Hiring your first people abroad: contractor, employer of record or subsidiary?

A company's first hire in another country is usually urgent: a strong candidate, a customer in the region, a founder who has moved. There are three common ways to engage them: as an independent contractor, through an employer of record, or by setting up a local subsidiary. Each carries a different mix of cost, speed and tax risk, and the right answer usually changes as the team grows.

Contractor

Engaging someone as a contractor is fast and cheap to administer. The risk is misclassification. Each country applies its own tests, typically asking whether you control how, when and where the person works, whether they are integrated into your team, whether they work only for you, and who bears the financial risk. A full-time developer using your tools, attending your meetings and working for no one else looks like an employee in most countries, whatever the contract says. If the arrangement is recharacterised, the company can owe back employer social security, penalties and interest, and the person may gain employment rights. In the UK, the off-payroll working rules add a further layer for medium and large clients.

Employer of record

An employer of record is a provider that employs the person locally on your behalf, runs payroll and handles employment law, in return for a fee. It removes most of the misclassification risk and can be in place within days. It does not solve everything. Your company may still have a permanent establishment in that country, and therefore owe corporate tax there, if the person habitually negotiates and concludes contracts for you, or works from a fixed place that is at your disposal. Seniority matters: a country manager signing deals is a very different risk from an engineer writing code.

Subsidiary

A subsidiary is a local company that employs the team directly. It costs more to set up and run: incorporation, a local bank account, bookkeeping, statutory accounts, payroll and corporate tax filings. In return it gives a clear structure. The subsidiary is usually remunerated on a cost-plus basis for the services it provides to the parent, and pays tax locally on that margin, which contains the permanent establishment question. It also allows equity plans and local benefits to be run properly.

Planning the path

A common and sensible route is to use an employer of record for the first hires, with roles designed so that no one abroad concludes contracts, and to set up a subsidiary once the team, or the commercial activity, justifies it. What causes trouble is drifting: a contractor who becomes full-time and indispensable, or a salesperson who starts signing deals, without anyone revisiting the structure.

Before you sign

• Before signing a contractor agreement, test the real working relationship against that country's employment status rules.
• Before signing with an employer of record, check what the role involves and whether it could create a permanent establishment.
• Agree who can negotiate and sign contracts on the company's behalf, and write it into job descriptions.
• Check where the person will actually work, including from home, and for how many days.
• Plan how equity or options will be taxed for someone employed abroad.

If you are about to make your first hire in a new country, call us before you sign the offer letter. The first 30-minute consultation is free, and every request is answered within 24 hours.

General information, not advice. Tax rules change and depend on your facts. Greyridge Global coordinates and delivers cross-border tax and corporate work through appropriately licensed professionals in each jurisdiction. Legal, tax, immigration, fiduciary, and regulated services are provided by qualified advisors engaged for your matter. Nothing on this page is tax or legal advice.