Top 5 Hidden Costs of Setting up A Foreign Subsidiary
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- Businesses often need to pay more attention to the substantial ongoing costs of managing international employees' payroll, which can be significantly higher than the payroll cost in their home jurisdiction due to varying local payroll laws, currency conversions, and exchange rates.
- Businesses must also factor in the ongoing costs of building and maintaining an HR, finance, compliance, and legal team to support employees hired through their own entity abroad. This can be a significant expense, especially for businesses operating in multiple countries with varying labor laws.
- Suppose a business closes or downsizes its business operations in a foreign market. In that case, it may incur significant exit costs, such as the cost of dissolving the entity and paying severance packages to employees, as well as a massive drain on management time and attention.
Forming a new foreign subsidiary or local business entity involves various upfront costs, such as paying setup fees, hiring legal and international expansion experts, and meeting minimum capital requirements for incorporation. The initial one-off set-up costs for these services and functions typically range from $60,000 to $120,000 or more.
However, many business owners are often caught off guard by five additional hidden costs associated with entity formation and management, which we’ll expose in this article.
1. Ongoing global payroll costs
Businesses often overlook the substantial ongoing costs of managing international employees' payroll. These costs include staying abreast of intricate payroll regulations concerning minimum wages, overtime pay, social security contributions, and local tax withholdings, which can vary significantly from your home jurisdiction.
In addition to regulatory and governance compliance, businesses must also factor in the cost of the administrative complexities of payroll processing, which includes calculating salaries, withholding taxes, issuing payslips, managing deductions, and ensuring timely payments. These tasks can be overwhelming, especially for businesses operating across multiple countries with varying currencies and exchange rates.
Unless you're planning to build or train an internal team on local payroll laws, available payment methods, currencies, exchange rates, tax regulations, rates, and deadlines, international businesses typically outsource their payroll function to a local payroll provider.
Running payroll through several local providers can get complicated if you operate in multiple countries. Another option is to hire a payroll aggregator that uses external third-party partners to process payroll locally. However, this often leads to low-quality support and multiple touchpoints.
A far more cost-effective solution is to use an employer of record (EOR) with global payroll capabilities. EORs like Deel can help you hire and run payroll in 100+ countries for a yearly cost of $7,188 instead of paying between $56,000 and $65,000 per year doing it yourself.
Take Clara, for example:
How Clara saves thousands of dollars per month with Deel’s EOR
Clara simplifies managing business expenses with an integral solution composed of corporate credit cards, a payment product, and a digital expense control platform.
Clara was founded during the pandemic in a virtual and remote work environment. From the beginning, they knew that talent isn’t tied to location, so they needed a solution to offer that same flexibility—without so many complications.
With Deel, Clara has opened themselves up to the possibility of savings at scale. Carolina Astaiza, Global People Director at Clara, explains:
”For global payroll, you would need a minimum of one software and one collaborator per new country; this, on average, would cost us about $2,000 USD per month. Deel gives us economies of scale because it allows us to hire talent without additional costs,” she said. “Also, those $2,000 USD are not fixed; as the operation grows, that number grows.”
With Deel, Clara’s operating costs remain the same as they grow, never incurring exponential expenses.
Read the full case study.
2. Ongoing HR costs
Many companies underestimate the expenses involved in building and training an internal HR team to onboard and support local employees hired through their own subsidiary company abroad.
While your existing HR team may be proficient in handling HR for employees hired in your home country or jurisdiction, expecting them to manage HR for employees hired through your new foreign entities is unrealistic since the laws and regulations pertaining to hiring and onboarding can vary significantly from country to country.
HR teams must be prepared to handle international employment contracts, worker classification, compliant onboarding and offboarding, compliance documentation, conduct work authorizations, benefits administration, and background checks in line with local laws and regulations.
The alternative approach is to outsource HR tasks to local providers. However, this approach still requires additional resources and investment since you may need to find a new provider for each separate entity you open.
By partnering with a global EOR, you can keep a low headcount, reduce the administrative burden on your existing team, and grow your company through global hiring without managing multiple HR and payroll systems.
