How to Run Bhutanese Payroll Using an Employer of Record (EOR) vs. Local Entity

Businesses hiring employees in Bhutan generally need to decide how they will establish and manage their local employment structure. Two common approaches are using an Employer of Record (EOR) or establishing and operating through a local Bhutanese entity.

The payroll process can involve employee contracts, salary calculations, benefits, tax withholding, statutory reporting, payments and employee records. Bhutan's tax framework also requires employers to consider withholding obligations and reporting to the Department of Revenue and Customs (DRC). The DRC's current rules provide specific employer withholding requirements for employment income.

What Is an Employer of Record in Bhutan?

An Employer of Record is a third-party organisation that employs workers on behalf of another company. The EOR typically handles employment administration and payroll while the client company manages the employee's day-to-day work and business responsibilities.

For a company entering Bhutan without its own local employing entity, an EOR arrangement may reduce the administrative work involved in setting up payroll operations.

However, an EOR does not automatically remove the client's responsibility for understanding Bhutanese employment, tax and immigration requirements. The legal structure, responsibilities and tax treatment should be confirmed with the EOR and appropriate Bhutanese advisers.

What Is a Local Entity?

Under the local-entity model, the company establishes or operates through its own Bhutanese legal entity and employs workers directly.

The company then becomes responsible for managing its own employment administration, payroll, tax withholding, filings, employee records and other applicable statutory requirements.

The DRC provides online processes for registered taxpayers to file relevant PIT, BIT and CIT returns through RAMIS.

EOR vs. Local Entity for Bhutanese Payroll

Payroll area	EOR model	Local entity model
Employment administration	Managed largely by EOR	Managed by company
Payroll processing	Usually handled by EOR	Managed internally or outsourced
Tax withholding	EOR handles agreed responsibilities	Company handles its obligations
DRC compliance	EOR supports agreed filings/payments	Company manages compliance
Employee records	Maintained by EOR and/or client	Maintained by company
Local infrastructure	Lower initial setup requirement	Requires local operational structure
Control over payroll	Shared with EOR	Greater direct control
Administration	Lower internal workload	Higher internal workload
Long-term local operations	Depends on EOR arrangement	Suitable for established operations

The exact division of responsibilities depends on the EOR agreement and the company's legal structure.

How Payroll Works With an EOR

A typical EOR payroll workflow can look like this:

Employee onboarding → Payroll data collection → Gross salary calculation → Tax calculation → Payroll review → Salary payment → Tax remittance → Payroll records

1. Employee Onboarding

The EOR collects the information required to employ the worker and establish payroll records.

This may include:

• Employee identification information
• Employment agreement
• Salary details
• Allowances
• Bank information
• Tax-related information
• Benefits
• Working arrangements

The client company should verify that the agreed employment terms match the employee's actual compensation package.

2. Calculate Gross Pay

The payroll team calculates the employee's gross monthly compensation, including applicable salary, allowances, bonuses and other taxable employment benefits.

The DRC identifies employment income as including items such as basic salary, allowances, fees and remuneration, bonuses, commissions, leave encashment and certain employee benefits.

3. Calculate Employee Tax

The applicable Bhutanese tax treatment should then be applied to taxable employment income.

Under the Rules on the Income Tax Act of Bhutan 2025, a resident employer is required to withhold tax from employment payments that are included in the employee's taxable income. The rules specify the calculation framework and applicable rates.

Because Bhutan's tax rules have changed, payroll teams should use the current DRC rules and tax tables rather than relying on older payroll calculations.

4. Process TDS

Tax deducted from employee payments must be handled according to the DRC's withholding requirements.

The DRC describes TDS as a mechanism for collecting tax as income is earned, with amounts deducted at source being adjusted against the taxpayer's final tax liability.

The current DRC notification states that withholding obligations are generally to be deposited and the relevant withholding statement filed within 10 days after the end of each calendar month.

An EOR should therefore have a clear process for calculating, filing and remitting the applicable amounts.

How Payroll Works Through a Local Entity

A company operating through its own Bhutanese entity generally has more direct responsibility for payroll.

A typical workflow is:

Employee onboarding → Attendance and payroll inputs → Gross-to-net calculation → TDS calculation → Payroll approval → Salary payment → DRC remittance and filing → Reconciliation

The company should maintain appropriate payroll and accounting records and ensure that its tax registrations and reporting arrangements are current.

