Choosing the Right US Market Entry Structure for Indian Businesses

Export Directly, Use a Distributor or Set Up a US Company? A Practical Guide for Indian Businesses Entering America

Summary: The article examines three structures available to Indian businesses entering the US market: direct exports from India, appointment of an independent US distributor, and establishment of a US subsidiary. Direct exports may suit businesses with modest US revenue, while manufacturers seeking local logistics and customer relationships may consider an independent distributor. A US subsidiary may become more suitable where the US is a genuine operating market requiring local employees, warehousing, contracts, support or management. The article highlights that a US subsidiary does not by itself change the country of origin of Indian goods or eliminate applicable tariffs. It also creates related-party transfer-pricing considerations, alongside ODI, federal and state compliance obligations. US sales-tax responsibilities may arise even without a US company because of state economic-nexus rules, while employees, inventory or premises can create physical nexus. The article states that the appropriate structure should follow the business’s actual operating model. It concludes that businesses should assess their US activities and choose a structure that balances tax, compliance and commercial considerations rather than incorporating first and designing the business later.

For an Indian business gaining traction in the United States, one question eventually moves from the sales team to the boardroom:

Should we continue selling directly from India, appoint a US distributor, or incorporate our own US company?

The answer is often driven by a customer request, investor advice or a desire to “look local”. But these three structures are economically very different.

The current India-US trade environment makes the decision particularly relevant. The United States has introduced an additional 10% Section 301 duty on specified Indian-origin goods, although substantial categories remain outside the measure, while India and the US continue negotiations on the broader bilateral trade framework.

The key mistake is assuming that incorporating a US subsidiary somehow turns an Indian product into a US product.

It does not.

The right structure depends on where the customers, inventory, employees, contracts, risks and decision-making actually sit.

Option 1: Continue Exporting Directly From India

For many businesses, direct export is the logical starting point.

The Indian company contracts directly with the US customer, raises the invoice and ships the product or delivers the service from India. There is no separate US subsidiary earning a local margin.

This model generally has the lowest structural cost and is particularly attractive while US revenue remains relatively modest.

For a software company delivering remotely, the model can be especially efficient. For a manufacturer, however, customers may expect local inventory, shorter delivery timelines, local returns handling or a US entity capable of accepting commercial liability.

Tax exposure must also be monitored as the business grows. An Indian company can become engaged in a US trade or business depending on its activities. The IRS specifically notes that employees working in the United States on behalf of a foreign company can create such exposure. Where treaty protection is relied upon, the India-US DTAA then requires a separate permanent establishment analysis.

The India-US treaty includes fixed-place and agency PE concepts and also contains a service PE rule. Services performed in the US through employees or other personnel can create a PE where the relevant treaty conditions are satisfied, including certain duration and related-enterprise situations.

So direct export works best when the business is genuinely being run from India rather than when the company is legally invoicing from India while commercially operating in America.

Option 2: Appoint an Independent US Distributor

The second model is to sell to an independent US distributor that purchases the goods and resells them to American customers.

This can remove a substantial operational burden. The distributor may manage importing, warehousing, local delivery, customer relationships and collections. The Indian manufacturer receives an export price and the distributor retains its own commercial margin.

That simplicity has a cost.

The Indian company gives up part of the economics and usually some control over pricing, customer relationships and market development. A successful US market may eventually make the distributor margin look expensive compared with operating directly.

For many manufacturers, however, a distributor is an excellent bridge between occasional exports and building an entire US operation.

From an income-tax perspective, using a genuinely independent distributor can also be cleaner than deploying the Indian company’s own employees or dependent agents in the US. The India-US treaty expressly provides that merely carrying on business through an independent broker, commission agent or other independent agent acting in the ordinary course does not by itself create a PE.

The contractual and actual relationship must, however, support that independence.

Option 3: Establish Your Own US Subsidiary

A US subsidiary becomes more commercially compelling when the US is no longer just an export destination but a genuine operating market.

The company may want local employees, warehousing, enterprise customer contracts, after-sales support, payment infrastructure or a US management team. Investors or large customers may also prefer dealing with a US entity.