EORs like Deel have 200+ local HR and legal experts on standby, ready to onboard and support your global hires.
Take EasyBroker, for example:
How EasyBroker saves 52% in fees when hiring with DeelEasyBroker makes buying or renting a home easy with digital optimizations, customizable designs, advanced searches, and everything you need to find your new home.
Being a US company, EasyBroker used outsourcing services to hire in Mexico, but employment laws passed in 2020 made this process more difficult. After dealing with long, tedious, and bureaucratic processes for hiring, onboarding, offboarding, payroll payments, and more, they decided to look for a legal and global solution.
"Onboarding a new team member used to take two weeks. Now, with Deel, the process takes less than two hours,” said Rodríguez León, Operations and People Coordinator. “The whole payroll process used to take three to four days. With Deel, it only takes me 10 minutes; plus, I can upload bonuses with a click. The platform is easy to use, both for hiring and for payments, and the quality-price ratio was a plus."
With Deel’s easy-to-use platform, EasyBroker has simplified its processes, saving them 52% in fees and 50% in onboarding time.
Read the full case study.
3. Ongoing compliance costs
Managing entity compliance for an organization is a crucial task that demands continuous investment to navigate changing regulations.
The responsibility to ensure compliance falls entirely on the local business, requiring oversight from in-house experts or outsourced counsel, which can be pretty expensive, costing hundreds of dollars per hour or thousands per month on retainer.
However, one of the most significant hidden costs arises when an entity fails to classify workers correctly, overlooks a change in local labor laws, or misses an expiring visa or work authorization, leading to costly lawsuits, penalties, and reputation damage, typically costing 2.71 times more than maintaining compliance.
EORs provide client companies with built-in compliance management and in-house expertise. Deel’s EOR comprises over 200 legal experts who proactively stay on top of regulatory compliance to reduce compliance risks.
Deel is also the only EOR provider on the market that uses continuous monitoring through its Compliance Hub to provide real-time compliance alerts for 150 countries, enabling you to stay aware of your compliance status while you confidently hire and manage workers across the globe.
Take SiteMinder, for example:
How SiteMinder confidently expanded in global markets while staying compliant with DeelSiteMinder has become the world's leading open hotel commerce platform, designed for hotels and accommodation providers to sell, market, manage, and grow their businesses. Headquartered in Sydney, Australia, SiteMinder is a global company with offices in Bangkok, Barcelona, Berlin, Dallas, Galway, London, and Manila.
However, with so many employees working around the world and new offices in the works, ensuring compliance with local employment and tax laws was a constant challenge for SiteMinder. As a publicly listed organization, it is subject to stringent audit and regulatory compliance standards, which made it even more challenging.
To address these challenges, SiteMinder made an easy decision by picking Deel.
"Choosing Deel was an easy decision; the platform simplifies SiteMinder's global compliance and provides the scalability needed to be globally consistent with its HR operations around the world," said Bec Donnelly, Vice President of People at SiteMinder. “Transitioning to Deel has saved us approx 2-3 days per month in administration time and costs. We used to have multiple people across the globe trying to coordinate and diagnose issues or run manual processes. The time saved includes multiple salaries and productivity time."
Read the full case study.
4. Exit costs
After many months of navigating the setup process and spending between $60,000 to $120,000 on entity setup, the prospect of tearing down your foreign entity is likely a bitter pill to swallow. However, with global business failure rates ranging from 20-40%, this cost is worth considering.
Dissolving an entity can involve long legal processes and financial implications. For example, it takes at least three months to dissolve a company in the UK, not including any preparatory work. The cost of closing a limited company in the UK can vary considerably depending on your circumstances. Striking a solvent company off the company house register will cost you a £10 admin fee, but liquidating an insolvent company can cost £4,000 or more.
However, when you hire through an EOR, the arrangement is much more flexible, so it’s often a much better option for companies looking to test the particular market before putting down more permanent (and costly) routes.
While the cost of EOR services varies depending on the provider, the upfront costs are typically low as no entity setup fees are required. Instead, EOR platforms usually charge an annual service fee per employee. These fees are typically more predictable than entity management fees, which can vary based on the business structure and regulatory requirements.
