Local Entity vs. Global EOR: Which is Right for Your Expansion?

Global expansion no longer revolves solely around building physical assets or manufacturing bases. Today, it’s increasingly driven by the need to hire talent across borders to produce intangible products and services.

This shift has opened up new avenues for businesses and new challenges in managing regulatory complexity, cost, and risk.

When businesses decide to enter new markets, they often face a critical choice:

1. Commit fully by establishing local entities, which requires substantial investment, long-term commitment, and careful planning, particularly when testing new markets. If the venture fails, exiting can be costly and complicated.
2. Alternatively, they can leverage third-party employment services, such as a Global Employer of Record (EOR), which enables agile, low-risk entry into multiple locations without the need for entity setup.

Think of a Global EOR as the shared economy’s solution to global hiring, similar to how platforms like Airbnb allow people to access existing infrastructure without the overhead.

A Global EOR leverages its expertise, legal entities, and established infrastructure across various markets, allowing businesses to “rent” a compliant and ready-to-go global hiring system. This approach gives companies the flexibility to scale, test, and withdraw from markets as needed.

Let’s explore these two strategies more deeply, starting with the traditional approach of establishing local entities to gain full control over operations and market presence.

Establishing Local Entities: A Deep Dive into Full Market Control

In the past, businesses expanding into new markets often had no choice but to establish local entities. This method reflected the realities of an era when economies were more tangible—rooted in physical infrastructure, manufacturing, and the need for face-to-face interactions. Travel, communication, and supply chains were less agile, making it essential for companies to build a permanent, on-the-ground presence to oversee operations and build trust with local stakeholders.

While this approach can be resource-intensive and complex, it is still relevant for businesses seeking full integration within local markets and long-term stability.

Why Businesses Still Choose to Establish Local Entities

• Deep Local Integration: For companies that require close relationships with customers, suppliers, and government authorities, a local entity builds credibility and signals a strong commitment to the market.
• Access to Local Incentives: Governments often offer tax breaks, grants, and subsidies to foreign companies establishing a physical presence. These incentives can offset some upfront costs, making the investment more attractive for long-term strategies.
• Direct Control Over Operations: With a local entity, companies can oversee all aspects of their operations—from hiring to compliance—ensuring they adhere to local laws and standards while maintaining brand consistency.

Curious Fact: Many countries offer attractive incentives to lure foreign investors. In some markets, like Singapore, the UAE, and Ireland, up to 80% of businesses receive tax breaks, grants, and subsidies.

However, the traditional model is tied to a world where physical presence was once critical. Today, with technological advances and the rise of remote work, businesses have more options for global hiring and market entry, reducing the need for costly entity setups.

This approach works well when your business plans to stay in a market for the long term and needs full control over operations, hiring compliance, and local market integration. It’s ideal for companies ready to commit substantially to a specific region, which requires strong, direct engagement with local stakeholders.

The True Cost of Market Exit

Exiting a market is rarely straightforward. Beyond initial investments and day-to-day operations, the decision to withdraw from a region comes with challenges. Liquidating assets, managing severance obligations, and navigating complex tax laws can make the exit process financially draining and administratively demanding.

The hidden burden of market exit often lies in the intricacies of compliance. Jurisdictions with rigid labour laws or punitive tax policies can turn an exit into a prolonged and costly ordeal. The legal and financial responsibilities are extensive, from settling severance payments to dissolving local entities.

For businesses considering a long-term commitment through local entities, it’s critical to weigh the costs of entering a market and the true cost of leaving. Exiting is more than just pulling back operations—it requires careful planning to mitigate potential financial penalties and avoid legal entanglements.

Did You Know? In countries like France and Brazil, strict labour laws can make market exits particularly expensive. For example, severance payments can reach up to 12 months of salary, making it critical for businesses to plan exits carefully to avoid severe financial penalties.s.

Global EOR: A Shared Economy Approach to International Expansion

Just as companies like Uber and Airbnb revolutionised the shared economy by tapping into the latent demand for more flexible access to services, Global Employer of Record (EOR) models have emerged in response to the growing need for outsourced global employment solutions. As businesses increasingly move toward remote work and focus on intangible products and services, the demand for flexible, scalable employment solutions has become more prominent.

The Global EOR model offers an agile alternative for businesses looking to test new markets or expand across multiple regions without the heavy financial burden of setting up legal entities. This model allows companies to hire and manage employees in various countries without local infrastructure.

Just as Uber utilises existing vehicles and Airbnb capitalises on available properties, a Global EOR leverages its own or partner-managed legal entities and local expertise to provide businesses with a fully compliant, ready-to-use global employment infrastructure.

Why Should You Use a Global Employer of Record (EOR)?

A Global Employer of Record (EOR) offers businesses the flexibility to explore new markets with minimal commitment. Instead of the traditional approach of setting up a legal entity in each market, an EOR allows you to test markets, hire talent quickly, and adapt to changing conditions without being locked into long-term infrastructure.

