Employer of Record: Is it an elegant solution to facilitate an expansion overseas?

Whatever the reason, it will come as no surprise that setting up a business in a new jurisdiction is not an easy task and, with the UK no longer part of the EU, there is less flexibility with travelling and working in the UK from the EU.

What is an Employer of Record, and why is it popular?

An Employer of Record offers a company the option to ‘outsource’ key functions to enable them to focus on implementing their business strategy.

Because an Employer of Record is an entity that legally employs workers on behalf of another business, it is seen as a one-stop shop to manage staff in a location where an employer does not have a presence. Most Employers of Record offer local HR support, which involves putting in place an employment contract, onboarding employees and managing compensation and benefits, as well as payroll services.

And let’s not forget about remote working. Better technology is now available on the market to enable employees to connect and collaborate across borders and put in place an effective remote working experience. Pre-Covid, approximately 6% of employees were working remotely. At the end of 2023, this number increased to 25%.

Permanent Establishment risks

While an Employer of Record can be an attractive solution from an administrative perspective, this arrangement can come with tax risks.

Activities being undertaken by individuals in a jurisdiction for the benefit of a company that is not based in the same jurisdiction can create a taxable presence for that company in the foreign jurisdiction. For example, if an individual is employed through an Employer of Record arrangement and occupies a senior role that involves negotiating and signing contracts from their home, it is likely that their home will be considered an office, creating a tax risk in the local jurisdiction for the company benefiting from their services.

So how should a company proceed?

It is important to consider which activities create a taxable presence in a jurisdiction when deciding whether an Employer of Record arrangement is a viable option.

Once an Employer of Record arrangement is put in place, it is important to monitor the tax risks, especially if activities pick up and more employees are hired. Although cumbersome at the outset, setting up a branch or a subsidiary can be a better long-term solution to manage the tax risks. Not only will a branch or a subsidiary give you more control over how employees are managed but it also helps mitigate other risks, such as rights to intellectual property.

There is never one solution to fit all. The best way to proceed will be driven by what you would like to achieve, both in the short and long term.

Would you like to know more?

If you have any questions about the above or would like to discuss your specific circumstance, please get in touch with your usual Blick Rothenberg contact or Vanesha Kistoo using the form below.