[Opinion] Tax Impact of Cross-Border Employment Contracts

Yogesh Mittal – [2026] 187 taxmann.com 1038 (Article)

In a vibrant and ever-evolving global tax landscape, we find a new favourite emerging, viz. Employment Contracts. In the global corporate structures with subsidiaries and/or other forms of associates of the same group spreading over different countries all over the Globe, a commonly found phenomenon is the transfer of employees from one Group Company to another.

The aforesaid employee transfer(s) are for several business reasons and often to promote the flow of understanding from one Group Company to another. In the transfer situation(s), the employee(s) are to shift to another Country and work for the other Group Company for a certain time period and thereafter, return to their original employer. Such situation(s) often lead to a question for the subject employee(s) as to whether or not to terminate their employment with the existing (transferor) company and join the other (transferee) group company for the specified time period and then return. Evidently, this topic can be very complicated and calls for a fine balancing act between achieving the underlying business objective(s) transpiring such employee transfers and also having employee satisfaction.

Over the last few years, we have observed that Multinational businesses achieve a simple employee transfer modality (we call it direct transfers). Alternatively, could also deploy the transfer arrangements, viz. deputation, secondment, stewardship, etc, designed to achieve the same purpose. These transfer arrangements are apparently similar where the original employment is maintained with the transferor company and the employees work for the transferee company for a certain time period. Yet, such transfer arrangements differ significantly in terms of the contractual conditions executed between the transferor and transferee companies and the subject employees.

In each of the above-mentioned arrangements, one common feature remains that the subject cost of the employees is borne by the transferee company. In the direct transfer situation(s), such employee cost (salaries, social security benefits etc) is paid directly by the transferee company to the employees. Whereas, in arrangements of deputation or secondment, etc, such costs are remitted by transferee companies to the transferor company, which ultimately pays such salaries, etc., to those employees. A common tax question emerges qua the implications of such payments between the transferee – transferor companies. A regular contention could be that such payments are towards the services rendered by the transferor company to the transferee company through deputation of its personnel and thus, taxable. Similarly, it could be said that such payments are towards the employment of subject personnel, and only for administrative convenience, the same is paid to the transferor company for further payments. Also, such payments are pure reimbursements and have no element of income at all and, thus, are tax-exempt.

The topic is therefore contentious and has been subject to several jurisprudences. In this series, an interesting ruling recently pronounced by the Hon’ble Delhi High Court in the case of Ernst and Young LLP (ITA 423, 424, 715, 753, 760 of 2025) examined tax implications on such arrangements and brought to light some key principles of tax law(s) interpretation. In this case, the taxpayer, a US-based firm that provided professional services in the field of assurance, tax, and business advisory globally, deputed certain employees to its Indian Group entities pursuant to the Deputation Agreement executed between the US and the Indian entities. The key terms of such an agreement were:

• Such employees worked exclusively for and were accountable only to the Indian entity during the deputation period
• They worked under the control, supervision and direction of the Indian Group entity, with no control, supervision or responsibility of the US Company
• The Indian entity would solely be responsible for bearing and paying the salary and other costs of the seconded employees. However, for administrative purposes, the India Co is to reimburse salaries to the US Co on an actual cost basis, and the US Co is to further pay such salaries, etc on behalf of the Indian entity

The taxpayer’s position was that these payments were pure reimbursement in nature and were not taxable in India. The Revenue, however, contended that such payments were for technical or consultancy services and therefore taxable. The Hon’ble ITAT ruled in favour of the taxpayer.

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