Germany and India have a Double Taxation Agreement (DTA) — a treaty designed to prevent income from being taxed twice, once in each country. Most founders hiring in India have heard the term. Far fewer understand what it actually does and doesn’t protect you from.
If you’re running a German company and hiring developers in India, here’s what you need to know.
What the Germany–India DTA Covers
The DTA between Germany and India primarily determines which country has the right to tax different categories of income. For employment and services income, the general principle is that income is taxable in the country where the work is performed.
This means an Indian developer working in India is taxable on their income in India — not in Germany. The DTA prevents Germany from also taxing that same income. For your employees and contractors, this is broadly good news: it simplifies their tax position and means you’re not creating a double burden.
What the DTA does not do is exempt you from Indian compliance obligations. Tax treaty or not, if you have people working in India, Indian employment law and payroll regulations apply.
Permanent Establishment Risk: The Part That Matters Most for Founders
The most important concept for any German company with an India team is Permanent Establishment — often abbreviated as PE.
A PE is triggered when your business activity in a foreign country crosses a threshold that makes it taxable there as a business presence. If your German GmbH or UG is deemed to have a PE in India, India can tax the profits attributable to that presence. That means filing Indian corporate tax returns, potentially restructuring how you invoice, and significant compliance overhead.
PE can be triggered by several things:
- Having a fixed place of business in India (an office, even informally)
- An employee or agent in India with authority to sign contracts on your behalf
- A dependent agent who habitually acts for your company in India
- In some interpretations, a sufficiently large and integrated team working exclusively for your company
A contractor working independently with multiple clients is generally low-risk. A team of five developers working exclusively on your product, managed by a local team lead with authority to make commitments, is a different situation.
Withholding Tax on Payments to Indian Contractors
When a German company pays an Indian contractor for services, India may require TDS (Tax Deducted at Source) to be withheld by the payer and remitted to Indian tax authorities. The applicable rate depends on the nature of the services and whether the contractor has a PAN.
The DTA can reduce or eliminate this withholding obligation in certain cases — but you need to follow the correct procedure to claim treaty benefits, including obtaining a Tax Residency Certificate from the relevant authority. This doesn’t happen automatically.
What Your Accountant Needs to Know
Most general accountants — even good ones — are not experts in cross-border India–Germany employment taxation. When you brief your accountant or tax advisor, make sure they’re working with the following information:
- The legal structure of your German entity (UG, GmbH, or other)
- Whether you’re using contractors, an EOR, or your own Indian entity
- The nature of the work (development services, not goods)
- Whether your Indian team has any authority to commit your company commercially
- The volume of payments and how they’re structured
If your accountant doesn’t have specific India cross-border experience, it’s worth engaging a specialist — at least for an initial review. The cost of getting this wrong is significantly higher than the cost of getting proper advice.
The Practical Bottom Line
For most early-stage German startups with a small India team of contractors or EOR employees, the DTA is helpful but not magic. Your developers pay tax in India. You pay tax in Germany. The treaty prevents overlap. But PE risk, withholding tax obligations, and Indian compliance requirements still need to be addressed — the DTA doesn’t make them disappear.
Structure your hiring correctly from the start, get specific advice on PE risk as your India team grows, and don’t assume a treaty solves everything.
We work with German startups navigating India employment structures. Reach out if you want a clear picture of what applies to your situation.