When you want to hire an employee who will be working in a country where your company has no business operations, you can consider five options that we outlined below, each with its own financial and tax implications. If you want to avoid business operations in a new country, the easiest way to hire an employee who will be working in that country is by engaging with a local contractor. The local contractor is not an employee but is a third-party service provider. You can engage a local contractor without registering your company in that country, but only in the situation that there is no real employer-employee relationship.

If there is an employer-employee relationship, the employer would normally need to be registered locally as a tax withholding agent. You can avoid this by interposing an Employer of Record (EOR), which is a third party that becomes the formal employer for your employee. Although you will not need to register your company in that country, this option is relatively expensive, and as you are not the individual’s formal employer, you will not be able to build on employee retention.

In many countries, employers can easily be registered locally as a withholding agent only for wage taxes and social securities. This so-called non-resident employer (NRE) registration if the most common foreign payroll solution. This is, however, only possible if your local activities and the activities of your employee will not lead to a Permanent Establishment (PE). When there is a PE, your firm - as the employer – can no longer hold a non-resident status, and then your company needs to report business profits locally. In case the local activities trigger a PE, the employer can either register a local branch or set up a local subsidiary. The establishment of a branch and the associated administrative and tax obligations are usually easier to meet, than for a local subsidiary. However, since the commercial benefits are usually decisive, the incorporation of a local subsidiary often proves to be a better alternative.

If you have any questions or would like our advice that fits best your business operations, you can always contact us and we will be happy to support you!