Recorded on 15th September 2020. (UnaTerra regularly hosts webinars on a range of international expansion topics – to sign up for the next one, visit our Webinar page.)

Video synopsis

There are a lot of options to consider when hiring outside your home country, and choosing the right one can seem overwhelming. We hosted a half hour webinar where we discussed what to consider when hiring internationally.


Hello and thank you for joining our webinar on international hiring. My name is Andrew Laing I am a business manager with UnaTerra. At UnaTerra, we help organisations expand internationally by managing the back office and business services that are necessary for operating in different international contexts. This includes HR, payroll, entity establishment, compliance and benefits implementation. UnaTerra is able to provide support for a diverse range of facets involved in managing business abroad. We are going to talk about the mechanisms that are available to you when hiring people in other countries. This will include a discussion of the types of costs related to compliance exposure and the scenarios in which each mechanism may be applied.

What follows is a brief overview of what will be covered during the webinar. We will start the presentation by talking about the different options that are available to you. This will include topics such as engaging with talent, recruiting contractors or full-time employees, and assessing which options will be the most appropriate for your particular business activity. For example, this may include factors such as generating revenue, R&D, compliance and recruiting support staff within a particular country. When addressing compliance exposure, we will examine the advantages and disadvantages for each mechanism and how these mechanisms interact with different international governments. This will also include a discussion of the approximate costs, which will vary, depending on the country you are recruiting in.

International hiring options: What solutions are available to you when working in other countries?

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Mechanisms for hiring international employees

Hiring as contractors

It is common practice for a business to hire contractors in other countries. Although recruiting in other countries is relatively uncomplicated, we at UnaTerra, often do not recommend this solution as it can raise compliance and litigation concerns. This form of recruitment does not always generate a productive employer-employee relationship.

Employer of record

The term Professional Employer Organisation or PEO is a popular option in the US. In the US, PEOs recruit employees through what is termed co-employment. However, internationally, PEOs often do not use co-employment and instead utilise an indirect employment mechanism. In practice, this means the PEO is hiring the employee and contracting them back to your business for a monthly fee.

Direct employment

Direct employment occurs when a business has a payroll registration, or a legal entity established within a given country and employees are hired directly through these mechanisms. Although this can create further administrative tasks it is the most compliant route for a business to undertake.

Permanent Establishment Risk: An important concept

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Before we examine the details of each employment mechanism, we will first address the concept of permanent establishment risk. If you have attended previous UnaTerra webinars you may be familiar with this concept. It is an important concept to understand when employing people in other countries and can be particularly relevant for certain types of business.

Permanent establishment risk

A permanent establishment risk is essentially a tax risk in a foreign country, and this can be influenced by a number of factors. These factors can include the type of business being conducted as well as the specific type of employees you may be recruiting within a different country. There are three criteria when assessing permanent establishment risk.

Commercial activity

Any commercial activity, such as generating revenue. A specific example of commercial activity may include employing sales staff within a different country. However, in certain cases this may also include R&D activity, specifically, if this activity contributes to intellectual property and generates revenue for the company. In certain, but not all circumstances, these activities may present as permanent establishment risks. These factors are important to be aware of and can be mitigated by working with an advisor who can provide effective advice on these issues. 

Senior management activity

If you have senior management operating in another country, such as at director level, this can create permanent establishment risks even within a zero-revenue market.

Fixed place of business

Fixed places of business can also generate permanent establishment risks. If employees are conducting business in a fixed location this can cause governments to regard office spaces as permanent establishments and a form of tax nexus.

This is intended as a general overview and different circumstances can create variations of permanent establishment risks; there are also various mechanisms for mitigating these risks. I will now introduce Julian Christmas, our Chief Revenue Officer, who will discuss the different employment options which are available.

Hiring international contractors

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When we were thinking about the subject matter for this presentation, we were aware that there has been an increase in clients, or prospective clients, who have regretted engaging contractors in other countries. Although the process is inexpensive, and relatively administratively direct, this activity can represent a false economy. This is because the intention behind recruiting contractors is to engage them as employees. This poses the question; when is it right to hire someone as an independent contractor?  

