Can an Employer of Record Protect Your Company Against Permanent Establishment Risks?

Triggering permanent establishment in another country comes with significant ramifications. You can become liable for corporate income tax, attendant penalties, interest charges, and additional local tax registration requirements. 

To completely eliminate permanent risk, you’d have to restrict business activities to your immediate jurisdiction—which isn’t conducive to building a global company.

Instead, you can significantly reduce your permanent establishment risk by engaging and paying international workers through a global employer of record (EOR). Today, Deel is the largest EOR provider with over 20,000 active employees under 95+ entities that leverage in-country payroll and employee experience experts.

Let’s look at what an EOR is and how it can help mitigate global expansion risks such as permanent establishment.

What is an employer of record (EOR)?

An EOR—also known as a global PEO (professional employer organization)—enables companies to legally work with international employees without setting up a legal entity in that country. 

The employer of record engages the worker for the client company, ensures compliance according to the local laws and labor regulations, and runs payroll and other HR functions or administrative tasks. EOR services do not include talent pool searches, staffing, or vetting but come into play only when the right candidate is selected. EOR services are not needed for hiring independent contractors.

Employees hired through an EOR will be on the EOR’s payroll, but they’ll work for your company just like any other direct employee. When the EOR onboards the employee, the employee will sign a localized contract with explicit details of their role and responsibilities. 

Employer of record services

Deel’s EOR services cover the following:

• Creating airtight localized employment contracts
• Collecting tax, permit, and compliance documents that are stored in a clean audit trail
• Ensuring you deduct the right amount of payroll taxes, pensions, and other local government fees 
• Distributing payslips and pay in 200+ currencies directly to employees’ bank accounts (or other payment methods)
• Providing employees with competitive benefits
• Protecting intellectual property and employee data
• Taking full legal responsibility for employees
• Managing your global employees’ expenses, bonuses, and time off
  
  

How EORs protect companies from permanent establishment risk

The term permanent establishment (PE) is a tax concept that refers to when a tax agent determines that a business has a steady, continuing, and taxable presence in a foreign country. When a business reaches this stage, it becomes subject to taxation in both its home country and the foreign country.

Every country has specific criteria to identify when business activity stops being sporadic or short-term and reaches a level that will prompt PE and subsequent double taxation.

The standard triggers for permanent establishment are:

• A fixed place of business, address, bank account, or other physical presence
• Revenue-generating activity by employees in a host country
• An adequate time frame to activate PE under local decrees or tax treaties
• Command and control of the employees’ activity by the parent company

Note: Not all business activity in a foreign country will trigger this PE risk, as not all business activities generate revenue. 

To reduce the risk of PE, some companies work with a local legal and tax expert and open a foreign subsidiary in the country of business operations. This presents tax benefits to the company and decreases the risk of PE by ensuring compliance with local tax authorities, as a foreign subsidiary operates autonomously from its parent company, is accountable for its own assets and liabilities, and is considered to be a separate legal entity for taxation and regulatory oversight.

But setting up a local business entity is costly and time-consuming, typically taking between three to twelve months to complete and upwards of $100,000 USD per entity, depending on the location and maintenance costs. The investment involved can hinder your ability to adapt to changing markets and requires an ongoing maintenance burden that distracts you from your core business operations.

Instead, many businesses use an EOR that already has entities in their target country. An EOR like Deel significantly reduces PE risk for their client company as it operates as the legal employer of their EOR employees and provides the following:

• Localized contracts: Deel’s expertise comes from over 350 labor law and accounting partners who ensure your contracts are up to date in every jurisdiction

• Country-specific statutory benefits: Deel’s experts understand the local markets and ensure plans include benefits, healthcare, and perks that meet local expectations
• In-house payroll: Deel has 95+ entities worldwide that are solely owned and managed by Deel, with in-house payroll and legal counsel and no outsourcing to third-party providers
  
  

Localized employment contracts

When you hire an employer through an EOR, the EOR becomes the legal employer of that employee. They take on all legal and tax responsibilities of said employee, including creating compliant contracts, correct employee classification, termination processes, and more, as per local labor laws. 

Local employment laws vary by country and will dictate how you structure your contracts, who you can hire, their legal entitlements, and the type of work they can do. In some countries, laws vary by state or jurisdiction. You can use Deel’s Global Employment Comparison Tool to compare local laws, benefits, holidays, minimum wages, and employee onboarding times across 80+ countries.

Deel localizes each contract to the employee’s local laws, and in-house experts regularly review the contracts to stay ahead of legal changes. Depending on where your employee is located, they will be entitled to specific:

• Mandatory benefits
• Regional holidays
• Leave entitlements
• Minimum monthly income
• Workers’ rights
• Working hours

There will also be specific requirements for payroll taxes, local government fees, hiring documentation (government ID, assessments, data processing agreements), visas, and work permits.

Deel streamlines new employee onboarding by integrating compliance-strengthening steps such as background checks into the process. You can edit, send, and sign localized contracts for employees and contractors in minutes from your Deel dashboard. 

Build the best team, wherever they are.

Hire the right talent for the job based on their skills, not location. See how an EOR makes it possible with this free guide.

