Setting up local entities for managing remote employees
An overview of the steps you need to take to set up local entities for managing remote staff
When considering to hire a remote employee in a new country, a business must have a local entity to operate legally in the country in order to pay employees and adhere to local employment rules and regulations. In the current climate, companies large and small are often overlooking their compliance towards these employment laws which can have huge cost and legal implications later down the line.
Even small companies must consider their compliance footprint when setting up local entities. It is not just something for the giant multinationals. Legal compliance is the process by which a business adheres to the rules, policies and processes that regulate business practice in any particular jurisdiction. These can be complex, especially if you don’t have the inhouse power to navigate these choppy legal waters.
If you are serious about employing a remote employee in a new jurisdiction, you need to look at the costs of creating and operating a new legal entity, which can often be very time-consuming and very expensive. Even once you have managed to set up the local entity, you must be aware of the ongoing costs of maintaining the legal obligations towards the company as well as your remote employees.
There are many different considerations and options available for companies when they look to hire remote staff. Often it is easy to overlook issues that are not immediately apparent when a company chooses to go down this route. Below we will attempt to highlight some of the common oversights. These include being aware of labour and employment laws of each country, tax and social contributions, payroll considerations, ongoing filing and book-keeping requirements as well as other risks that may be relevant for a company considering to embark on the process of setting up a local entity.
We will divide these into categories of all the potential considerations, looking at different options, costs involved and set up time. We will also give some idea of the resources and other considerations that may need to be employed to get up and running.
Considerations before setting up entities for hiring remote staff
Labour and employment law
Hiring an employee without a corporate presence can be illegal or might not be feasible for many businesses. Some countries also put explicit and extensive limits on the hiring of workers.
Tax and social contributions
Employers in many countries are subject to some form of income tax reporting, especially in Europe where employers are also subject to social contribution payments. Until you have a local corporate presence, complying with these obligations can be difficult and can even lead to penalties.
Corporate permanent establishment risk
This is primarily a corporate tax issue but it is important to flag the risk if you are bringing on staff beyond your existing corporate structure. Hiring someone where you have no corporate presence can potentially expose you to corporate tax in those places.
Filing, reporting and financial disclosure requirements
Every country, province, state or even cities impose their own reporting obligations on all domestic and foreign business entities. They also penalise companies that don’t comply, which is why it is not only to be familiar with the compliance requirement of each country, but it is also vital that a company stay up to date with the changes in each jurisdication as these requirements may change.
Remember that there’s no one-size-fits-all approach.
Costs and complexities of setting up local entities for managing remote staff
If you want to employ your team members directly, in most countries you will be required to set up a local legal presence, either a subsidiary or a branch. This can cost anything from £10 to £50k in upfront professional fees and initial share capital requirements. In addition, it can cost £5 to £20k a year in ongoing professional fees for filings and resident director costs.
It’s not just the costs. It’s also a matter of time. It can take anywhere from a few weeks to over six months to get set up. This needs to be factored into your plans. There are countries where it can be very expensive or difficult to set up an entity.
Forbes magazine says of China: ‘China, for example, is an attractive expansion target for international businesses, but its bureaucracies are notoriously opaque.’
‘And winding down a business in China can actually take longer - and cost more - than setting up shop'.
Benefits and limitations of each type of international entity
There are other ways of doing it, of course, rather than just employing people directly in another jurisdiction. You can engage an international team member as a contractor, either directly or through a personal service company. On the face of it, this appears to be a convenient solution. However, it is often not legal in most jurisdictions and can land you in hot water, especially when these individuals actually act in roles which are long term and the nature of their roles actually require them to take a longer term view.
If you are embarking on a relationship that looks like employment, you are probably not compliant with tax or employment law. That’s why direct employment is often the best long-term solution.
Omnipresent as an alternative
Rather than setting up your own entity and having to deal with the myriad of continuous legal, compliance and finance overhead that you have to maintain in order to hire a remote employee or a team of international workforce, we offer a different way to do this at Omnipresent.
We specialise in providing local employment solutions to global businesses, giving you and your remote employee all of the rights and benefits of full time employment while minimising complexity and cost.