Independent contractor arrangements are often part time roles which are generally appropriate for short-term projects. Issues can arise if you have an employment relationship with a person who is not technically an employee. This could be described as an issue of substance over form. For example, the substance of a relationship may be an employment relationship whereas the legal form this takes is of an independent contractor. Therefore, it is important at the outset of recruitment to understand whether the terms of engagement are intended to be an employment relationship or not. If the terms of employment engagement are open-ended and full time, then it is not an independent contractor form of employment. Also, if you intend to provide PTO or holiday allowances, employment related benefits, or stock options, then this would be an employment relationship. Businesses need to distinguish between circumstances when it is appropriate to hire an independent contractor and when it is unsuitable. When it is not appropriate to hire an independent contractor, it is based upon the intention behind the engagement and the nature of the relationship. If you do engage international contractors, it is important to do so in line with a HQ contractor template. Regardless of the country that the contractor is operating in. Our guidance would be to avoid localising agreements and use standard documentation which will support the notion that they are independent contractors.

In order to safeguard your business, you can ensure the contractor operates through their own personal service or limited company. This will create a degree of corporate separation which will reduce the chance of contractors misinterpreting their employment relationship with the business.  


Some advantages of engaging international contractors are it’s quick to hire and relatively cost effective. Once a contractor is engaged under an agreement you can then utilise talent who will then provide invoices for their time.


Independent contractors can have limited application. There is also potential for liability, both on the part of the company, and the individual contractor. This issue is typically related to contractors not managing their tax’s correctly, or either the contractor or company not maintaining compliancy. Unfortunately, tax authorities will always pursue the company before the individual in relation to compliance.

In terms of permanent establishment risk, I often have conversations with people who think that because a contractor does not have a strong relationship with the company there are no permanent establishment risks. If you have a contractor in another country, who is operating in a sales capacity, this will create a permanent establishment risk for your business. It is important to consider that any activity in another country, whether it is through a contractor, employee or on a PEO arrangement may create permanent establishment. This can expose your business to local, corporate, or other forms of taxation.

International Professional Employer Organisation (PEO)/Employee of Record (EOR)

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PEOs are third party organisations who will employ people locally on your behalf. They maintain an employment relationship and your business has a commercial relationship with the PEO/ EOR. The concept is generally well known within the US. However, it is sometimes mistakenly assumed that PEOs function in a similar way outside of the US. In the US they function through the concept of co-employment which is a concept that is not often used internationally. At UnaTerra, we recommend PEOs and we recognise that it is an excellent solution in some circumstances.


PEOs can facilitate immediate entry into a market. For example, in Brazil, the start to finish process can take up to six months. That means it’ll be six months before you can hire your first employee. PEOs can give you almost next day hiring capabilities. This can give your business an important advantage, particularly in complex markets where hiring your first head count can be expensive and take a considerable amount of time to achieve. If you wanted to access complex markets such as Brazil, Russia and China utilising PEOs could be a good solution.

Administratively, they will provide an employment contract, manage benefits and onboard the employee on your behalf. Your business will be charged for the employment with an additional PEO fee. In terms of upfront costs, the PEO solution is relatively inexpensive and fast.


There are aspects which are ambiguous from a compliance perspective. Although they provide compliance within employment law there are some complexities in some areas, such as stock options. Providing stock options for people who are on PEO arrangements can be complicated. It can be difficult to maintain compliancy with stock option legislation if an employee is not your own employee. Further to this point, tax advisors have anecdotally expressed that large gains in other countries can be processed through payroll. For example, in the UK stock option exercises can result in large gains that are processed through PEO providers. These providers usually charge a percentage of gross payroll amounts. This can result in an increase in PEO costs due to the increased earnings from stock option gains.

Another factor to consider, is that, from the perspective of corporate culture, PEOs can create other issues. For example, employment through a third party can make it difficult to provide specific types of benefits as they are usually set by the PEO. This can make it difficult to tailor benefits to your employees.