Country-specific statutory employee benefits

Every country defines their own mandatory employee benefits that employers must provide employees, ranging from health insurance and employment insurance to social security and workers’ compensation. You can use Deel’s Benefits Tool to identify the statutory, common, and competitive benefits in new markets so you can hire compliantly and stay ahead of the competition.

Deel ensures every employee receives the necessary localized employee benefits along with any optional benefits you would like to provide. Deel’s EOR takes care of global benefits for your team, helping you achieve the following:

• Ensure compliance: Deel ensures your new employees are equipped with the correct mandatory benefits, protecting your business from compliance issues
• Stay competitive: Deel experts will help you build benefits packages that meet (or exceed) local expectations to attract top talent
• Get exclusive plan rates: Deel’s partnerships allow us to reduce costs through group plans and regular market reviews
• Access to HR services: Deel manages everything for you, making HR admin seamless through a platform that combines human resources, payroll, and benefits, all in one place
  
  

Our team will work closely with you to assess how your current benefits can be adapted for each country with localized benefits plans. Or, we can help you develop a comprehensive global benefits strategy that aligns with best practices. Global plans provide consistent offerings across multiple countries, while localized plans are tailored to specific requirements and demands of each country.

All mandatory benefits are covered through Deel’s offerings, and in most countries, clients can also offer employees optional top-up options for healthcare and pensions. Deel supports most other benefits companies already offer their employees. 

Learn more about managing global benefits in Deel’s on-demand webinar. In 30 minutes, Deel's Expansion and Business Operations experts Kate Welsh and Sia Mahajan cover:

• The importance of prioritizing global benefits
• Managing global benefits vs. local benefits
• What to include in global benefit plans
• How to manage global benefits with Deel EOR services
  
  

Cross-border payroll and taxes

When you engage an EOR, they take on the responsibility of managing your international payroll and remitting employer and employee taxes according to local tax laws. Deel’s in-house payroll teams take care of local payroll taxes, payroll processing, withholdings, deductions, contributions, benefits, and additional country-specific requirements.

With Deel, clients can easily make payroll adjustments for employees’ expenses, allowances, or bonuses in the platform, with additional support for off-cycle payments, terminations, and updates. Funding payroll is easy, too—you can make a single mass payment to Deel, and we take care of the rest. Employees receive a direct deposit into their local bank account in their local currency with a full payslip.

Terminations and severance

Global companies must handle severance and terminations according to a country’s local labor laws. Typically, you need to pay attention to the proper termination notice, severance payouts, and managing any accrued benefits like untaken vacation days. Deel manages the entire process to ensure everything goes smoothly.

Bonus: Granting equity to international EOR employees

Can a company using an EOR provide those employees with equity? The short answer is yes, but it depends on the country. 

Because EOR employees are not on your direct payroll, issuing non-qualified stock options (NSOs) is usually the best way to provide additional compensation. In most cases, equity grants to EOR employees will be considered a bonus. Regular employment and income taxes apply and will be calculated based on the local laws of the employee and the type of equity granted. 

An EOR employee’s equity grant can be considered a base for “co-employment” re-qualification of the employees, which can eventually lead to a permanent establishment-related risk. Deel’s legal framework helps mitigate this risk. 

Other options for granting equity to EOR employees include:

• A direct grant from the business to the employee
• Stock Appreciation Rights (SARs) and Phantom Stocks through Deel
• Grants of equity through Deel (NSOs, RSUs, RTUs, Warrants)

Continue reading: Deel Makes Granting Equity to Your Team Easy

Frequently asked questions about EOR service providers

How are EOR services priced?

Common EOR pricing is broken down per month, per contract. At Deel, we provide transparent pricing for EOR services and make getting a quote for additional products like Deel Shield and Global Payroll easy. 

Can an EOR help protect intellectual property?

Since intellectual property (IP) laws vary from country to country, your EOR should have a strategy in place for managing IP rights and be able to recommend local legal counsel to create compliant contracts accordingly. At Deel, we have stringent IP protection clauses built into contracts, which means all IP passes through to you, the customer.

When shouldn’t you use an EOR?

An EOR may not be suitable if establishing an entity in your target country takes less than two months for larger headcounts. If there are clear permanent establishment (PE) risk issues, such as hiring C-level executives, an EOR should not be used. You can use an EOR as a short-term or long-term solution when entering a new region—learn more in the guide to using an EOR for M&As.

How long does it take to hire employees through an EOR?

With Deel, it typically takes three days to hire an employee in another country. Without Deel, that process spans three to five months. You can also implement global payroll in just two to three months with Deel, compared to three to six months via individual entities.

How does Deel compare to competitors?

Learn more about how Deel stacks up against the competition. When comparing potential providers, you can use the EOR request for proposal template to invite potential vendors to create proposals that match your business needs.

Protect your company against expansion risks with Deel

Through Deel’s EOR services, you can tap into a global network of local entities and partners where the legal legwork is done for you, reducing your risk of non-compliance.

You can use Deel’s employer of record to:

• Easy test and expand into global markets
• Hire full-time remote workers without opening a subsidiary
• Ensure compliance with labor laws and regulations in a foreign country
• Eliminate non-compliance and misclassification risks of hiring independent contractors
• Access knowledge and operational expertise you don’t have in-house

Learn more about Deel’s EOR services or book a 30-minute product demo with a Deel expert to get your questions answered.