?

Software is usually priced in dollars, accessed globally, and bought online. That makes it easy to forget that who pays for it can have tax consequences, especially when your Indian entity is involved.

At first, it might seem natural to run software costs through your India subsidiary, especially if the tools are being used by your team there. But that can lead to three common problems:

i) GST under Reverse Charge

When your India entity pays for foreign software, it must also pay 18% GST directly to the government under the Reverse Charge Mechanism (RCM).
If your India entity doesn’t generate revenue, that GST becomes a cost with no input credit to offset it.

ii) Forex Losses

You’re converting dollars to rupees to fund the India entity, and then using those rupees to pay for software priced in dollars. That’s two currency conversions with added cost at each step.

iii) Transfer Pricing Complications

If the India entity pays for software that supports US operations, that cost might need to be included in the inter-company invoice with a markup. You end up paying tax on a service that wasn’t really India’s responsibility.

For early-stage companies with a US-based product, IP, and customers, these costs add up quickly.

When It Makes Sense to Pay From the US

If your software is used for global work, your IP is in the US, and your revenue comes from international markets, the cleaner approach is to pay from the US entity.

No GST complications
No currency conversion losses
No transfer pricing markup

This is especially helpful for tools like AWS, HubSpot, Slack, Notion, and other common platforms that are priced in USD and billed globally.

When Paying From India Makes Sense

There are cases where paying from the India entity is appropriate:

The software is used only by your India-based sales or support team
You're building a product for the Indian market
You want to claim local expenses against Indian revenue

Even then, be prepared for GST obligations and potential cash flow delays.

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How to Handle Travel and Reimbursements Across Entities?

Travel expenses can look straightforward on the surface. But deciding which entity should cover the cost can affect both your tax position and your cash flow.

i) Travel Within India: Best Paid by the India Entity

If your India-based team is traveling within India, the cleanest approach is to have your India entity cover the cost. This keeps things local and avoids unnecessary tax or currency complications.

Benefits include:

Easier GST documentation and input credit
No currency conversion required
Local expenses align with local operations

Reimbursements, flight bookings, lodging, and per diems can all be managed through India payroll or expense systems.

ii) International Travel: Usually Paid by the US Entity

If your India team is traveling abroad for global work like investor meetings, US customer visits, or conferences, it often makes more sense to pay from the US entity.

This avoids draining INR reserves or having to route money back to the US through reimbursements. It also keeps expenses aligned with the part of the business that benefits from the trip.

Watch for Taxable Perks

If your US entity pays for an Indian employee’s international travel, the cost could be viewed as a taxable benefit in India, especially if the travel includes any personal components.

To stay compliant:

Make sure the travel has a clear business purpose
Document itineraries, approvals, and outcomes
Avoid mixing personal and business costs on the same invoice

For early-stage companies, this may seem like overkill. But it helps avoid problems later during audits or diligence reviews.

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How to Build a Scalable Payment Strategy

If you're running operations across both the US and India, your payment decisions aren't just about who has the company card. They're about long-term cost, compliance, and clarity.

The goal is to avoid two extremes: overcomplicating things too early or sticking with short-term fixes that don’t scale.

Step 1 - Start With a Clear Picture

Begin by mapping out how things work today. Don’t overthink it, just ask:

Which entity is paying for which categories of expenses (salaries, software, travel, rent)?
Are those payments aligned with where the work happens or where the revenue is booked?
Are you seeing signs of inefficiency, like double currency conversions or recurring GST burdens?

You’ll often find patterns that made sense when the team was small but now cost more in time, tax, or manual effort.

Step 2 - Fix the Big Gaps First

Not every fix needs a full restructuring. Some high-impact improvements are simple:

Move global software payments to the US if your India entity is non-revenue generating and facing GST leakage.
Shift India-based team members onto local payroll if you’re still using US contractor agreements.
Avoid routing rent or asset purchases through your US entity, which can trigger PE risk.

Each of these moves helps you simplify compliance, reduce tax exposure, and make your finance ops cleaner.

Step 3 - Keep It Flexible as You Scale

Your payment strategy for 5 people will look different from what you need at 50. That’s okay.

The goal isn’t to lock yourself into rigid rules. It’s to set up a system that’s:

Compliant enough to avoid big risks
Efficient enough to keep overhead low
Adaptable enough to grow with your business

As you expand, revisit this setup regularly, especially before key moments like fundraising, entering new markets, or launching new products.

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Final Checks Before You Scale: A Payment Strategy Wrap-Up

Your cross-border payment strategy isn’t just a finance exercise. It’s the foundation for compliant growth, better margins, and smoother due diligence down the line.

As your operations mature, the way money moves between your US and India entities will be closely scrutinized by investors, auditors, and tax authorities. Getting this right early helps you avoid cost and friction later.

Use this checklist to pressure-test your current setup before you scale further:

Payment Strategy Checklist

1. Are you paying India salaries or rent from the US entity? - If yes, you may be creating Permanent Establishment (PE) risk. Shift these to the India entity.

2. Is your India entity paying for global software or SaaS? - Check for GST under Reverse Charge and transfer pricing leakage. Pay from the US, where possible.

3. Are you reimbursing international travel from the India entity? - If the travel benefits the US business, consider paying directly from the US parent.

4. Are your India-based team members still contractors? - This may have made sense early, but risks misclassification and limits your ability to offer ESOPs.

5. Do you face delays or overhead in processing recurring payments from India? - Recurring payments, foreign cards, and subscription tools often fail or carry hidden costs when run from the India entity.

6. Have you reviewed your structure recently? - Revisit your payment flows every 6–12 months, especially before fundraising, hiring sprees, or launching in new markets.

There’s no perfect payment structure. But there could be a thoughtful one-tailored to your stage, structure, and team.

If you're not sure where to begin, start with the big risks: PE exposure, unnecessary taxes, and employee misclassification. Fixing those gives you a strong foundation to grow with confidence.

Need help thinking this through? Reach out to us at Inkle. We work with global-first startups navigating these exact decisions every day.

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Frequently Asked Questions

1. Can I pay India-based contractors directly from my US entity?

Yes, but only for a short period and only if they are genuine contractors. Long-term or full-time workers paid this way may trigger Permanent Establishment (PE) risk or misclassification issues. If you're scaling beyond 4–5 people in India, it’s safer to shift to local payroll.

2. When should I set up an India subsidiary?

Typically once you have more than 4–5 people in India, or if you’re preparing for a funding round. A local entity helps with ESOPs, tax compliance, and team stability. Most VCs will expect it during diligence.

3. Is it okay if the US entity pays for software used by the India team?

It depends. If the software supports a global product and the India entity is just a cost center, paying from the US is often cleaner. It avoids GST under Reverse Charge and transfer pricing complications. But if the software is India-specific, consider local billing.

4. Can I pay the India office rent from the US?

Rent is a major trigger for PE risk. If the US entity pays for a fixed office location in India, Indian tax authorities may treat it as a local presence, requiring filings, registrations, and local tax payments.

5. What happens if I get this wrong?

You may face avoidable tax costs, compliance gaps, or reputational issues during diligence. Some issues like PE exposure or misclassification can take months to resolve and may result in penalties. It’s easier (and cheaper) to set things up right from the start.