Should you decide that a particular market isn’t working out, you can quickly and painlessly exit the EOR arrangement without incurring any fees or use it to transition seamlessly into another market with more promising prospects.
EORs like Deel help you compliantly and sensitively offboard your international employees to protect your company and leave the employee with a good, lasting impression.
Once Deel receives your exit or termination request, we notify the employee and automatically calculate and prepare final payments based on the termination date, local and national labor laws, time off used, and any additional items like severance pay.
Take DevBase, for example:
How DevBase automated 20+ HR processes (including terminations) with Deel API
DevBase is a software development company offering customized software solutions to businesses across industries. The company provides services to clients worldwide with its fully remote working model.
DevBase needed an all-in-one international payment and HR solution to consolidate their international workers' data and automate processes from onboarding and expenses to contract amendments and terminations.
"Having one place for contracts and payments with lots of withdrawal methods was key for us at the time. Then, we discovered Deel has much more power than just that," explains Oscar Mastroberti, Head of Recruiting and HR at DevBase.
Using Deel's API automation, DevBase was able to automate the entire employee lifecycle and save 278+ hours on HR ops and admin tasks monthly.
Usually, HR staff represents 10-15% of the total headcount. But with Deel API's automation, it's different.
"We still are a 5% HR staff company for 130 people right now. That's extremely lean for any company. It's a great KPI that shows us we're extremely productive because of all the integrations we have. Deel played a huge role in this efficiency and productivity we have. All of the validations that the recruiting team used to do, thanks to Deel, are now done automatically." said Mastroberti.
Read the full case study.
5. Indirect costs
When establishing your separate legal entity, remember that the costs involved go beyond just the direct expenses of formation.
Indirect costs can also add up quickly, including travel expenses for meetings with lawyers, accountants, audit and HR consultants, the cost of translating, printing, and shipping legal documents, setting up local bank accounts, and hiring local representatives, not to mention the time and energy you invest in coordinating the entire process over many months.
With an EOR solution, these costs are nonexistent. You simply choose which new market you’d like to build a local presence, source talented candidates, and sit back while our dedicated employee experience teams get to work onboarding new hires, running payroll, administering benefits, drafting IPRs, and everything in between.
Today, Deel is the largest EOR provider, with over 20,000 active full-time employees under 95+ entities. More than 20,000 companies, including big names like Dropbox, Nike, and Shopify, trust Deel with their global team needs.
Take Project44, for example:
How Project44 saves around $500,000 a year since switching to DeelProject44 is a software company on a mission to improve supply chains. Headquartered in Chicago with a global workforce spanning 25 countries, the company takes a global approach to multimodal connectivity to enable supply chain and logistic professionals to track inventory throughout its journey.
Once Project44 began its expansion push, the team concluded there was a need for more efficiency.
“We considered a lot of options, but we chose Deel primarily because of the usage of the platform and secondly because we could tell it was in hyper-growth mode, so it just seemed like a perfect fit that would be able to help us achieve our expansion goals,” Chloe Riesenberg, People Specialist at Project44, explained.
Project44 had a small workforce of independent contractors before partnering with Deel. Now, the company has hired 129 people in 25 different countries. Compared to what the company was paying for other services, with the number of team members they now have, Project44 is seeing savings of over $500,000 each year with Deel.
Read the full case study.
Mitigate hidden costs and manage all entities in one place with Deel
As an all-in-one platform, Deel streamlines compliance with local labor laws, tax regulations, and HR requirements in 110+ countries, reducing the burden of legal and regulatory complexities for global employment and management.
Deel’s EOR pricing structure starts at $599/month and includes:
- Handling local payroll services, benefits administration, taxes, and compliance
- Competitive benefits packages tailored to each foreign country
- Support from 200+ local HR and legal experts
- Full IP protection
- 20+ integrations for HR, Finance, and more
When clients move from the EOR model to owned entities, Deel can continue supporting them with Entity Setup services and Global Payroll. Clients can use multiple Deel services to fit their needs, using the EOR model for some locations and Global Payroll for others, as well as hiring independent contractors.
To discuss your options with an expert, book a 30-minute demo with our team today.