ComparisonGeographic Expansion
Employer of record vs subsidiary vs branch: choosing how to hire abroad
An employer of record (EOR) is usually the quickest way to employ a few people abroad, but it cannot sign customer contracts for you and does not settle your tax exposure. A branch lets the parent company trade locally with no separate legal person; a subsidiary is a separate local company that can hire, contract and hold licences. The right answer depends on what those first people will do, not on how many there are.
On this page
- What each route is in law
- The three routes side by side
- Contracting with local customers is usually the deciding row
- Permanent establishment: why an EOR does not settle the tax question
- Intellectual property, equity and employment terms under each route
- Conversion triggers: when to move from an EOR to a local entity
- Questions to put to your lawyers and accountants
- Questions and answers
- Sources
What each route is in law
The three routes are often discussed as if they were pricing tiers. They are different legal arrangements, and each answers a different question.
- Employer of record
- A provider that is already established in the country becomes the legal employer of your staff. It issues the contract, runs payroll and handles local employment compliance, while you direct the day-to-day work under a services agreement with the provider.
- Branch
- A registered local presence of your existing company. It is not a separate legal person: contracts are signed by the parent, employees are the parent's employees and the parent answers for the branch's debts.
- Subsidiary
- A new company incorporated in the target country and owned by your group. It has its own directors, accounts, bank account and tax registrations, and it can employ, sign customer contracts and apply for licences in its own name.
- Permanent establishment
- A tax treaty concept describing when a foreign company's activity in a country is substantial enough for that country to tax the profits attributable to it. Treaties based on the OECD model define it in Article 51.
The three routes side by side
| Question | Employer of record | Branch | Subsidiary |
|---|---|---|---|
| Time to first hire | Usually the shortest: the provider's entity already exists | Registration first, then payroll and employer registrations | Incorporation, bank account and registrations before the first contract |
| Administrative load on you | Low; the provider runs payroll and filings | Moderate; local filings under the parent's name | Highest; directors, accounts, audit where required, tax returns |
| Signing local customers | Not through the EOR; contracts stay with your home entity | Yes, as the parent company | Yes, in the subsidiary's own name |
| Holding a local licence | No | Sometimes, depending on the regulator | Usually the form regulators expect |
| Permanent-establishment exposure | Not removed; depends on what staff do | A branch is generally a fixed place of business | Profits taxed locally in the subsidiary; transfer pricing applies |
| Liability | Employment liability sits with the provider under its contract with you | Unlimited to the parent | Limited to the subsidiary, subject to local law and any guarantees |
| Equity incentives | Possible, but plan rules must cover non-employee service providers | Parent plan, with local tax and securities checks | Parent plan extended to subsidiary staff, with local advice |
| Cost shape | Per-employee fee; rises with headcount | Set-up and running costs, no per-head fee | Highest fixed cost; falls per head as the team grows |
A qualitative summary. Specific timings, fees and filing duties vary by country and must come from local advisers; this page is not legal or tax advice.
Contracting with local customers is usually the deciding row
Hiring speed gets the attention, but the row that most often forces the decision is contracting. An EOR employs people; it does not trade on your behalf. If a buyer in the new country needs a local counterparty, invoices in local currency from a local tax registration, or a supplier registered for public procurement, an EOR on its own cannot provide it.
So the useful question is what the first hires will do. Engineers building product for the home company are a different case from a salesperson who negotiates and closes deals with local customers. The first case often suits an EOR for some time. The second raises the contracting question and the tax question at once.
Permanent establishment: why an EOR does not settle the tax question
Under Article 5 of the OECD Model Tax Convention, a permanent establishment can arise from a fixed place of business through which the enterprise carries on its business, or from a person who habitually concludes contracts, or habitually plays the principal role leading to their conclusion, on the enterprise's behalf1. Many bilateral treaties follow that model, though each treaty's wording is what applies.
The test looks at activity, not payroll. A salesperson employed through an EOR who routinely negotiates contracts that your home company signs without material change may still create exposure for your company. Senior staff working from a dedicated office may raise the fixed-place question. An EOR reduces administrative work; whether it changes your tax position is a question for a tax adviser who has seen the job descriptions.
A branch is generally a fixed place of business, so profits attributable to it are expected to be taxed locally. A subsidiary is taxed on its own profits instead, and its dealings with the parent must be priced as if between independent parties.
Intellectual property, equity and employment terms under each route
With an EOR, the employment contract sits between the employee and the provider, so intellectual property created by the employee must pass from employee to provider and from provider to you. Check that both links exist in writing before the first line of code is written, and that local law does not require extra steps such as separate compensation for inventions.
Equity plans need similar care. Many share option plans define eligible participants as employees of the group, and an EOR employee is not one. The plan may need amending to cover service providers, and the local tax and securities treatment of each grant should be confirmed before an offer letter promises equity.
Conversion triggers: when to move from an EOR to a local entity
- If
Local staff start negotiating or concluding contracts with customers in that country.
ThenAsk a tax adviser to assess permanent-establishment exposure now, and plan a subsidiary or branch if the risk is real.
The exposure arises from the activity itself, so it may already exist before any entity is formed.
- If
A customer, regulator or public tender requires a local counterparty or licence holder.
ThenStart the entity work and put it on the critical path of that deal or licence application.
An EOR cannot sign customer contracts or hold licences for you.
- If
The team is growing and EOR fees are approaching what an entity would cost to run.
ThenAsk your accountants to compare total annual cost of both, including audit, payroll and director time.
Per-head fees rise with each hire, while entity costs are largely fixed.
- If
You only have a few engineers or researchers serving the home company, with no local customers.
ThenStay with the EOR and review the position at each hiring milestone.
Forming an entity early adds filings, governance and cost without a commercial need.
Questions to put to your lawyers and accountants
In a ColdAI programme these questions go into written adviser instructions, so that each answer can be compared against the rollout plan2.
Questions and answers
Can an employee hired through an employer of record sell to local customers?
They can talk to customers, but the EOR is not a trading entity for you, so contracts are signed by your home company or a local entity. If the employee habitually negotiates and concludes those contracts, your company may have a permanent establishment in that country. Ask a tax adviser to review the role before it starts, not after the first deals close.
Does using an employer of record avoid permanent establishment?
Not by itself. Permanent establishment depends on the activity carried on for your business, such as a fixed place of business or someone who concludes contracts on your behalf, not on which company runs payroll. An EOR is a sound route for staff whose work does not raise that question, such as engineers serving the home company, but it is not a tax shield.
Is a branch cheaper than a subsidiary?
Sometimes to set up, rarely in total. A branch avoids a separate company's governance, but it still registers locally, files returns and is generally taxed on profits attributable to it, and the parent carries its liabilities without limit. Whether that trade suits you depends on the activity, the regulator's expectations and how long you plan to stay, so ask local counsel to compare both.
Can we keep some staff on an employer of record after forming a subsidiary?
Yes, many companies run both for a period, for example keeping a few staff in a second country on an EOR while the main market has an entity. Within the same country, running both usually only makes sense during a planned transfer, because two employers for one team complicates benefits, policies and the transfer-pricing picture.
Sources
- Model Tax Convention on Income and on Capital: Condensed Version 2017 — OECD · checked 10 October 2026
- Geographic Expansion: expansion sequence, adviser coordination and support options — ColdAI