Difference between Setting up a Foreign Entity and Employer of Record in 2026

Talent is the cornerstone of competitive advantage in a global economy increasingly shaped by digital transformation and technology. Businesses competing for market leadership need workforces equipped to act on emerging opportunities before competitors do. Even amid ongoing skills shortages, organizations are recognizing that success depends not just on headcount, but on accessing people with the right capabilities and expertise.

Global hiring offers a powerful solution for businesses seeking to close skills gaps. By accessing a worldwide talent pool, employers can find professionals with the qualifications and experience necessary to remain competitive—often at more favorable cost structures than domestic markets. The sustained shift toward remote and hybrid work models has normalized international hiring ([2025 Employer of Record Market Trends, Key Players, and Stats - SSR](https://www.selectsoftwarereviews.com/blog/employer-of-record-statistics-and-trends)) ([2025 Employer of Record Market Trends, Key Players, and Stats - SSR](https://www.selectsoftwarereviews.com/blog/employer-of-record-statistics-and-trends)), enabling businesses to onboard talent from virtually anywhere without the complexity of relocation.

Yet international hiring brings a critical challenge: navigating compliance across jurisdictions. Most countries impose specific legal requirements on foreign companies wishing to employ workers within their borders, and these regulations vary widely by location. Understanding your options—and the trade-offs between them—is essential to managing risk and maintaining operational agility.

This article outlines two common approaches to international employment: working with an employer of record (EOR) and establishing a foreign entity. We examine what each model entails, the responsibilities they involve, and the advantages and drawbacks associated with each.

What Is An Employer Of Record (EOR)?

An employer of record (EOR) is a third-party organization that handles the administrative and legal responsibilities of international employment on behalf of companies. EORs assume the role of legal employer for payroll, tax withholding, benefits administration, and compliance, while the client company retains operational control over day-to-day work. The global EOR market was valued at approximately $5.6 billion in 2025 and is projected to grow at a compound annual growth rate of 6.8% through 2035 ([Employer‑of‑Record Market: Size, Growth & Trends 2026](https://fmcgroup.com/employer-of-record-market-size-growth-trends/)), reflecting its growing role in global expansion strategies.

The Role EORs Play In Global Hiring

An EOR functions as an intermediary between a company and its international employees. As a distinct legal entity, EORs provide specialized services and expertise to simplify cross-border employment. This includes registering with local authorities, drafting compliant employment contracts, and managing payroll and statutory deductions on behalf of both employer and employee.

EORs effectively serve as compliance specialists, applying in-house expertise to help businesses navigate international hiring requirements they may lack the capacity to manage independently. The outsourced support they provide enables companies to access global talent markets with reduced risk and greater efficiency.

Employers of record can be based in any country and typically facilitate hiring across multiple jurisdictions. While there are no universal accreditation standards, established EOR providers generally employ in-house specialists with formal education and professional experience in international tax law, employment regulations, and contract compliance.

A Look At the Services An EOR Typically Provides

Some EORs specialize in particular industries—such as technology, healthcare, or professional services—while others support a broader range of sectors. Regardless of focus, the services they provide are typically comprehensive and cover the full employment lifecycle.

Common EOR responsibilities include:

• Payroll Management: EORs process payroll on behalf of client companies, including payment scheduling, wage calculation, tax withholding, and filing of income tax and unemployment insurance returns with the appropriate government agencies.
• Benefits Administration: EORs manage employee benefits such as health insurance, life insurance, retirement accounts, and paid time off. They enroll eligible employees, verify eligibility, prepare and submit required filings, and coordinate benefit payments.
• Compliance: EORs monitor changes to employment law and ensure that employment practices align with current regulations. This helps protect client companies from compliance violations, fines, and legal disputes by identifying and addressing potential liabilities proactively.
• Human Resources Management: EORs support global hiring and onboarding processes, often functioning as an outsourced HR department. Services may include creating and maintaining employee handbooks, drafting job descriptions, conducting performance reviews, and running background checks on prospective hires.
• Employee Termination: EORs provide guidance on compliant termination procedures, including notice requirements, severance obligations, and unemployment benefit coordination based on the applicable jurisdiction's labor laws.

What Is a Foreign Entity?

A foreign entity—sometimes called a foreign subsidiary, international entity, or local entity—is a business registered and operating outside the country where its parent organization is headquartered. Multinational corporations are a common example: they may have offices or operations in cities around the world, but all report to a central headquarters, typically located where the company was originally founded. Every establishment beyond that base is a foreign entity, representing the organization's business presence in that market.

Foreign entities must be formally licensed by the government of the jurisdiction in which they operate. Each country has its own registration process, though virtually all begin with an application to register as a separate legal entity. Depending on the industry, organizational structure, and local regulations, foreign entities may be established at the federal, state, or municipal level.

