It’s crucial to note that an EOR arrangement isn’t intended for long-term use, nor does it provide a company with the ability to thoroughly conduct a broad spectrum of business operations within a country. Significantly, relying on an EOR might constrain an organization’s expansion within the target country. Depending on local tax regulations, enforcement trends, and other factors, if a company gradually hires an excessive number of workers under an EOR, it faces the risk of establishing a taxable presence, also known as a permanent establishment (PE). Therefore, it’s imperative for businesses utilizing an EOR to monitor their local headcount and operational activities closely.

As the risks of establishing a permanent establishment (PE) rise, a company must contemplate creating its local legal entity and transitioning EOR employees to the new entity’s payroll. Alternatively, the company might terminate its association with the EOR and withdraw from the market.

Triggering a permanent establishment involves navigating a complex and, at times, uncertain terrain. Hence, a company facing this situation should engage a third-party expert well-versed in local tax and labor laws to comprehend the advantages and drawbacks of continuing with an EOR. Generally, a company should utilize an EOR for two years or less before setting up its own legal entity or exiting the market.

Sometimes, EOR providers downplay or omit the risks related to permanent establishment (PE). Hence, it’s crucial to either partner with an EOR service provider capable of setting up legal entities, bank accounts, and payrolls in the expansion country or enlist a third-party advisor to accurately evaluate when to transition from the EOR to the company’s independent legal entity.

Establishing a legal entity might extend up to six months in select countries, so organizations should plan well in advance. Despite the potential expenses and time investment, creating a legal entity becomes more cost-efficient than utilizing an EOR once a company achieves a particular scale in a market. Additionally, it grants organizations the freedom to expand without concerns about their tax status.

It’s crucial to grasp that while an EOR offers a speedy, low-risk method to kick off operations in a new place, it might not suit every expansion scenario. Depending on various factors such as the target country, corporate strategies, planned activities, the number of employees involved, and other considerations, initiating a legal entity from the start could be more suitable.