A subsidiary, a representative office, or any other term you want to use, describes the foreign arm of a multinational company that does business in said country. Technically, a given company could have as many legal entities as it has in countries it does business in, one in the Philippines, one in the UAE, and one in Spain, for example.
One thing that is going to have a significant ripple effect on your foreign branch is what structure you decide to take. Whether you go into incorporation or create a stand-alone subsidiary impacts your tax liability, business capabilities, and more. Here’s a look at all the major entities that can employ staff and what sets them apart:
Selecting the Ideal Overseas Legal Entity Set Up Option
When your company leadership decides to expand into a new country, one of the first things you’re likely to hear is how important it is for you to start a new legal entity in that country. Short-term employee trips may be satisfactory for exploratory visits, but a formal legal entity is needed for significant business relationships. So, with this in mind, here’s a closer look at what it takes to set up a foreign business entity and when you should look into employment without establishment in a country of your choice.
Establish Entry and Exit Strategies Beforehand
The business world is always moving forward. To stay ahead of the competition, it is essential to grow quickly and make decisions without hesitation. This can sometimes lead to businesses expanding without a well-thought-out plan, but taking advantage of opportunities as they arise is often necessary.
Different businesses have different strategies for entering and exiting countries. However, ad-hoc strategies are more likely to lead to miscommunication and problems. Businesses must have a fully realized strategy before entering or exiting countries. By doing more planning and preparation, the process will be more straightforward.
If your business can rapidly enter and exit markets, it will be much easier to be agile and responsive to fluctuations in demand. This flexibility reduces the chances of disruptive bottlenecks and helps ensure continued growth.
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Understanding the Concept of Permanent Establishment
There is no one-size-fits-all when choosing the suitable business model for your company. It depends on your business activities, budget, employment plans, time constraints, and risk tolerance.
When organizations consider expanding their operations internationally, they must decide whether to establish a legal entity in-country. If your organization has determined the time is right for global expansion, and you’ve decided the location(s) targeted, you will need to consider establishing a legal entity in-country. Deciding whether to set up a legal entity in the host country and, if so, what type of entity to set up will be critical to protecting your organization’s bottom line and reputation.
What Is a Permanent Establishment?
A permanent establishment (PE) is a fixed place of business that can be a branch office or an independent office to conduct business activities and generate profits in a foreign country. The PE is subject to tax on its income derived from within the host country, even though it may be part of an integrated enterprise with operations outside the host country. The PE can also be taxed on its income from outside the host country if it has obtained substantial benefits from being present in the host country and carrying out business activities there.
Permanent Establishment Management Control
The critical question is whether your organization wants to control its business operations in that country or prefers to outsource all aspects except managing assets and collecting profits.
A foreign legal entity might be best suited if you want to maintain direct control over everything from accounting procedures to staff management. However, an alternative setup option may be right for you if you want to outsource some aspects of your operations other than managing assets and collecting profits.
Some countries require you to have a percentage of local ownership to do business. This makes the LLC an appealing option. As a limited liability company, shareholder exposure is limited based on the investment.
Permanent Establishment Timeframe
Establishing a legal entity is a critical first step. Depending on the country, the type of legal entity selected, and other factors, this process can take anywhere from two weeks to six months. Some countries allow businesses to establish an entity without having a physical office space or local bank account – these are typically the faster options.
Before you embark on any foreign venture, ask yourself the following questions.
20 Questions to Ask Before Choosing a Foreign Legal Entity Set Up
- What activities do you see your company performing in the host country, now and in the future?
- How many employees or contractors will you engage in the host country?
- What will the partners’ level of involvement be in the host country?
- What are your long-term plans for operating in the host country? Do you plan to expand your business there?
- Would you like to buy or lease office space in the host country?
- What is your timeframe for operating in the host country?
- What revenue model do you plan to use?
- Are marketing and PR any significant advantages to operating as a local company?
