Business expansion approaches: The pros and cons Business expansion approaches: The pros and cons

Business expansion approaches: The pros and cons
11 Aug 2015

If you have found an employee you want to employ or located a business need outside your home country, there are several ways in which you can proceed. John Tinsley, director, Compandben looks at the advantages and disadvantages of various means of international expansion:

Branch or subsidiary formation

Your company can form a branch or subsidiary in the country concerned. It is usually recommended to form a subsidiary rather than a branch because this limits legal liability to the limited company in the country concerned. If you form a branch the head office is technically fully liable.

Advantages

With a branch or subsidiary you can carry out any form of business, employ staff and take out local contracts with suppliers, for example, company cars, offices and mobile phones. Your employee can make decisions, sign deals, offer prices and generally the unit can operate as a profit centre.

The employee will get an employment contract from your company and can be put on the email listings, can work full time for you, is excluded from working for other firms and can be asked to sign non competition clauses. Ongoing costs vary for each country.

Disadvantages

It will normally cost between US$4000 $7000 for a local lawyer to set up a branch. There are some bureaucratic hurdles including getting apostilled copies of certificates of incorporation and passports. In a lot of countries it is required that a local bank account be established which entails bank recommendations.

The local branch or subsidiary is a legal taxable entity. It will be taxed on the profits. The finance department may not relish creating taxable entities elsewhere in the world, subject to tax rules with which they are not familiar. There is a need for quarterly or annual returns and accounts have to be kept and filed with the local country authorities.

In general I would not recommend a branch unless you are planning to expand the operation to 10 or more employees. Interns of employment the local branch is fully legally responsible for the actions of its employee(s) and must employ and terminate staff in line with employment legislation, which may be a lot different to their home location.

Registration as an employer

This is the same as setting up a representative office. The idea is that the head office (or a branch in another country) is registered as a foreign employer with the local social security and for employment tax withholding.

Advantages

No legal or taxable entity is created. There are no accounts to keep. The cost is much lower - between US$250 (Germany for instance) to US$1500 (for example in Italy where there are three registrations with three separate social security organisations).

The employee will get an employment contract from your company and can be put on the e mail listings, can work full time for you, is excluded from working for other firms and can be asked to sign non competition clauses. This is the cheapest solution. Ongoing costs vary.

Disadvantages

The employee cannot sign contracts, issue prices or credit terms without head office approval. Because there is no legal entity established your company cannot take out local contracts for company cars, mobile phones, maintenance, local benefits and insurance.

The employee can have a mobile phone and your company would have to reimburse the costs. The tax authorities MAY claim that the operation is really a permanent establishment and should be subject to taxation like a branch.

But in practice as long as employee income taxes are paid and social security is paid this is unlikely. In 10 years I have only seen this once - in Slovakia - and the company successfully said "no we are not a branch". My comments about having to employ and terminate staff in line with local laws apply too, but in this case the Head Office is legally liable.

Employment through a third party

This is sometimes referred to as a Professional Employment Organisation (PEO). A local company will employ the employee on your behalf.

Advantages

The local company will be legally liable for the employee (although their contract will ensure that any final costs, for example in a termination case, are paid by you the client). The local employer will be able to offer extra insurances and other benefits (although we tend to warn American clients in particular not to be in a rush to offer USA style benefits like private health coverage, 401k, private pension, life insurance as these are not required in the local labour market).

If there are disputes involving the employee it is the local firm's job to manage this - even if you end up paying the bill.

This solution is the one favoured by the ‘social media’ companies and we have a client that employs 400 employees in UK but employs all its staff outside UK using this PEO method, including 27 in USA.

Disadvantages

The authorities may still say that your company is really an employer and that there is a permanent establishment, but in practice your firm is less liable to this approach. The employee may be a little disappointed at getting a job offer from a company he has never heard of rather than your company.

But he will be on your company's emails and will have your company’s business card. This solution will on an ongoing basis be the most costly. Tariffs vary from around 10 per cent of salary and social charges in Portugal to 20 per cent in Japan. There are sometimes minimum charges inserted.

Using a consultant or contractor

Your firm can decide to have the employee work as a contractor or consultant. The employee is paid on presentation of invoice. The invoice will normally cover the employee's salary and the employee and employer social charges payable.

Advantages

Your firm has technically no legal liability. The consultant is liable for his own taxes and social security charges.

Disadvantages

In some countries individuals are very uncomfortable with this approach. They worry that their social security coverage will be lessened and that their health care and state pensions may suffer. British employees are usually quite relaxed about such arrangements but Italians and French are less keen..

There is also the potential problem that may arise if the consultant does NOT fully declare his revenues and pay his taxes and social charges and this is found out by the authorities in the country. They will attempt to get the funds from the consultant, but they may well also decide that he ‘was really an employee’ and therefore will dun you the company deemed to be his employer for back taxes and social security - so you will end up paying twice.

If you do follow this route you should NOT put the employee on telephone lists and mail lists as these will be used as evidence that ‘he was really an employee’. And most importantly, the consultancy contract must say somewhere that the employee may work for other companies at the same time as working for your firm. You cannot say that he must devote himself 100 per cent to your firm because he will then be getting treated as an employee.