We have heard from recruiters that in some countries there is an increasing reluctance to recruit people through the PEO model. This is because it can demonstrate a lack of commitment towards a new market.

In certain situations, it’s a great solution. It’s good for hiring people immediately and in the longer-term other solutions can be implemented, which makes it a great interim solution.

Direct employment (no legal entity)

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This is a direct form of employment relationship. There is a common misconception that having an employee inextricably links your business to a legal entity within a country. We often hear that people choose different solutions such as a PEO or independent contractor to avoid creating a legal entity. It is not the case that you need to have a legal entity in order to employ someone in another country. At UnaTerra, a large proportion of the work we do is setting up employment arrangements and payroll registrations. So, that clients can hire people in different countries without the need for establishing legal entities. We do this by taking a non-resident company, this could be a US parent company or foreign subsidiary, and then registering it for payroll taxes and social security. This creates a confined payroll which allows businesses to compliantly employ people and provide benefits. This solution is quick and low cost. This is particularly true for businesses with a low head count, between four and five people. However, this does not mitigate a business from permanent establishment risk. It can be difficult to navigate the risk of permanent establishment versus the cost of setting up a legal entity. If a market proves to be successful, then in due course, a legal entity will be established.

Although this solution is not available everywhere, most European countries will allow businesses to hire people without establishing a local legal entity. This is also the case in Canada, Australia and many Asian countries. This solution is not available in the US, South America and China. However, depending on the market which you intend to do business in this solution can be effective and efficient.

Direct employment (with legal entity)

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Direct employment with a legal entity is what people most often associate with large sales and marketing activity. The advantages to this are being fully compliant and maintaining direct employer-employee relationships. Legal entities allow you to apply for visas and transport people from other countries; this is a common path for clients to follow. This route also allows businesses to take advantage of tax incentives. For example, if you are a company in the US and you would like to do R&D outside of the US, Canada has a generous tax credit scheme. This is also the case in the UK, Australia and most other countries.


It can be costly to set up legal entities. It also increases the pressure on administration. It is not advisable to set up a legal entity for one person but occasionally it is necessary. We have clients who have placed senior executives or founders in different countries. At the executive level you need to employ people through a legal entity because decision making at this level can create permanent establishment risks.

Compliance exposure

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We will now look at compliance exposure for each option and its associated protection for each arrangement.

Independent contractors

If you hire independent contractors, you cannot create any sort of compliance in the country; you will not be compliant with employment law or be able to offer any benefits. It will also not give you any protection from permanent establishment risk. You can’t get visa sponsorship and it’s not compliant with stock options.


The key thing is compliance with employment law. This is important because you want to create a compliant relationship with the employee. However, this can prevent you from offering the flexibility of benefits. Again, you will not get protection from permanent establishment risk through the PEO model. Generally speaking, you can’t get visa sponsorship, so you can’t transfer somebody overseas. It is not compliant with stock options.

Non-Resident employer/Direct employment

Whether you have a legal entity or not, you can be compliant with employment law. You can also offer competitive benefits and maintain compliancy with stock options. The legal entity provides various functions that a simpler payroll registration will not. The first is protection from permanent establishment risk and the second is the ability to sponsor visas.

I am just looking at one of the questions which is relevant to this topic. The question is, ‘how does direct employment deal with a PE risk with a legal entity?’ Essentially, creating a legal entity allows you to govern your own tax position and tax exposure. If you do not have a legal entity you will not have a corporate tax registration. If there is any exposure as a result of permanent establishment, then tax authorities are able to opine unchallenged because they are looking at an issue of non-compliance. If you have a legal entity, then you can use transfer pricing. Cost plus is a concept which protects your business from permanent establishment risk by conceding that there is some local revenue with a small amount of tax being paid. Having a legal entity and transfer pricing allows a business to control their own tax exposure. In this scenario tax authorities are not able to opine unchallenged because there is a legal and tax structure in place; this gives a high degree of protection.


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Independent contractor

These arrangements do not incur any costs.