For an established Indian company, the structure commonly involves the Indian parent making Overseas Direct Investment into the US subsidiary. Under RBI’s current overseas investment framework, the initial ODI is routed through the designated authorised dealer bank. Form FC and supporting documentation are required, and the UIN for the foreign entity must be obtained before the initial ODI remittance is facilitated. Annual Performance Report obligations generally continue thereafter.

The US entity then becomes a separate taxpayer with its own federal and potentially state-level obligations. A US corporation that is at least 25% foreign-owned generally has Form 5472 reporting where it undertakes reportable transactions with related parties.

That means incorporation solves the commercial presence question by deliberately creating local presence. It does not eliminate compliance.

The Biggest Misconception: A US Company Does Not Eliminate Tariffs

This is particularly important for manufacturers and D2C businesses.

Suppose an Indian company manufactures engineering components in Pune. It forms a Delaware subsidiary, sells the components to that subsidiary and the subsidiary imports them into the United States.

The product has not become American simply because the importer is American.

US Customs and Border Protection states that applicable duty depends on factors including tariff classification and country of origin. CBP also expressly confirms in its Section 301 guidance that these additional duties are based on country of origin rather than the country from which the goods are exported.

Therefore, if goods remain of Indian origin under the applicable customs rules, creating a US subsidiary ordinarily does not remove tariffs applicable to Indian-origin products.

A genuine change in origin generally requires the applicable rules of origin to be satisfied. Merely routing an invoice through Delaware is not substantial transformation.

This distinction can prevent a very expensive structuring mistake.

A US Subsidiary Also Creates Transfer Pricing

Once India and the US become related entities, the price between them matters.

Imagine the Indian parent manufactures a product for ₹100. The US subsidiary imports it, markets it and sells it for ₹160 equivalent.

How much of the ₹60 economic spread belongs in India and how much belongs in the US?

The answer depends on functions, assets and risks. Does the US entity maintain inventory? Who bears warranty risk? Who controls pricing? Who develops customer relationships? Who funds marketing? Who owns the brand and technology?

Under section 161 of India’s Income-tax Act, 2025, income and expenses arising from international transactions must be determined having regard to the arm’s-length price. US Internal Revenue Code section 482 applies the same broad arm’s-length principle to transactions between controlled taxpayers.

A US subsidiary therefore does not simply “retain whatever profit is left”.

Its remuneration should follow its actual economic role.

Sales Tax Can Arise Even Without a US Company

Another misconception is that sales tax begins only when a US entity is incorporated.

Following the development of economic nexus rules across US states, a remote seller can become responsible for sales-tax registration and collection based on sales into a state even without physical presence. Thresholds and the types of sales counted vary significantly by state.

This matters for both product sellers and certain digital or service businesses because state taxability rules differ.

Conversely, establishing employees, inventory or premises in a state can create physical nexus independently of remote-sales thresholds.

Sales tax should therefore be mapped by state, not treated as a single “US tax”.

Choosing the Right Structure as the US Business Matures

The answer usually changes as the US business matures.

An Indian company testing the market with a handful of customers may find direct export perfectly adequate. A manufacturer needing logistics and local relationships but not yet ready for fixed infrastructure may prefer an independent distributor. A business generating significant recurring US revenue, hiring locally and controlling customer relationships may eventually justify its own subsidiary.

For SaaS companies, the calculation can be different again. There may be no customs duty or inventory, making direct contracting commercially viable for much longer. But state sales tax, employees working in the US, customer contracting requirements and PE exposure still need attention.

The structure should therefore follow the operating model rather than precede it.

Conclusion: Do Not Incorporate First and Design the Business Later

A US company can be extremely valuable. It can improve customer confidence, facilitate local hiring, support inventory, simplify contracting and create a platform for long-term American operations.

But it is not automatically the next step after direct exports.

It introduces ODI compliance in India, federal and state compliance in the US, related-party reporting, transfer pricing and eventually profit-repatriation questions. And for physical goods, it generally does not change customs origin simply because the importer is now a group company.

The right question is not:

“Should we open a company in the US?”

It is:

“What do we actually want to do in the US, and which structure achieves that with the least unnecessary tax, compliance and commercial friction?”

That distinction is what separates an overseas incorporation from an international business structure.