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Foreign Company Setup for Employing Workers: Advantages & Disadvantages

The process of entering new international business markets brings up the question of how to employ both local and expat workers in the foreign country. Global mobility programs are on the increase, and businesses are being forced to reconsider traditional approaches to foreign assignments.

While some multinationals may simply rely on short term employee visits to explore a new market, those with a business commitment may have to find a way to establish some type of local entity and office.  One way to do this is to set up a foreign company in the country, to stay in compliance with local employment laws.

Why Set Up a Foreign Company to Employ Staff?

Before going through the expense to set up a foreign company, a business must assess the core reasons for this type of commitment.  This is not always the best strategy to employ staff on assignment, especially if the market has unknown potential.

Initiating marketing activity or attending meetings using only a few employees is not a sufficient reason to go through the multiple steps and expense of setting up a full foreign company. In that scenario, it may be worthwhile to explore other alternatives such as a GEO service, employing through local partners or simply relying on shorter visits to the new market.

However, if a multinational company plans to have a lasting presence in foreign country with long term employee assignments, then setting up a formal entity may be warranted.  There can be additional valid business reasons for taking this step in addition to employing and paying staff.

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Objectives of Setting up a Foreign Company

While meeting local employment rules is one reason to set up a foreign company, there may be other business factors that can influence this decision.  There is no doubt that having a local entity can make it easier to interact with new customers, vendors and clients, as well as concluding sales contracts.  Establishing a foreign company can speed the process of obtaining bank accounts, leasing office space and registering business names and brand identity.

A business can establish its credibility with government authorities more readily with an identifiable local company, and also will be in a position for total compliance with host country employment regulations.  Without this, it may be more difficult to payroll staff, obtain work permits and meet all statutory withholding requirements for employees. 

Foreign Company Set Up Options: Types of Entities that can Employ Staff

There are different levels of business structure for a foreign entity, all of which may not be available in every country. There will be different rules and compliance standards in every market and these should be researched thoroughly before a business begins to set up a foreign company.

  • Subsidiary: The subsidiary is the most formal business structure to use as a foreign company, and many countries will allow 100% foreign ownership of a subsidiary.  This form is more expensive and onerous to set up, but allows for a greater range of business activity.  Some countries may have capitalization requirements for a subsidiary to ensure that they can maintain operational effectiveness and financial stability.
  • Branch: The branch office has many of the attributes of the subsidiary, with fewer registration or capitalization requirements.  Sometimes a branch office will be limited to marketing and sales activity, but can also be easier and less expensive to set up.
  • LLC: The LLC (Limited Liability Company) is an attractive business form since it allows for a mix of local and foreign ownership, with shareholder exposure limited to the amount of investment.  It is an ideal way to engage local investors or participants, especially in countries where some percentage of local ownership is required.

Advantages and Disadvantages of Setting up a Company to Employ Workers Overseas

The increase of global mobility programs for multinationals has called into question historical international employment methods.  A business will want to closely evaluate the pros and cons of setting up a foreign company, and weigh the overall cost of a DIY approach compared to other alternatives.

The advantages of setting up a foreign entity include:

  • Having an established entity to run a compliant payroll and make all required tax and statutory withholdings
  • Eliminating the need to pay either local or expat workers remotely
  • Avoiding immigration problems with overuse of business visas, since the local entity will be in a position to secure valid work permits

The disadvantages of setting up a foreign entity can include:

  • The expense and time required for setting up a full local company may not be worth it in a market with unknown potential
  • There is an increased risk of triggering “permanent establishment” and exposure to corporate tax liability
  • Some types of business entities may be limited in the scope of employee activity, undermining the very reason to set up a company in the first place

The GEO Alternative

When the pros and cons of setting up a foreign company are considered in light of real business objectives, it becomes apparent that going through this complex process for just employing a few staff may not be worth the effort and expense.

The GEO solution is designed to address this very situation, and offer a cost-effective means to deploy staff quickly into a foreign location.  This alternative is an agile approach that supports modern employment needs, without having to set up subsidiaries in every international market.

Using a GEO makes even more sense if a company’s global mobility strategy involves multiple countries.  A company may have a limited presence, but the amount of time spent in country can still exceed the parameters of typical business visas.  In essence, the GEO becomes the local employer of record, by providing an established entity that can easily comply with host country laws.

Shield GEO has developed several different options for structuring employment relationships with workers on assignment, and have local partners in most international business destinations.

Get in touch to find out more about how an Employer of Record solution can help your company

The information in this article is subject to changes in local legislation.

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