- What potential tax implications will your company have if it expands into the host country?
- Could any taxes be levied on specific industries or types of investment?
- Would there be any unusual withholding taxes on fund transfers or sales of goods?
- What initial capital and governance requirements must be met to establish a new business in a foreign country?
- What is the ideal number of shareholders to distribute ownership among?
- Who will act as a local director?
- What level of freedom will local management have?
- Do your employees in the host country have a designated workspace from which they will operate? This could be their home office or other formal business accommodation.
- Are your employees in the country extensively involved in sales or contract negotiations? They don’t need the power to sign contracts to qualify as being involved in contract negotiations.
- Do your employees’ job titles or descriptions pertain to revenue generation?
- Do your employees receive compensation related to sales, such as commissions or bonuses for meeting sales targets?
- Do they receive compensation based on sales, such as commissions or bonuses for their sales performance?
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3 Options for Multi-location International Employment
Businesses establishing a global presence face the challenge of managing and scaling an employee base with no common borders or language. To successfully expand abroad, companies have several options for enabling hiring in international markets.
There are six key things to consider when choosing an employment method for your company’s global expansion:
- Budget and time frame
- Tax implications
- Compliance
- Employment liability
- IP protection
- Asset acquisition.
The most commonly used foreign market entry modes are the following:
- Overseas Permanent Establishment (a representative office, a branch, a subsidiary, and other foreign legal entity types )
- Selecting independent contractors to handle tasks remotely.
- Work with a global EOR (Employer of Record) and GEO (Global Professional Employer Organisation) Partner.
The legal entity available to you will differ depending on the country, but there are generally three most common Permanent Establishment options:
- a representative office;
- a branch;
- a subsidiary.
Representative Office
What is a Representative Office?
If you’re looking to establish a presence in a new country with little to no revenue generation, a Representative Office (RO) may be the way to go. A Representative Office is the most limited of all options on this list, generally designed to allow a company to do marketing and other non-transactional practices.
Representative Offices are relatively quick and easy to set up. Your staff can be involved in brand promotion, customer service, or distributor support—but not direct sales or contract negotiations. Due to these limitations, an RO may not be the best option if you’re looking to grow your business rapidly in a new market.
When Open a Representative Office?
If your organization is considering establishing a Representative Office, some circumstances might make it a worthwhile investment. For example, if you need to conduct market research or attend trade shows to gauge potential interest in your product or service in a new territory or if you have customers or distributors who would benefit from regular in-person communication and support. Another reason you might need a Representative Office is to oversee local or regional brand promotion.
Branch
What Is a Branch?
A branch office is a company’s division that operates in a different geographical area from the parent company. This allows the business to serve a specific market or region more effectively. For example, a company headquartered in New York may have an office in Tokyo to serve the Japanese market or an office in Munich to serve the German market.
When Open a Branch?
Opening a branch office in another country can have profound implications for your company. First and foremost, you will not be protected from any legal obligations arising from the branch’s activities. Secondly, any profits generated by the branch will be subject to host-country taxes. Before deciding to open a foreign branch, be sure to research the host country’s tax laws and transfer pricing arrangements.
A branch office keeps many of the benefits of a subsidiary and is generally easier to register or capitalize. The trade-off here is that the laws of some countries mean you can only do marketing and sales work from a branch office.
Branch offices can have some disadvantages, but there are also situations where registering one may be the right decision for your organization. You should consider establishing a branch office if the following circumstances apply:
- You will be involved in many activities in your host country beyond marketing. These activities are essential for sales and transactions but do not directly or indirectly generate revenue. Therefore, you need staff on the ground to carry out these essential tasks.
- After careful consideration, you have concluded that the host country’s tax laws will protect the parent company from liability and have little impact on your overall profitability.
- You have an excellent opportunity to move quickly and capture a market before the competition. You don’t want to spend time establishing a subsidiary entity type, so take advantage of this chance now.
