Typically, if a company would first like to explore the new market before deciding to set-up a permanent establishment, an option could be to enter into a consultancy (or free-lance) agreement with a local consultant. Under this agreement, the company would simply pay an agreed fixed fee (or hourly rate) to the consultant to carry out services in combination with pre-agreed objectives. The advantage of such an agreement is that the taxes/ social security liabilities are solely assumed by (and paid by) the consultant. However, there are certain conditions that need to be met in order to avoid the consultancy agreement being regarded as a “deemed” employment agreement (and that subsequently the company will be liable for withholding taxes and social securities). Example conditions are that the work assigned should have a beginning/end term (project basis), consultant having other clients/projects (and not exclusively work for this specific company) etc. These conditions may vary for each jurisdiction.
Professional Employment Organisation (PEO)
Under this option the company’s local employees will be formally employed by a local 3rd party employer (also called “employer of record”). While the employment agreement is with this 3rd party employer, the local employee can still be part of the company’s organizational structure including assigned work, reporting lines etc. The 3rd party employer, however, will be responsible for any and all employment liabilities including carrying out a local payroll (Gross-to-Net calculations), withholding and paying taxes/social securities etc. This also includes assuming all risks associated with being an employer. In return, the 3rd party employer will charge the company a fee which normally consist of the fully loaded employment costs of the respective employee PLUS a mark-up. The mark-up will not only cover a margin but also cover any (potential) risks associated with being the “employer of record”. While the mark-up can be significant, this can be a feasible option for a company in case it would like to have its “own” full-time employees without the cost burden of local compliance. This is dependent on the size and nature of the company’s anticipated local activities.
Employment Without Establishment (EWE)
In general, within the European Union (EU) it is possible to register an entity established in one EU country as an employer in another EU country. In other words: if a company already has a subsidiary in an EU country, it is possible to register this subsidiary as an employer in another EU country. The registration process, depending on the EU country, can be straight forward and generally consist of collecting certain information/documents from the respective subsidiary and subsequently obtain a local tax/social security number in the other EU country. Once obtained, the “foreign” subsidiary can act as an employer for local employees (who all need to be EU citizens) and a local payroll (Gross-to-Net calculations) can be processed in accordance with local laws/regulations. Main advantages are that the “running/compliance” costs are relatively low PLUS all local staff are directly part of the company’s organization which can be important for both the local staff as well as for local market visibility (branding). Prior to selecting the EWE option, it is highly recommendable that the company ensures that it will not create a local permanent establishment (PE) based on the (again) size and nature of activities. A PE could create potentially tax consequences.
Establishing a Local Entity
This is the straight-forward option having numerous (commercial, corporate governance and tax) advantages in case the company had decided to enter a new jurisdictions and set-up/grow operations. Depending on the jurisdiction, a company has various type of legal forms to choose from such as a representative office, branch, limited liability company etc. The right type of legal form is again dependent on the company’s plans/objectives for the new market, taking into account the advantages/disadvantages of the specific form of legal entity. For instance: while a representative office can normally be set-up easily and the local compliance burden is minimal, a representative office can also have restrictions e.g. it cannot generate any profit.
There are an increasing number of countries who have adapted a straight-forward process (often online) for incorporating a local entity. While an entity in certain countries can be established even in a few days, the application of a local tax registrations and/or opening of a bank account can be more time-consuming.
The above is the personal view of the author. Amesto Global and its affiliates do not provide tax or legal advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax and/or legal advice. You should consult your own tax and legal advisors before engaging in any transaction.