If you’re thinking about global expansion and hiring talent abroad, you may also be wondering if you need to set up local entities in your new markets. While establishing foreign entities is certainly the right choice if it is part of a validated growth strategy, there are better alternatives available if your goal is simply to hire the best global talent.
Below, we highlight some of the key things you should consider before setting up a local entity abroad, as well as the types of entities available to you. If you do decide that establishing a foreign entity is right for your business, this article will also show you how to get started.
Should Your Business Set up a Local Entity?
Setting up local entities is both time-consuming and expensive, so you need to evaluate whether it’s the right decision for your business at this time. After all, there are simpler alternatives that enable you to hire the best talent without geographical restrictions.
However, if you’re considering global expansion to increase your customer market size or optimize your operations, the decision may be more challenging.
Here are the main risks to consider before you set up a foreign business entity:
- It can be really expensive to set up and maintain a local entity due the costs of professional fees and initial share capital requirements.
- Setting up local entity can take a long time, and it often requires management resources. This can impact your most vital people for months.
- Laws and regulations vary from jurisdiction to jurisdiction, and some require a local citizen or resident to be a director of the business. If you fail to comply with local laws, your business could incur irreparable legal, fiscal, and reputational damage.
- Closing down a local entity can be almost as challenging as setting one up, which makes exiting a market complex and time-consuming.
Now you know what the risks are, let’s define what a local entity is and in which contexts it would be beneficial for you to set one up.
What Is a Local Entity?
A local entity - sometimes called a “foreign entity” or an “international entity” - is a business structure that exists in a separate jurisdiction from its parent company. Some foreign business entities are legally and fiscally tied to their parent companies (like a branch office or sales office), while others are completely separate (typically called a subsidiary).
When Should You Set up a Local Entity?
While there are a number of risks and costs associated with setting up a foreign entity, it remains a great way for some businesses to expand internationally.
If you intend to permanently expand your business into a new jurisdiction - i.e., sell to clients, work closely with suppliers, or build aggregated teams there - and your initial market research is promising, setting up a local entity might be right for your business. This is particularly true if you want to hire a large number of employees in each target market. Skip ahead to discover how the process works.
However, if you’re simply looking to tap into global talent or hire a select few people in your target market for initial research, you may not need to set up a local entity at all.
Can You Hire International Talent Without a Local Entity?
Yes, there is a simple way to hire international talent compliantly without setting up your own foreign entities, and that’s by using an Employer of Record (EOR) service.
An Employer of Record (EOR) is a local organization that employs and pays talent on your behalf. While your chosen talent is technically an employee of the EOR, they’re still very much a part of your team. The employee is assigned to your company and carries out the tasks you set for them. This is all outlined within a service agreement that your business and the EOR sign.
As the EOR already has a legal entity in the country it’s operating in, your business can hire international talent without needing to set up your own entity. The EOR takes responsibility for complying with local employment laws, including taxation, benefits, payroll, and termination. This makes using an EOR much less risky than setting up a local entity or hiring independent contractors.
How Do You Set up a Local Entity?
Here’s a short step-by-step guide to show you what the entity set-up process may look like for your business:
1. Review the Host Country’s Legal Requirements
If you’d like to proceed with setting up a local entity in your target market, you will need to research the local jurisdiction’s regulations and requirements for foreign businesses.
Remember, every country and jurisdiction is different, so don’t assume the laws will be similar to your home country. You will need to consider a host of issues including the legal structures available, the governance structure - including minimum requirements for shareholders, directors, and sometimes a board of commissioners -, minimum share capital, business licenses, bank accounts, and annual filing requirements.
As regulations are complex and sometimes opaque, you will likely need to seek legal and tax advice from local experts to ensure your entity set-up and management are compliant.
2. Evaluate the Benefits & Limitations of Each Type of Local Entity
Choosing the right type of local entity depends on your global expansion strategy, as well as the local regulations of the market you’re entering. Here are the three main types of local entities to consider, as well as their benefits and limitations:
A representative office is typically the quickest and simplest way to establish a business entity abroad. It gives your business a minimal presence in the target market, allowing you to test the waters before taking your expansion to the next stage.
Employees working for a representative office aren’t permitted to carry out core, transactional business activities. As the name implies, they’re representatives of your company only. This means they can carry out market research, marketing campaigns, and/or customer liaison, for example.
As representative offices don’t generate revenue, your business shouldn’t be liable for corporate tax in the host country. There is also less regulatory oversight.
However, representative offices aren’t suitable to employ most employee types or conduct any revenue-generating activities (e.g., sales, software engineering, product development, management, etc.).
A branch office offers more flexibility than a representative office, but it can be very costly to set up. It’s considered an extension of the parent company, and employees are permitted to carry out core, transactional activities like signing contracts.
This means that branch offices are typically considered to be permanent establishments and liable for corporate tax in the host jurisdiction.
Since branch offices are wholly owned by the parent company, any legal or fiscal liability is held by the parent company, as opposed to a subsidiary where liability remains with the local company.
Separate Legal Entity (Foreign Subsidiary)
A separate legal entity - also known as a “foreign subsidiary” where it is majority-owned - is legally and fiscally distinct from its parent company. Foreign subsidiaries can take various forms, but the most common would be a private limited company.
Setting up a separate legal entity abroad allows you to benefit from local tax rebates, grants, and other related benefits. Separate legal entities also help protect your parent company from legal risk by isolating liability at the subsidiary level.
However, setting up and running a foreign subsidiary can be very expensive and time-consuming. It may also require the presence of local directors.
3. Register Your Business & Set up Relevant Accounts
Once you choose the type of entity you want to set up, you need to start the establishment process according to local regulations. This will depend on the jurisdiction and type of entity you wish to set up. For example, you may have to:
- Fill out application forms
- Provide relevant evidentiary documents
- Secure office premises and a registered address
- Appoint a local manager or director
- Pay associated fees and costs
- Acquire a business license
- Open local bank and tax accounts
- Set up payroll for local staff
- Register for social security
- Register with the local tax authority
- Relocate or onboard new employees
Once complete, you need to stay up-to-date with local laws and regulations to remain compliant. This will help to reduce legal and fiscal risk.