The DRC provides RAMIS for registered taxpayers to manage applicable return-filing processes, including PIT, BIT and CIT returns.

Key Advantages of the EOR Model

Faster Payroll Setup

An EOR can provide an existing employment and payroll infrastructure, reducing the amount of administrative work required from a company entering Bhutan.

Reduced Administrative Burden

Payroll calculations, employee documentation and certain compliance activities can be handled by the EOR according to the service agreement.

Useful for Smaller Teams

Companies testing the Bhutanese market or employing a relatively small number of workers may prefer not to build a complete local payroll function immediately.

Local Payroll Support

An established EOR may provide local knowledge and operational support for payroll processing and statutory requirements.

Key Considerations With an EOR

An EOR arrangement also requires careful due diligence.

Before signing an agreement, companies should clarify:

• Who is the legal employer?
• Who is responsible for employment contracts?
• Who calculates employee tax?
• Who files withholding returns?
• Who remits taxes to the DRC?
• Who maintains payroll records?
• Who handles employee benefits?
• Who manages employee termination?
• Who is responsible for immigration or work-permit matters where applicable?
• How are payroll errors corrected?
• What happens if tax legislation changes?

Companies should also verify that the EOR is properly structured and authorised to provide the relevant services in Bhutan.

Key Advantages of a Local Entity

A local entity provides greater direct control over the employment relationship and payroll process.

The company can manage:

• Payroll software
• Employee records
• Salary structures
• Payroll approval
• Benefits administration
• Tax compliance
• Accounting integration
• Internal reporting

This approach can also be useful for companies planning substantial or long-term operations in Bhutan.

Key Considerations With a Local Entity

The additional control comes with additional responsibilities.

The company may need to establish appropriate local registrations, maintain payroll and accounting systems, employ payroll personnel or service providers, monitor tax deadlines and maintain documentation for compliance purposes.

The DRC's current regulatory framework includes the Income Tax Act of Bhutan 2025 and the related 2025 rules, while the DRC also publishes subsequent notifications and updates.

Which Payroll Model Should a Business Use?

The choice depends on the company's operational plans rather than payroll alone.

An EOR model may be considered when a company:

• Is entering Bhutan for the first time
• Has a small local workforce
• Wants to reduce payroll administration
• Needs local employment administration
• Is evaluating the market before establishing its own operation

A local entity model may be considered when a company:

• Plans significant long-term operations
• Expects a larger workforce
• Wants direct control over employment
• Needs its own local business infrastructure
• Wants payroll and accounting integrated into its internal systems

These are business-structure considerations, not substitutes for checking the applicable Bhutanese legal and tax requirements.

Best Practices for Bhutanese Payroll

Regardless of the model selected, businesses should establish a documented payroll compliance process.

Maintain a Payroll Calendar

Track salary processing dates, TDS deadlines, tax filing dates and other applicable statutory deadlines.

Reconcile Payroll Before Submission

Compare payroll registers with accounting records, employee payments, deductions and tax calculations before filing.

Keep Supporting Documents

Maintain employment contracts, payroll registers, tax calculations, payment records, TDS information and filing acknowledgements.

Monitor DRC Updates

Bhutan's tax framework is evolving. The DRC's 2026 updates include notifications concerning TDS filing obligations, tax prepayments and implementation of GST changes.

Automate Payroll Where Possible

Payroll software can help manage employee records, salary calculations, deductions, tax calculations, approvals and payroll reports while reducing repetitive manual work.

Conclusion

Running Bhutanese payroll through an EOR can simplify the initial employment and payroll administration process, while operating through a local entity provides greater direct control but requires more internal compliance and administration.

Whichever structure a company uses, payroll should be designed around accurate employee data, correct tax withholding, timely DRC remittances, proper record keeping and regular compliance reviews. The DRC's current tax legislation and notifications should always be checked before applying payroll rules because requirements can change.

Whether payroll is administered through an Employer of Record or a local entity, InnBuilt Payroll Software can centralise employee data, earnings, deductions, attendance inputs, and approval records. Configurable workflows support clear coordination between the employer and local payroll administrator.