- You don’t plan to stay in the host country for very long.
Subsidiary
What Is a Subsidiary?
A subsidiary company is a separate legal entity from its parent company. A parent company usually establishes a subsidiary to conduct business in the host country. The main advantage of having a subsidiary is that it provides a layer of protection for the parent company from any liabilities arising from the subsidiary’s activities.
While setting up a subsidiary can be time-consuming and require significant financial investment, the advantages often far outweigh the challenges and costs. Subsidiaries can help limit the parent company’s tax exposure by shielding profits from taxes in the host country, which can provide excellent stability and security for the business.
A subsidiary is the most formal structure possible, which brings some key benefits, like having 100% foreign ownership. The trade-off is that it is also the most expensive and challenging to set up. Note that some countries require capitalization for any subsidiaries.
When Open a Subsidiary?
Businesses should consider establishing a subsidiary when the following circumstances exist:
- Your plans involve staying in the host country for an extended period.
- You have big plans for your business in the host country, and you’re confident that the profits will be high enough to justify setting up a subsidiary there.
- Registering your company locally will improve its image and bolster its marketing and sales efforts. This move will help communicate to your customers that you are invested in the community and increase confidence in your brand.
- If a company decides to open a branch office or another type of non-subsidiary entity in another country, that company will be required to pay taxes on its earnings in that country according to the tax laws of the host country.
Foreign Entity Set-up Expenses
- Incorporation fees
- Statutory fund
- Filings
- Legal services
- Consultancy fees.
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Advantages and Disadvantages of Each Legal Entity Type
| Entity Type |
Advantages |
Disadvantages |
| Representative Office |
- No in-country Corporate Tax
- Less regulatory oversight
- Short set-up time
|
- Cannot perform core business activities, sell, or transact business
- Grey-area activities, such as marketing and service activities, may trigger the permanent establishment
|
| Branch |
- Can engage in the core business, sales, and transactional activities
- No share in the capital is required in most jurisdictions
- Greater flexibility to enter or exit markets
- Relatively short set-up time across most of the jurisdictions
|
- Subjects parent company to legal obligations arising from branch activities
- Can expose parent company profits to host-country taxes
- Set-up and administration costs can be as expensive as a local subsidiary
|
| Subsidiary |
- Can engage in the core, sales, and transactional activities
- Limits tax and legal liability of host-country activities
- The entity can be marketed as a part of the local community
|
- Set-up can be a lengthy process, with multiple government registrations
- May require statutory capital investment
- May require local directors
- Subject to host-country regulatory oversight
|
Pros and Cons of Setting Up a Business Entity
One topic that isn’t discussed as much as it should be is whether setting up a business entity can help or hinder expansion plans. Here are some examples of positives and negatives in this regard.
Pros of Setting Up a Business Entity
Compliance
This is probably the apparent advantage. You can’t legally hire and manage employees unless you have some form of legal entity. There are alternatives that are arguably better suited for many companies, though. We will discuss those later.
Flexibility
Depending on your setup format, your company will have much more versatility in business actions in the new country. If you are willing to make the investment to set up a full subsidiary, you have an entirely separate legal entity to work with.
Cons of Setting Up a Business Entity
Outright Restrictions
In some countries, like Saudi Arabia, there are limits on who can open a business in certain industries. For example, if you wanted to get into oil there, you would need to partner with a local. Naturally, finding a business partner you want to work with takes time.
Bureaucracy
Setting up a foreign branch or representative office still requires you to fill out various forms and communicate with different government agencies in your country of choice. Language and cultural barriers can make these complicated and slow things down even more.
Different Entry Requirements & Costs for Opening a Company in Several Countries
Permanent Establishment Risk: Addressing the Concerns
You may think you can conduct business overseas without registering a legal entity, but you would be wrong. You might need to register your business even if you only send an employee on a temporary assignment or establish a small promotional office. Failing to do so can result in severe consequences.