Market Testing Without Long-Term Commitment

Think of the Global EOR model as renting a car before buying. You get to experience the market, build a local team, and gather key insights before deciding whether to fully commit. If the market doesn’t perform as expected, the EOR allows you to pivot and withdraw with minimal financial or legal repercussions. This model is perfect for businesses entering unfamiliar or unpredictable regions with a higher risk of failure or underperformance.

Easy Entry and Exit

With a Global EOR, the barriers to entry are significantly lower. Establishing a legal entity is unnecessary, which means you can enter a market faster and avoid bureaucratic complexities. If the market isn’t right for your business, you can easily exit without dealing with liquidation costs or severance issues typically associated with shutting down a local entity. It’s like living in a rented apartment to get the feel of the place before committing to buy.

Business Transitioning and Scaling

As your business evolves, an EOR gives you the flexibility to scale up or down without long-term commitments. Whether you need to expand into multiple locations simultaneously or transition from one market to another, an EOR acts as a bridge, providing the infrastructure to grow without being tied down. Once you feel confident in a market’s performance, you can transition to a more permanent setup.

Simultaneous Foreign Multi-Market Entry

One of the key advantages of a Global EOR is the ability to expand into multiple countries at once without the need for complex entity setups. You can onboard talent across various regions in a matter of weeks, not months. This is particularly useful for businesses looking to capitalize on time-sensitive opportunities or those testing several markets simultaneously. The EOR’s established infrastructure allows you to enter new markets rapidly, avoiding the delays and costs typically associated with traditional entity setups.

The global employment solution is ideal for businesses with aggressive growth strategies that require rapid market entry across multiple regions or for those looking to test various markets with minimal risk before committing to full-scale operations.

Curious Fact: Payroll compliance violations can be costly. In countries like France and Germany, companies can face fines as high as €300,000 for non-compliance. This highlights the importance of expert guidance when managing international payroll.

Comparing Costs, Time, and Risks: Local Entity vs. Global EOR

When expanding globally, businesses face critical decisions about cost structures, timelines, and the risks of entering new markets. Establishing local entities and leveraging a Global Employer of Record (Global EOR) can facilitate international growth, but their effectiveness depends on the specific market strategy and operational requirements.

The Cost of Establishing and Maintaining Foreign Entities

As covered earlier, creating a legal entity in a new country gives businesses full control over their operations, workforce, and compliance. However, the costs involved—from upfront capital investment to ongoing administrative expenses—are significant. Furthermore, the long timelines associated with entity setup and the complexity of maintaining compliance in multiple jurisdictions can delay market entry and reduce agility.

COST COMPONENT	DETAILS
1. Charter Funds	Employer contributions to social security, healthcare, pensions, and other statutory benefits governed by local labour laws.
2. Entity Setup Costs	Legal fees, registration with government authorities, incorporation paperwork, and other bureaucratic approvals. Costs vary by market complexity.
3. Ongoing Maintenance Costs	Long-term expenses for accounting, annual audits, governance, statutory filings, and board meetings. Recurring costs that depend on local regulations.
4. Corporate Taxes	Country-specific corporate tax rates, with the potential for double taxation if operating in multiple jurisdictions without tax treaties.
5. Employment-Related Taxes	Employer contributions to social security, healthcare, pensions, and other statutory benefits, governed by local labour laws.
6. Legal and Compliance Costs	Costs for legal representation, compliance with local labour laws, tax regulations, and business regulations.
7. Exit Costs	Costs for exiting a market, including liquidation fees, severance payments, and settling outstanding tax liabilities.
8. Post-Incorporation Expenses	Payroll setup, statutory benefits registration, and compliance with data protection laws. These are mandatory costs for operating in a new market.
9. Banking and Financial Setup	Establishing and maintaining a local bank account, including ongoing banking fees. Compliance with local financial regulations may also be required.
10. Audit and Reporting Fees	Ongoing bookkeeping, financial reporting, and mandatory audits. Reporting frequency and complexity vary by country, from quarterly to annual.

Comparing Costs, Time, and Risks: Local Entities vs. Global EOR

When deciding between establishing local entities or using a Global Employer of Record (EOR), the key differentiators often boil down to costs, time to market, and risk management.

Cost Considerations

• Local Entity: Setting up a local entity involves substantial upfront capital—including legal fees, registration, and charter funds. Ongoing costs such as tax filings, audits, and payroll management add complexity. The exit process can also be costly, with potential severance payments, asset liquidation, and tax implications.
• Global EOR: The Global EOR model reduces upfront costs by eliminating the need for entity setup. Businesses pay service fees covering payroll, HR, and compliance, making this a more cost-effective option for companies with smaller teams or those entering new markets without committing long-term.

Time to Market

• Local Entity: Establishing a local entity can take 6–12 months, depending on the market’s complexity. This delays your ability to start operations and take advantage of emerging opportunities.
• Global EOR: Market entry with a Global EOR is much faster—often within a few weeks. This speed is critical for businesses looking to respond to time-sensitive opportunities or those that need to test markets quickly without the burden of local bureaucracy.

