The Hidden Costs of Owning a Tax Entity Abroad

As companies increasingly look abroad to expand their business and tap into wider talent pools, HR teams must manage employees in different countries efficiently and according to local labor laws. The resources and costs of setting up and maintaining a tax entity abroad can stack up, which is why many organizations are turning to an Employer of Record (EOR) to help avoid this problem.

Challenges of managing a foreign business entity 

Here are the key challenges businesses face when managing a tax entity abroad:

• Compliance risks in navigating different regulations, tax obligations, and labor laws.

• Significant entity set-up and ongoing management costs.

• Cultural differences, language barriers, and communication issues.

• Administrative resource drain of attracting, hiring, and retaining employees in different countries.

• Disparate systems and processes, which make managing people across regions difficult.

• Economic uncertainty, varying market conditions and currency fluctuations.

Why businesses are shutting down their tax entities abroad

These challenges demonstrate the complexity and costs of managing a foreign tax entity. As a result, many businesses are shutting down their entities abroad, especially those with minimal employees in different countries.

Setting up and establishing a foreign tax entity can cost companies thousands, if not hundreds of thousands of dollars.  Added to this  are numerous ongoing costs, which vary significantly, depending on the location, headcount, scope of office sites, and general employee management needs.

Being aware of the hidden costs of owning a tax entity abroad enables businesses to make informed decisions on if it's the right fit for them, and if not, what their alternatives are.

Hidden costs of owning a tax entity abroad that your business should  know about

1. Compliance obligations and global regulatory complexities

Global employment management involves complex regulatory requirements, mainly due to the various legislations and labor laws across numerous jurisdictions. These are also subject to ongoing change, which makes maintaining compliance a huge burden for HR teams. It can be tricky to navigate the complexity of global regulations, local employment laws and tax rules.

Costs include resource time to stay abreast of the latest regulations, software implementation to ensure process consistency, legal guidance, and any costs incurred from non-compliance. Breaches can result in fines, leading to financial and brand reputation loss.

2. Financial and reputational risks

While compliance issues can hit your pocket and damage your company’s reputation, consider all financial and reputational risks when owning a foreign business entity. These risks include:

• Legal costs and fines incurred for any cases brought against your business,

• Economic/political volatility in certain regions,

• Currency fluctuations and inefficient payment solutions,

• Tax liabilities and penalisation if processes are not followed correctly,

• Reputational issues as a result of not understanding cultural differences.

3. Ongoing entity management

Beyond the initial entity set-up, you should consider the ongoing entity management costs. These include location costs like rent, utilities, insurance, and site maintenance, plus the procurement of office equipment and tech solutions.

Beyond the upkeep of your entity, there are administrative and employee-related duties to consider, such as global payroll, employee benefits and other accounting tasks.

4. Local payroll, employee benefits and other HR administration

Local knowledge is key, but many companies don’t have the in-house experience of certain regions. This presents a big risk of falling foul of local labor laws, mishaps with regional payroll requirements, and cultural misalignment.

Resource-wise, there is a significant burden to managing HR responsibilities in multiple countries, running payroll in different currencies, and ensuring your employee benefits programs are diverse and inclusive. Therefore, it’s difficult to keep global entity management cost-effective unless you transfer the responsibilities to an EOR provider.

5. Resource drain and loss of opportunities

An indirect cost of owning a tax entity abroad is the drain on internal resources. Firstly, the training and process alignment needed to hire and onboard local employees and support them throughout their lifecycles. Then consider the learning involved in understanding local regulations and cultural differences, to carry out worker classification, background checks, and other legal requirements.

This prevents your HR team from focusing on other operational needs, which leads to lost revenue opportunities.

You can outsource responsibilities to local HR teams but if you have staff in multiple countries, this can get complicated. Your best solution is a dedicated global EOR provider.

6. Entity dissolution

The final step in foreign entity management is if you need to dissolve a tax entity. ‘Entity teardown’ can take a few months or as much as a year, depending on the country and your circumstances. 

Costs include legal fees, outstanding tax liabilities, compliance filings, and administrative expenses. Then there are potential employee terminations, relocation and contractual obligations. Consider the thousands of dollars spent setting up and managing the entity, only to dissolve it later.

How Employer of Record (EOR) services can help with entity management

Companies looking to expand into new regions or streamline their HR operations are increasingly using EOR services to address key challenges and alleviate the costs of entity management.

What is an EOR services provider?

An EOR service provider is an organization that legally employs your international staff and handles HR tasks in each country, such as payroll, benefits, and compliance. This helps you align with local laws and empowers better global employee experience.

Exploring EOR as a cost-effective alternative to owning a tax entity

Using global EOR services removes many of the costs of establishing and maintaining  a tax entity and eases the burden of countless compliance and HR duties. Many businesses are already making the move to EOR providers, with the global EOR market forecasted to grow from $5.8 billion in 2024 to $8.05 billion USD by 2031.

Key benefits of using EOR services for entity management

Here are the main reasons to use an EOR service provider  instead of managing foreign tax entities:

• Cost savings: Consolidating entities can reduce your headcount, minimize administrative expenses, and increase financial efficiency.

• Dedicated global HR support: Enhance your capabilities with specialized expertise and on-the-ground local knowledge and support.

• Reduced administrative workload: Offload in-country HR admin tasks to the EOR provider to ease workload pressure.

• Enhanced strategic focus:  Entity management time-savings mean that your internal teams can focus on more strategic initiatives and revenue-generating opportunities.

• Fewer liabilities: Shift key compliance and legal responsibilities and reduce the risks associated with global employment regulations.

• Scalability benefits: Simplify global expansion with a centralized EOR solution, allowing you to scale at pace, easily expand into new countries, and attract and retain top talent.

Introducing Atlas

Atlas offers a wide range of EOR services to support businesses with global expansion, talent acquisition, and employee onboarding. We were the first direct Employer of Record and now we’re much more than that.

Atlas helps you hire with confidence in over 160 countries and get to market 82% faster with lower costs. We were recently named global EOR organization of the year in the 2024 Global Payroll Awards.

Why use Atlas’ direct EOR solutions to manage your global tax entities?

We assume the responsibility (and liability) as the legal employer to ensure you comply with local employment regulations and let you focus on growing your business. By using Atlas’ direct EOR solutions, you’ll gain greater flexibility, optimize HR costs, and reduce risks while retaining control of your employees and operations.

Explore our success stories, including our global entity consolidation case study to learn about the impact our experts have delivered.

Here are just a few reasons to use Atlas:

• Expand into new markets quickly and easily

• Ensure 100% compliance with global regulations

• Attract and retain top global talent and become an employer of choice

• Transform your HR team’s operational efficiency

• Hire and manage employees in over 160 countries