Different countries have different tax laws, and a multinational company must consider all of these when conducting business. The tax authorities of a particular country can determine which elements of the company’s economic activity take place in that country and how much profit is attributable to them. This process can be complex, but ensuring that the company complies with all applicable laws is essential.
Flying Under the Radar of Local Tax Authorities
An organisation’s sustained physical presence in a country can trigger a taxable presence, or a “permanent establishment” (PE), in that country. This may occur if the organization generates revenue directly from activities in that country or if the organization’s activities contribute to the revenue of a group entity in that country.
As an organization operating overseas, it is crucial to be cautious of triggering a Permanent Establishment (PE) under local laws, as this can expose your company to unexpected tax liabilities, fines, and reputational damage. Failure to properly register a Permanent Establishment can have severe consequences for your business, so it is essential to understand the requirements of each country in which you operate.
Although the Organisation of Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project has had many far-reaching outcomes, one of the most significant is the modification of the definition of a permanent establishment. This change has important implications for businesses operating in multiple jurisdictions, as it may affect their tax liability.
The OECD is using Action 7 of BEPS to tackle common tax-avoidance strategies used by multinational corporations to avoid paying taxes in the countries where they do business. The organization is trying to stop companies from sidestepping local tax authorities by establishing related distributors rather than agencies or commissionaires.
Triggering Permanent Establishment Risk
A business is taxed based on the geographic location of its income-earning activities. To ensure Fair Taxation of the Digital Economy, on 21 March 2018, the European Commission proposed new rules to ensure that digital business activities are taxed in a fair and growth-friendly way in the EU. The penalties for noncompliance are steep (20% penalty on top of the 3% tax, plus fines).
As businesses look to expand into new markets, they must be aware of their tax liability in each country with a customer base. They must also be aware of the compliance obligations in each country where they sell their products. Suppose you are selling digitally and don’t already have this in-house expertise or don’t work with a global PEO & EOR partner. In that case, you need to start thinking about addressing this challenge immediately.
As it turns out, the trigger of a taxable presence in another country is not just an abstract challenge but a real non-compliance risk. Business in another country can come with hidden risks – like inadvertently triggering a taxable presence.
Acumen International has experience dealing with this problem – we were approached by a client who had unwittingly violated PE laws abroad. Two of the company’s employees were placed in one of the EU countries, working from home. However, since they weren’t generating much revenue directly in that country, the company decided to do their payroll registration instead of registering a complete corporate legal entity.
One year later, the local state tax authorities came knocking to say that an employee’s job title containing the word “sales” meant the company should have registered in-country as a business, resulting in higher employer payroll taxes. Ultimately, the company owed over €20,000 in back taxes and fines.
Non-compliance with local PE requirements can have dire consequences for businesses. The company took steps to mitigate the damages, but the message is still pretty clear: adhere to the requirements or face serious repercussions.
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When Can a Legal Entity Setup Be Justified?
A company set up in a foreign country can be justified as one with an international headcount of over 20 employees. If you’re dealing with a smaller headcount, a global PEO solution will be able to satisfy your needs cost-effectively.
A company setup is closely connected with ongoing expenses that must be considered during decision-making. A business’s cost to invest borders on $20K for legal company setup, with an additional $40 thousand annually spent for maintenance. The process will take three to four months, and this time must also be allocated.
A global PEO tackles this pain point by cutting you as much as 60% of expenditures while still providing you with the desired result: presence in a new country and active operations.
Third-party Global Employment Solutions: Be as Agile and Super Protected with a Global PEO and EOR Partner
Before hiring global talent, you must set up your business entity and jump through all the associated hoops. This can include paying taxes, setting up a compliant payroll system, and sometimes applying for a social security number from the tax authorities. These additional steps can take anywhere from a few weeks to several months.
Many companies see the decision to set up subsidiary companies as a critical function of doing business abroad. However, as we’ve pointed out, there are pros and cons to this approach.
