Venturing into international markets is an appealing opportunity for companies seeking expansion, access to new markets, a broader range of skilled professionals, and various other advantages.
Indeed, expanding globally comes with inherent risks. These include increasing interest rates, inflation, geopolitical tensions, supply chain interruptions, and additional challenges. Multinational corporations are focused on mitigating these risks while actively seeking the advantages linked with international expansion.
Certain multinational companies are investigating options beyond the conventional method of international expansion. This traditional approach typically includes creating a legal entity in the desired country, initiating a local payroll system, and directly recruiting and compensating staff.
This article provides an overview of an alternative approach offering lower risk and flexibility than traditional international expansion methods. Additionally, it highlights essential aspects service providers often watch or restrain when pursuing this path.
Scaling Horizons Enterprises need to meticulously assess their alternatives prior to venturing into global markets, ensuring the selection of the most advantageous resolution in accordance with the regulations of the destination nation, short- and long-range corporate tactics, and additional variables. It is crucial to bear in mind that every nation possesses distinctive regulations governing taxation and labor, along with a variety of legal entity alternatives. This segment aims to furnish overarching insights into prevalent alternatives, encompassing advantages and pitfalls, and is not all-encompassing.
Engaging Independent Contractors
Non-Resident Employer Registration
Partnering with an Employer of Record (EOR)
An employer of record (EOR) or EOR provider is a company with an established local legal presence in a specific country. When a growing organization opts for an EOR, this provider hires local workers, pays them in the local currency, offers benefits, and manages income and social security tax payments to local authorities. Simultaneously, the growing company (the client of the EOR provider) supervises and directs these workers. Importantly, using an EOR solution means the expanding organization doesn’t have to establish its legal entity or payroll system in the target country.
Employer of Record services is not designed as a lasting employment resolution. Depending on regional regulations, the type of operations, the workforce size, and additional considerations, an entity might activate a permanent presence and associated responsibilities.
Local Entity Setup
Exploring Markets Securely & Risk Reduction via EOR
The overview of expansion choices above emphasizes that creating a local legal entity is the most compliant and adaptable approach for entering a new country. However, initiating a legal entity in a new market signifies a substantial commitment, with the process being both costly and time-consuming, especially when considering the potential need to close it down later.
On the contrary, an EOR offers a company a relatively low-risk and swift method to expand internationally and, if needed, withdraw from the market. During periods of intense global economic or geopolitical uncertainty, or when a company isn’t entirely confident about the benefits of entering a new market, an EOR can be especially attractive. It enables an organization to evaluate market feasibility, workforce potential, and customer demand while minimizing expenses, legal intricacies, administrative burdens, and compliance risks.
Moreover, numerous EOR providers operate across multiple countries, allowing companies to test markets in diverse jurisdictions simultaneously. This comparison of outcomes can significantly influence their future operational strategies.
Determining the Transition from EOR to a Legal Entity
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.
Departing the Market
As previously mentioned, one advantage of using an EOR provider to enter a new market is the relatively swift and economical process of discontinuing the association and exiting the market if your plans alter or your endeavours don’t yield the expected advantages. Conversely, winding down a legal entity can be costly and typically spans around six months.
Should an organization utilizing an EOR depart from the market for any reason, it’s crucial to provide advanced notice to local employees and the EOR provider. Contractual or compliance obligations regarding employee notification and the continuation of benefits might exist. Additionally, terminating an engagement before the end of a calendar year might sometimes entail tax or other responsibilities.
Lastly, it’s worth noting that an EOR can serve as a viable option for organizations winding down a legal entity in a specific jurisdiction yet aiming to sustain a presence in the market. Just as an EOR presents a relatively low-risk market entry, it mitigates risks associated with a complete market exit by enabling the organization to uphold local relationships, cater to local clientele, and retain valued employees.
Bringing on board new employees for your company can often be challenging. IMC offers an EOR & PEO structure to streamline this process, enabling you to recruit fresh talent without establishing a new entity.