For example, a U.S.-based company expanding into Germany may establish a separate German legal entity with its own bank accounts, tax registration, and compliance obligations.

The criteria that trigger a requirement to register as a foreign entity vary by jurisdiction. Some countries consider duration of activity (e.g., operating regularly for a consecutive period), while others assess capital investment or business volume. Often, registration becomes mandatory once a combination of thresholds is met, at which point the company must apply for official status and begin adhering to local legal and regulatory requirements.

The Complexities of Foreign Entity Tax

Non-resident taxation is often more restrictive than domestic corporate tax treatment. In many cases, foreign entities are subject to higher effective tax rates or additional withholding obligations on certain income types.

In the United States, the federal corporate income tax rate is 21% ([United States - Corporate - Branch income](https://taxsummaries.pwc.com/united-states/corporate/branch-income)), and state corporate income tax rates range from 0% to approximately 12%. The U.S. imposes a 30% branch profits tax on foreign corporations with a U.S. branch ([United States - Corporate - Taxes on corporate income](https://taxsummaries.pwc.com/united-states/corporate/taxes-on-corporate-income)), applied to the dividend equivalent amount repatriated or deemed repatriated outside the United States. This is in addition to regular federal corporate income tax. For a foreign corporation to be subject to U.S. federal taxes, it must have Fixed, Determinable, Annual, or Periodical (FDAP) income sourced from the U.S. and must meet the IRS definition of a corporation under U.S. tax law.

Regional policies add further complexity. For example, New York State requires foreign corporations subject to state tax to file and pay, even if they have not yet been formally authorized by the state Department of State.

That said, tax treaties can significantly alter effective rates. Many governments enter into bilateral tax agreements to facilitate trade and investment between allied nations. For instance, the U.S.-Canada income tax treaty provides partial exemptions from branch profits tax on the first $500,000 of earnings, enabling businesses to invest across both markets with reduced tax friction.

Additionally, the OECD released a 2025 update to its Model Tax Convention in November 2025, introducing new guidance on how remote work arrangements may trigger permanent establishment obligations ([KPMG report: 2025 update to OECD Model Tax Convention](https://kpmg.com/us/en/taxnewsflash/news/2026/01/kpmg-report-2025-update-oecd-model-tax-convention.html)) ([OECD Employment Outlook 2025: Bouncing back, but on shaky ground: Wages continue to recover in uncertain labour markets | OECD](https://www.oecd.org/en/publications/2025/07/oecd-employment-outlook-2025_5345f034/full-report/component-5.html)). Under the updated framework, a permanent establishment generally does not exist if an employee works remotely for less than 50% of their time over a 12-month period, and even above that threshold, a PE only arises if there is a valid commercial reason for the employee's presence in that jurisdiction ([OECD Indicators of Employment Protection | OECD](https://www.oecd.org/en/data/datasets/oecd-indicators-of-employment-protection.html)) ([OECD Indicators of Employment Protection | OECD](https://www.oecd.org/en/data/datasets/oecd-indicators-of-employment-protection.html)). This development has significant implications for companies with distributed workforces.

Labor and Employment Law-Related Considerations for Foreign Entities

Taxation is only one dimension of foreign entity compliance. Established foreign entities must also adhere to the labor and employment laws of their host country, both at the federal and local levels. From parental leave policies to standard working hours, the regulatory landscape varies significantly across jurisdictions. Maternity leave entitlements in the United Kingdom, for instance, differ substantially from those in the United States. Companies operating in multiple countries must tailor employment practices to align with the applicable legal framework in each location.

Employers must also ensure compliance with wage and hour laws, including minimum wage standards and overtime pay requirements where applicable. In many jurisdictions, employers are legally required to provide specific employee benefits such as statutory health insurance and pension contributions. Organizations that fail to meet local labor law requirements in their foreign locations risk penalties, fines, and potential legal action from employees.

EOR vs Foreign Entity

The key distinction between an employer of record and a foreign entity lies in structure and ownership. An EOR is a third-party service provider that acts as the legal employer on behalf of a client company, handling payroll, compliance, taxes, and benefits administration for a service fee. A foreign entity, by contrast, is a subsidiary or branch owned and operated by the company itself. It performs the same functions—hiring, payroll, tax compliance, benefits—but as a direct extension of the parent organization rather than through an intermediary.

Working with an EOR and establishing a foreign entity are both viable pathways to international employment, but they are not equally suited to every situation. The optimal choice depends on factors including the level of control required, the complexity of local regulations, the intended duration of operations, and overall cost considerations.