However, due to a lack of industry knowledge, many assume that building a legal entity abroad is the only way to expand while staying in industry compliance. Not necessarily.
Rather than go through the bureaucratic process, you can use a global Employer of Record solutions provider like Acumen International. We can help you in over 190 different countries. By taking the burden off your hands, we serve as an alternative, agile approach that supports modern global employment needs.
Global PEO and EOR — Alternative Options To Setting Up A Legal Entity Overseas
As your business expands globally, it is essential to be agile to make the best decisions for your company. Markets and consumer demand constantly change, so being as flexible as possible is vital. The more agile you are, the easier it will be to make the right choices for your business.
Outsourcing can be an excellent way for organizations to save money and increase efficiency. By carefully selecting which global employment functions to outsource and working with a trusted partner, businesses can reap the benefits of outsourcing without putting themselves at risk. Outsourced standard functions include payroll, benefits, and absence management, but deciding which functions to outsource should be made case-by-case. With careful planning and execution, outsourcing can help your organization run more smoothly and save money in the long run.
When expanding your business into new countries, there are many benefits to using a global PEO (Professional Employment Organization) or EOR (Employer of Record). A Global PEO and EOR Partners can handle all the immigration, hiring, payroll, tax, and HR compliance for you, freeing up your time to focus on other aspects of running your business. And if you ever need to leave the country, you can do so without being tied down by any long-term commitments.
The main benefit of using a global PEO versus a new entity for your business setup abroad is a lack of administrative cost and burden. Your global PEO provider will handle the complex logistics of staying compliant and managing your international employees without a legal entity. However, you ultimately have the final say on what gets done. Also, by going this alternative way, you still get the most considerable benefit that setting up a foreign entity could give you – expanding your presence in a new and lucrative market.
18 Burdens a Global PEO Can Relieve for Your In-House HR Department
- Global expansion complexity
- Global payroll administration
- Employee benefits administration
- Immigration support and continuous immigration compliance
- Drafting compliant employment contracts to adhere to local labor and tax regulations in 190 countries
- Lengthy onboarding
- Complex and risky offboarding
- Background checks
- Workforce compensation administration
- Ongoing compliance monitoring and guidance
- Guidance on best practices of voluntary benefits provisioning
- Immigration and relocation support for your ex-pat workforce, such as visa sponsorship and securing work permits
- Lack of institutional knowledge.
- IP right protection
- Lack of local and international legal support
- Convert local contractors into full-time employees
- Business Transitions: acquisitions, mergers, close-downs
- The need to deal with multiple global employment service providers.
Difference between an EOR and a PEO. Global Employment Risk Mitigation Strategy
Both PEOs and EORs work differently. However, an EOR is a company that takes on the legal risks of employing your workers, including finance, legal & compliance, and safety risks, saving you from any potential problems down the line. This means that all of the responsibilities that come with being an employer are shifted to them — from tax reporting to handling any injuries or issues on the job. You’ll have none of these hassles but will take responsibility for managing your employees’ tasks and performance.