This is general advice on international employment expansion and the rules may not cover all countries and legislations.

 

If you have found an employee you want to employ or located a business need outside your home country, there are several ways in which you can proceed. John Tinsley, director, Compandben looks at the advantages and disadvantages of various means of international expansion:

Branch or subsidiary formation

Your company can form a branch or subsidiary in the country concerned. It is usually recommended to form a subsidiary rather than a branch because this limits legal liability to the limited company in the country concerned. If you form a branch the head office is technically fully liable.

Advantages

With a branch or subsidiary you can carry out any form of business, employ staff and take out local contracts with suppliers, for example, company cars, offices and mobile phones. Your employee can make decisions, sign deals, offer prices and generally the unit can operate as a profit centre.

The employee will get an employment contract from your company and can be put on the email listings, can work full time for you, is excluded from working for other firms and can be asked to sign non competition clauses. Ongoing costs vary for each country.

Disadvantages

It will normally cost between US$4000 $7000 for a local lawyer to set up a branch. There are some bureaucratic hurdles including getting apostilled copies of certificates of incorporation and passports. In a lot of countries it is required that a local bank account be established which entails bank recommendations.

The local branch or subsidiary is a legal taxable entity. It will be taxed on the profits. The finance department may not relish creating taxable entities elsewhere in the world, subject to tax rules with which they are not familiar. There is a need for quarterly or annual returns and accounts have to be kept and filed with the local country authorities.

In general I would not recommend a branch unless you are planning to expand the operation to 10 or more employees. Interns of employment the local branch is fully legally responsible for the actions of its employee(s) and must employ and terminate staff in line with employment legislation, which may be a lot different to their home location.

Registration as an employer

This is the same as setting up a representative office. The idea is that the head office (or a branch in another country) is registered as a foreign employer with the local social security and for employment tax withholding.

Advantages

No legal or taxable entity is created. There are no accounts to keep. The cost is much lower - between US$250 (Germany for instance) to US$1500 (for example in Italy where there are three registrations with three separate social security organisations).

The employee will get an employment contract from your company and can be put on the e mail listings, can work full time for you, is excluded from working for other firms and can be asked to sign non competition clauses. This is the cheapest solution. Ongoing costs vary.

Disadvantages

The employee cannot sign contracts, issue prices or credit terms without head office approval. Because there is no legal entity established your company cannot take out local contracts for company cars, mobile phones, maintenance, local benefits and insurance.

The employee can have a mobile phone and your company would have to reimburse the costs. The tax authorities MAY claim that the operation is really a permanent establishment and should be subject to taxation like a branch.

But in practice as long as employee income taxes are paid and social security is paid this is unlikely. In 10 years I have only seen this once - in Slovakia - and the company successfully said "no we are not a branch". My comments about having to employ and terminate staff in line with local laws apply too, but in this case the Head Office is legally liable.

Employment through a third party

This is sometimes referred to as a Professional Employment Organisation (PEO). A local company will employ the employee on your behalf.

Advantages

The local company will be legally liable for the employee (although their contract will ensure that any final costs, for example in a termination case, are paid by you the client). The local employer will be able to offer extra insurances and other benefits (although we tend to warn American clients in particular not to be in a rush to offer USA style benefits like private health coverage, 401k, private pension, life insurance as these are not required in the local labour market).

If there are disputes involving the employee it is the local firm's job to manage this - even if you end up paying the bill.

This solution is the one favoured by the ‘social media’ companies and we have a client that employs 400 employees in UK but employs all its staff outside UK using this PEO method, including 27 in USA.

Disadvantages

The authorities may still say that your company is really an employer and that there is a permanent establishment, but in practice your firm is less liable to this approach. The employee may be a little disappointed at getting a job offer from a company he has never heard of rather than your company.

But he will be on your company's emails and will have your company’s business card. This solution will on an ongoing basis be the most costly. Tariffs vary from around 10 per cent of salary and social charges in Portugal to 20 per cent in Japan. There are sometimes minimum charges inserted.

Using a consultant or contractor

Your firm can decide to have the employee work as a contractor or consultant. The employee is paid on presentation of invoice. The invoice will normally cover the employee's salary and the employee and employer social charges payable.

Advantages

Your firm has technically no legal liability. The consultant is liable for his own taxes and social security charges.

Disadvantages

In some countries individuals are very uncomfortable with this approach. They worry that their social security coverage will be lessened and that their health care and state pensions may suffer. British employees are usually quite relaxed about such arrangements but Italians and French are less keen..

There is also the potential problem that may arise if the consultant does NOT fully declare his revenues and pay his taxes and social charges and this is found out by the authorities in the country. They will attempt to get the funds from the consultant, but they may well also decide that he ‘was really an employee’ and therefore will dun you the company deemed to be his employer for back taxes and social security - so you will end up paying twice.

If you do follow this route you should NOT put the employee on telephone lists and mail lists as these will be used as evidence that ‘he was really an employee’. And most importantly, the consultancy contract must say somewhere that the employee may work for other companies at the same time as working for your firm. You cannot say that he must devote himself 100 per cent to your firm because he will then be getting treated as an employee.

This is general advice on international employment expansion and the rules may not cover all countries and legislations.