Here's a breakdown of the advantages and disadvantages of each approach:

Advantages and Disadvantages of Establishing a Foreign Entity

Businesses that establish a foreign entity typically do so to maintain maximum operational control and demonstrate long-term commitment to a market.

Advantages

• Control: Establishing a foreign entity gives your organization full authority over hiring decisions, compensation structures, and employment policies.
• Employee Confidence: A local legal presence signals commitment to the market and provides employees with assurance that the organization is invested in the region for the long term.
• Tax Benefits: Depending on the jurisdiction and applicable treaties, businesses may be able to access tax incentives, credits, or preferential rates available to locally registered entities.

Disadvantages

• Costs: Entity formation involves significant upfront and ongoing expenses, including registration fees, business licensing, legal counsel, accounting services, and payroll infrastructure setup.
• Complexity: Establishing and maintaining a foreign entity requires navigating complex regulatory requirements that differ from the parent company's home jurisdiction. This can be time-intensive and challenging, especially for organizations unfamiliar with local language, legal systems, or business culture.
• Legal Liabilities: Operating a foreign entity may expose the company to legal obligations and liabilities under local law that were not anticipated based on the home country's legal framework, creating additional risk.

Advantages and Disadvantages of Working With an EOR

Employers of record specialize in enabling businesses to expand internationally without the need to establish local infrastructure. Approximately 41% of organizations currently use EOR services, with an additional 49% planning to adopt them. Key drivers include risk mitigation (65%), cost reduction (63%), and access to global talent (51%) ([Employer of Record Market Size | Global Forecast To 2033](https://www.globalgrowthinsights.com/market-reports/employer-of-record-market-102101)).

Advantages

• Faster Market Entry: EORs enable companies to hire employees in new markets within days or weeks, bypassing the months-long process of entity registration and setup.
• No Local Entities Required: An EOR serves as the legal employer, eliminating the need to register a subsidiary or branch in each country where you employ workers.
• Access To Talent: Even in jurisdictions with restrictive employment regulations, an EOR provides compliant access to local talent pools that might otherwise be difficult or impossible to tap.
• Easier Exit Process: If operations in a market do not meet expectations, companies can disengage by providing notice to the EOR, avoiding the cost and administrative burden of entity dissolution.

Disadvantages

• Time Investment: Selecting a reputable EOR provider, negotiating service agreements, and coordinating employee onboarding and offboarding requires time and due diligence.
• Potential Long-Term Costs: While entity formation has high upfront costs, EOR fees are recurring. For companies planning multi-year operations with significant headcount, cumulative EOR costs may eventually exceed the total cost of maintaining a local entity.
• Limited Oversight: Although reputable EORs maintain transparency and involve clients in key employment decisions, the use of a third-party provider inherently involves some degree of reduced direct oversight compared to operating your own entity.

How to Decide Whether an EOR or Local Legal Entity Is Right for Your Business

Choosing between an employer of record and a local legal entity depends on your organization's specific circumstances, strategic goals, and risk tolerance. Consider the following factors:

• Longevity: If you are testing a new market or hiring for a short-term project, an EOR is typically the most cost-effective option. For sustained, multi-year operations with plans to grow local headcount significantly, a foreign entity may offer better long-term value.
• Expertise: Do you have in-house expertise in international employment law, tax compliance, and HR administration for the target jurisdiction? If not, an EOR's specialized knowledge can significantly reduce risk and administrative burden.
• Cost: Evaluate both upfront and ongoing costs of EOR services versus the total cost of entity setup, operation, and eventual dissolution. Perform a multi-year cost analysis based on expected headcount and activity levels.
• Oversight: How much direct control do you need over local employment operations? EORs provide substantial involvement in hiring and management, but if you require complete autonomy, a local entity offers greater control.
• Flexibility: An EOR typically allows faster onboarding and greater flexibility to scale up or down in response to business conditions. Establishing a foreign entity requires more planning, longer timelines, and a higher degree of commitment.
• Legal Protection: Consider the legal and regulatory complexity of your target market. Some jurisdictions have highly stringent employment protections, tax rules, and reporting requirements. If your organization lacks local legal expertise, an EOR can provide critical protection against compliance violations and penalties.

Why Borderless?

The decision between an EOR and a foreign entity is a meaningful one, but it reflects a positive milestone: your organization is ready to expand beyond its current borders and access new opportunities.

Regardless of which path you choose, the strategic benefits of global expansion are clear: access to deeper talent pools, entry into new markets, and improved competitive positioning. The question is not whether to expand, but how to do so in a way that aligns with your organization's goals, resources, and risk profile.

As an employer of record, Borderless specializes in supporting companies through every stage of global expansion. Our team can help you evaluate which approach is right for your business and execute your international hiring strategy with confidence. Reach out today to learn more.

^{Disclaimer: Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.}