Could your global payroll process benefit from the use of a PEO?
A number of multinational businesses, for a variety of reasons, need to employ people in a different country, but don’t have or are not yet ready to set-up an entity there.
Establishing an entity abroad can take time, will likely be costly and will require a lot of administration and include the need for a local bank account and a registered business address. Then, once set-up, a local entity will become liable to corporate taxes and annual filings. But, what if, after all that, the parent company decides it does not want to continue to operate in that country?
What are the options at the outset to avoid such global payroll processing predicaments? Recently a popular option for many companies is to turn towards an international Professional Employer Organisation (PEO).
The PEO concept is seen as a relatively quick cost solution and entails the practice of outsourcing payroll and employee benefits to a local third party organisation.
This idea originated from the USA to service non-USA organisations looking to set up operations there. Naturally, this concept developed and became recognised and from this PEOs started to be established in other countries. One consideration however is that employee benefits are not a big requirement outside of the USA but the ability to employ and pay individuals in full compliance with local regulations is.
Choosing a solution to your global payroll process that is right for you
Such a solution for clients with no local entity already existed outside the USA as an “Employer of Record” (EoR) service – when a local provider hires the client’s employee as a service purely in order to compliantly pay them along with any payroll taxes and social insurance deductions. Meanwhile, the individual performs day to day functions for the client company.
This provides a compliant payroll solution without the need to establish a local entity. EoR solutions also ensure that any contract of employment is locally compliant.
However, certain criterion needs to be adhered to, otherwise local authorities will “see through” the EoR (or PEO) arrangement as a way round having to set up a Permanent Establishment (PE) and all the costs and regulations that go with that.
As such, if an operation is deemed a PE, the authorities will require the company to establish a local entity (e.g. a subsidiary or branch).
The PEO and EoR solutions have become synonymous as largely the same thing when a client requests a PEO abroad. However, whenever a client requests a PEO or EoR, expert advice is needed when considering an appropriate and compliant solution. For example, if a client aims to just market in the country, a PEO or EoR is acceptable. An example of when a PEO might be useful is in countries where international corporations, such as in the energy or engineering sectors, enter more remote locations such as the nations in West Africa for short-term projects or to test the market.
However, a PEO or EoR is deemed inappropriate if the client intends to sell and sign contracts in the country, as local authorities will likely deem this as a PE. It is essential therefore to be familiar with the local regulations around PEs, PEOs and EoRs.
A PEO / EoR solution is considered cost-effective when compared to the set-up cost and ongoing costs of establishing an entity (PE) in a country. But, when compared to outsourcing payroll to an in-country provider (ICP), this solution tends to be relatively expensive.
This is because a PEO/EoR typically charges a percentage of the cost to employ – that is the gross compensation, including commissions, bonuses plus any employers’ on-costs, such as employer social insurance contributions or any mandatory statutory pension contributions – whereas an ICP tends to charge a flat rate per cycle.
However, in some countries there is an alternative solution whereby payroll can be outsourced to a local ICP when a client has no entity, which can more cost effective than a PEO/EoR.
In Europe, for example, it is possible to hire local employees, without having an entity via a structure known colloquially as a Foreign Non Resident Employer (FNRE), which can be as effective as a PEO/EoR, but lower cost. An FNRE can be run in the same way as a local payroll. The parent company can register for payroll purposes in, for example, Spain. In Spain a no residente sin Establecimiento permanente (FNRE) requires Certificado de Identificación Fiscal (CIF) registration. In France, the FNRE is known as Entreprise Sans ÉtablissementEtablissement en France (ESEF). In Norway, a similar concept is via a Norwegian Registered Foreign Company, Norskregistrert utenlandsk foretak or NUF.
It must be stressed again that be it a PEO/EoR or an FNRE or equivalent, these are all short-term, non-permanent solutions and do not circumvent the local regulations regarding being considered a PE.
However, they can be an ideal vehicle, for example, to test a foreign market before deciding to commit to setting up a PE there – or if there is no intention to do business and sign contracts there.
Either way, Global EMS is happy to guide you through the options to ensure you have a compliant solution. Contact us today on – firstname.lastname@example.org