These are inexpensive in terms of the initial set up, although, the monthly costs can be high. On a per person basis, this could be $2,000 to $3,000 per month. If you have one employee within a market the cost can perhaps be between $25,000 to $37,000 just in PEO fees. If you had three employees, you would multiply that figure by three. As an employer this can become expensive.

Non-Resident employer/Direct employment

This is employing people without a legal entity.  The set-up cost can be modest. Monthly costs are also modest and your compliance borders on being non-existent. With one employee your year one cost could be between $4,000 and $9,000 depending on the complexity of the country. By year two these costs could be between $3,000 and $6,000. With three employees it is slightly more expensive but only by a small amount. For example, again, depending on the complexity of the market, this figure could be between $6,000 to $13,000.

Subsidiary/Legal entity

Set up can be more expensive; monthly costs such as accounting, VAT compliance, GST compliances are also more expensive in this scenario. Annual compliance can also become an issue. The year one cost for one employee can be between $20,000 to $40,000 which is a similar cost to a PEO with one employee. However, if there were three employees, subsidiary costs can be higher, between $25,000 to $50,000.

Beware the Contractor Trap!

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Based on my experience of working with many different companies the contractor trap is a situation in which companies engage contractors because they are immediate and inexpensive. Although this can be effective for a period of time, after a year, new decision makers or tax advice may require your business to regularise their employment. You can then be caught in a trap in which a contractor, who will have a beneficial tax position, will want your business to pay more than you may be willing to pay them. If you reach an impasse in regard to benefit packages or how much they will be paid,  and after a period of time, they will be protected by employment law. At this point, a constructive dismissal case could be brought as a result of not being able to agree on how much to pay them. This can create a difficult situation. One of my recent clients placed a person back on a contract because the risk was too great in trying to convert them into being an employee. We are happy to talk to anyone about this issue if anyone has any specific examples or situations which they may be facing.

Finally, if you are employing people as independent contractors, make sure you observe the golden rules of independent contracting. Do not offer them paid time off and do not offer them benefits. The disadvantages to offering these can be two-fold. The first is that they can become key bargaining chips when converting them to employee status. Typically, PTO is worth 10% of a salary for someone who has paid time off. If the employee already has this then you will lose that bargaining chip. This is also the same for benefits. Both of these rules are also indicative of an employment relationship. If you offer benefits it can be difficult to argue that contractors are not de-facto employees.


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Do you have a minimum cost-plus percentage that is usually accepted in the main markets for having a legal entity?

Broadly speaking the accepted bracket is 5% to 10%. It is very unusual for this to be below 5%. However, it is common to settle on between 5% or 7%, although this can be as high as 12%. In certain markets, such as India, cost plus percentages are typically higher, but in general cost-plus percentages are between 5% and 8%.

Would you say it is important to have someone in a particular country you are doing business, to handle the employment side of the business for you if you are employing without a legal entity?

If you are employing someone in another country without a legal entity it is important to have somebody manage matters of HR and payroll. It is not possible to have an employment relationship without one. This is central to the work we do at UnaTerra. We discuss their prospects, what they’re trying to achieve, and what their growth trajectory is in a country. Once they’ve settled on the best solution, we implement it. Whether that’s employing directly with a non-resident legal entity or whether it’s creating a legal entity and providing all that wraparound support. This is the core of what we do at UnaTerra. It’s territory we know very well, and we’re very well placed to advise and deliver these services.

How easy is it to switch from a PEO to establishing a legal entity if we need one?

It is relatively straightforward. PEO arrangements are often transferred to direct employment relationships. One key thing to remember is that a period spent under PEO before transitioning to direct employment does generally constitute continuous employment. If somebody transitions to direct employment their PEO period would need to be acknowledged as part of their employment period. In this case, the PEO relationship is terminated and a new hire would need to sign a new employment contract directly with the company, a newly created legal entity, which can onboard them onto the new payroll.

Thank you for taking the time to listen to this webinar. I am always happy to take an hour-long phone call just to discuss what specific circumstances you have, what your need is, what your timeline is like and how we can help you meet that. If you do have any questions, feel free to reach out to me at

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