| ATTRIBUTE |
PEO |
EOR |
| Employment Model |
Co-employer |
Sole Employer |
| Permanent Establishment Factor |
Can only work with clients who have a registered in-country (state) entity |
Facilitates foreign expansion without setting up an entity |
| Key Services |
Global employment, payroll, benefits, immigration (visa, work permits), mobility |
Global employment, payroll, benefits, immigration (visa, work permits), mobility |
| Responsibilities |
Responsible for the entire array of HR functions |
Responsible for a portion of HR functions |
| Tax Administration |
Depending on local tax regulations may require taxes to be filed under the client’s taxpayer ID |
Files taxes under own Taxpayer ID Number |
| Payroll Funding |
Requires advanced payments from the client |
Provides payroll funding |
| Local Entity Establishment |
Required |
Optional |
| Local Entity Ownership |
Does not own the entities. Instead, a global PEO partners with a local or global third-party provider. A PEO does not allow you to hire in other countries where you do not have a local entity. |
100 % owns legal entities in the country of service. Allows to hire a workforce in other countries without setting up a business entity |
| Liability |
Shares responsibilities and liabilities |
EOR assumes all responsibilities and liabilities. It hires employees in the new country under its local business entity and takes on all of the legal risks. |
| Legal Advice |
Optional |
100% compliance required |
| Global Labour & HR Compliance |
Optional |
100% compliance required |
| Insurance |
May require the client to provide their own insurance. |
Provides general liability (GL) and workers’ compensation (WC) insurance coverage. |
| Benefits |
Provides higher quality employee benefits at competitive prices |
Provides higher quality employee benefits at competitive prices |
| Employment Agreement |
The client must draft and sign the employment agreement with an employee. |
Drafts and signs the employment agreement directly. |
| Pricing Structure |
- Fixed monthly fee per employee
- Percentage of payroll plus applicable taxes
|
- Fixed monthly fee per employee
- Percentage of payroll plus applicable taxes
|
Global Employment Services: How a Global PEO and EOR can Help You in Business Transition
Acumen International PEO offers a unique blend of experience and service suite, providing global employment opportunities that are genuinely global-ready. If your company is transitioning, such as going through an acquisition or merger, or experiencing a company liquidation, Acumen International can find a legal and compliant solution to hire your employees—anywhere in the world! Many companies struggle with handling the employees being left behind during these times of transition. It’s common for employees to feel insecure about their future employment prospects, particularly when they have been forced out of their positions.
This can also be problematic for companies, who will likely have open positions that need filling but still have lingering contracts to fulfill. In both cases, having a resource like Acumen International PEO can ensure that the company’s business continues without being negatively affected by the change. When you’re working with Acumen International, we take care of all the paperwork and legal obligations so that you can focus on completing your transition plans. We also handle everything from payroll to benefits and even complete payroll tax administration for all our employees worldwide. This gives employers peace of mind that all their international obligations are fulfilled while allowing them to focus on their transition plans.
A reduction in the workplace can be a scary time for employees. Global PEO can provide outplacement services to help reduce the risk and ensure that downsized employees have some assistance while searching for a new employer.
Legally Compliant, Cost Effective & Hassle-Free Mode of Market Entry
Acumen International is a global employment (PEO and EOR) company that provides services to expanding businesses. Acumen understands how employers can benefit from outsourcing their human resources management and the challenges an employer faces during this period of change. Acumen can help minimise these risks by offering businesses compliant and secure global employment services.
Acumen International’s global PEO and EOR services can help you by providing faster access to qualified talent in your industry. Our PEO and EOR services can help you get a presence in 190 countries quickly and easily without worrying about compliance with labour and tax regulations.
Are you an employer looking to hire looking for qualified talent in your industry but don’t want to go through the hassle of setting up a foreign legal entity? If so, you may need to partner with a global Employer of Record (EOR).
8 Scenarios When You Might Need a Global PEO and EOR Partner
- You have hired an employee but are unhappy with your current employment service provider.
- You’ve decided to hire an independent contractor instead of a full-time employee, but you’re unsure if you comply with local laws and regulations.
- You are currently looking to improve the quality of your employment services.
- You can no longer afford to maintain a whole legal operation via your entity in the target country.
- You have a temporary project or one that doesn’t require you to open a legal entity in the target country.
- You need to hire a foreign workforce for your new project.
- To expand your business, you will need a mix of local and foreign employees. Those who are familiar with the local market will be able to help reduce the learning curve.
- International employers’ biggest challenge is supporting their organization’s employees when their business restructures or reorganizes. A global Employer of Record can support your business upon mergers, acquisitions or close-downs. When you manage the employee relations aspects during any business transitions (M&As or close-downs), you want to ensure that the process is seamless and 100% compliant.
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