Risk Management

• Local Entity: With full operational control comes increased responsibility for navigating local labour laws, tax regulations, and compliance risks. Mistakes can be costly, and exiting a market can involve significant financial and legal burdens.
• Global EOR: The EOR takes on the compliance risks and ensures that all employment laws, taxes, and regulations are handled. This reduces your exposure, especially in unfamiliar or volatile markets. However, relying on an EOR may limit your control over certain operational decisions, particularly in markets where you might eventually want to establish a more permanent presence.

Did You Know? Hiring employees through a Global EOR can significantly accelerate your time to market. A Global EOR can help you cut time to market by up to 70% by streamlining the hiring and onboarding process.

Navigating the Risks of Permanent Establishment in Global Expansion

While expanding your business globally offers exciting opportunities, it’s crucial to understand the concept of Permanent Establishment (PE) and its potential tax implications. A PE is a fixed place of business through which a company conducts business in a foreign country. This can trigger corporate tax obligations in that country, even if your company isn’t formally incorporated there.

How Does PE Risk Apply to Different Expansion Strategies?

Establishing Local Entities

Creating a local entity, such as a subsidiary or branch office, inherently creates a PE. This means your company will be subject to corporate taxes in the foreign country. While this is expected with a formal presence, careful tax planning and compliance are essential to optimize your tax liability and avoid penalties.

Using a Global Employer of Record

A Global EOR can help mitigate PE risk, as the EOR becomes the legal employer of your workforce in the foreign country. However, it’s important to remember that your company’s activities can still trigger PE status. Factors such as:

• Employees with significant decision-making authority: If your employees in the foreign country have the power to conclude contracts on your company’s behalf, it could create a PE.
• The nature and duration of your activities: Conducting core business activities like sales, marketing, or manufacturing for an extended period can also lead to a PE.

Understanding and managing PE risk is crucial when choosing your global expansion strategy. By carefully structuring your operations and seeking expert guidance, you can minimise your tax liabilities and ensure a smooth and successful expansion.

Curious Fact: The Global EOR market is experiencing rapid growth, with an estimated annual growth rate of 15%. This surge in demand reflects the increasing need for agile and compliant solutions for managing international workforces.

Checklist for Choosing Between a Foreign Legal Entity and a Global EOR

1. What are your long-term goals in the target market? Are you aiming for a permanent market presence or simply testing the waters?
2. How much control do you need over your operations?
   Do you require direct oversight of all functions, or can payroll, HR, and compliance be outsourced?
3. What is the complexity of local labour and tax laws?
   Would handling local compliance be too resource-intensive, or could a Global EOR navigate this more efficiently?
4. How quickly do you need to enter the market?
   Is rapid entry critical to your strategy, or can you afford the time it takes to set up a local entity?
5. What is your budget for expansion?
   Can you manage the higher costs associated with establishing and maintaining a local entity, or does a Global EOR fit better within your financial limits?
6. What workforce size are you anticipating in this market?
   Will you need a large team to meet local demand, or will you start with a small, agile workforce?
7. What’s the risk of market failure or underperformance?
   How much would it cost to exit the market if your expansion does not go as planned—especially when comparing the costs of dissolving a local entity versus ending an EOR agreement?
8. How important is flexibility in scaling your operations?
   Will you need the ability to scale operations up or down quickly based on market demand, and how does each option impact that flexibility?
9. How important are local tax incentives or subsidies?
   Are there significant tax advantages or government incentives only available if you set up a local entity?
10. What are the ongoing administrative and compliance costs?
    Can your company handle the long-term administrative burden and compliance responsibilities of maintaining a local entity?
11. How flexible does your market entry strategy need to be?
    Do you need the option to scale quickly and adjust your presence based on market performance, or is your commitment long-term?
12. How will local tax regulations affect your operations?
    Are you prepared for the complexities of local tax filings, corporate taxes, and potential risks of double taxation?
13. How important is your brand’s local market perception?
    Will having a local entity improve your brand’s credibility in the market, or can you operate effectively without this?
14. How important are direct government relations or incentives?
    Will setting up a local entity give you access to grants, programs, or other government-led initiatives that would benefit your expansion?
15. How complex is the process of exiting the market?
    Are you prepared for the costs and legal steps of liquidating a local entity, or would the easier exit offered by a Global EOR better suit your risk tolerance?

Conclusion

Global expansion strategies have shifted dramatically. Businesses once relied on setting up local entities for complete control and integration into new markets. While that method still has value, the demands of modern globalisation call for greater flexibility. The Global Employer of Record (EOR) provides a newer alternative, helping companies navigate complex regulations while staying agile in fast-changing markets.

The best path forward depends on your business’s specific goals, market conditions, and capacity for adaptation. By weighing these factors carefully, you can choose a strategy that supports your growth in an increasingly interconnected global market.