Almost every first-market conversation arrives at the same fork. The answer is rarely about tax alone. It is about how permanent you intend to be, and how quickly you need to find out.
Key takeaways
- An employer of record gets you live in weeks but costs more per head as you grow, and typically stops making sense somewhere around five to ten local employees.
- A branch is not a separate legal person, so liability is not ring-fenced and the parent accounts can become visible locally.
- A subsidiary is the default for any market you intend to stay in, and the recurring compliance load matters more than the incorporation fee.
- Tax authorities pay closer attention to employer-of-record arrangements as headcount rises, particularly once a local team reaches double digits.
- Plan the conversion path before you start, because employment transfers and contract novation are much harder to unpick later.
There are three practical ways to put people and revenue into a new country, and companies routinely pick the wrong one because they optimise for the wrong horizon. The structure that is cheapest to open is often the most expensive to unwind, and the one that looks heavyweight on day one is sometimes the only option that survives a serious customer contract.
Employer of record: renting a presence
An employer of record hires your people on its own payroll in the target country and invoices you for the cost plus a margin. Nothing is incorporated in your name. You can be live in weeks, and if the market disappoints you can be out again almost as fast. In 2026 this is no longer a workaround; it is a normal part of workforce planning, and boards increasingly expect a stated rationale for where you use it and where you use an entity.
Its limits show up in three places. Cost scales linearly, with global providers commonly charging in the region of several hundred dollars per employee per month, or a percentage of salary. At roughly five to ten local employees, that usually overtakes the fully loaded cost of running your own entity. Larger enterprise customers sometimes refuse to contract with a supplier that has no legal presence in their jurisdiction. And the arrangement gives you very little standing to sign leases, hold local licences, or import goods.
There is also a scrutiny curve worth knowing about. An employer of record does not by itself create a taxable presence for you in ordinary employment arrangements. But as a local team grows, and particularly once it passes ten people or starts making decisions and signing contracts locally, tax authorities take more interest in whether the substance matches the paperwork. Regulators in several markets have tightened their treatment of these arrangements, and the EU's Platform Work Directive, which member states must transpose into national law by 2 December 2026, is sharpening scrutiny of contractor models more broadly.
Use an employer of record when you are testing demand, when your first hires are one or two salespeople, or when a real entity is already being built and you need someone selling before it is ready.
Branch: an extension of the parent
A branch is not a separate legal person. It is your existing company, registered to do business abroad. That sounds simpler than it is. Registration usually requires filing translated and apostilled parent-company documents, and in most jurisdictions the branch's accounts sit inside the parent's, which means the parent's financial statements can become publicly visible in a market where you would rather they were not.
Critically, liability is not ring-fenced. A claim against the branch is a claim against the parent. For regulated activities, or anything with meaningful product or contractual risk, that alone rules it out.
Branches earn their place in a narrow band of cases: certain financial-services structures, some markets where a branch has a genuinely lighter tax profile in the early loss-making years, and situations where the parent wants losses abroad to offset profits at home.
Subsidiary: a company of your own
A locally incorporated company, owned by the parent, is the default answer for a market you intend to stay in. Liability is contained. You can hire directly, sign leases, hold licences, open local bank accounts, and contract with counterparties who insist on a domestic entity. It also gives you a clean vehicle if you ever sell the market or take on a local partner.
The cost is real but usually misunderstood. Incorporation itself is rarely the expensive part. The recurring obligations are the ones that add up: statutory accounts, an annual filing, payroll registration, VAT or GST returns, and in many jurisdictions a resident director or local company secretary. Since 2026 you can add e-invoicing capability to that list in a growing number of markets, which is why the local accounting partner you choose matters more than the incorporation lawyer.
The question that actually decides it
Not "which is cheapest?" but "what will we need to be able to do in eighteen months?" If the honest answer includes signing enterprise contracts, holding a licence, employing more than a handful of people, or raising local finance, you are building a subsidiary eventually. The only real choice is whether you build it now or pay twice.
The trap: structures that cannot be upgraded cleanly
Companies often start with an employer of record, intending to convert to a subsidiary later. That is a sound plan, and it fails more often than it should, because the transition is treated as an afterthought.
Watch for three things. Employment continuity: in many jurisdictions, moving staff from an employer of record to your own entity is a legal transfer with accrued-rights implications, and in some it resets probation or triggers consultation duties. Customer contracts: agreements signed by the employer of record may need formal novation, which hands your customer a moment to renegotiate. And permanent establishment: if your people were already concluding contracts in-country, the tax authority may take the view that you had a taxable presence all along, regardless of what the paperwork said.
None of these is fatal. All are cheaper to plan for at the start than to discover during the switch. The tax questions to answer before entry covers the permanent establishment point in more depth.
A short way through it
- Write down what you must be able to do in the market in eighteen months, not what you want to spend now.
- Check whether your target customers require a domestic counterparty. One enterprise procurement policy can settle the question by itself.
- Model the crossover point, meaning the headcount at which employer-of-record fees exceed running your own entity. If you expect to pass it inside a year, skip the intermediate step.
- If you do start light, agree the conversion path in writing on day one: who employs whom, which contracts move, and what triggers the switch.
- Confirm the recurring compliance load before you incorporate, and line up the local accounting and payroll firm at the same time, not after the first filing deadline is missed.
The structure is a means, not a milestone. The point is to be able to sell, hire, and get paid in the market without your head office spending its week on foreign paperwork.
Frequently asked questions
What is the difference between a branch and a subsidiary?
A subsidiary is a separate legal company owned by the parent, so liability is contained within it. A branch is the parent company itself registered to trade abroad, which means claims against the branch reach the parent and the parent accounts may become locally visible.
At what point should we move from an employer of record to our own entity?
The usual trigger is cost, somewhere around five to ten local employees, where per-head fees overtake the cost of running an entity. Enterprise customers requiring a domestic counterparty, or a need to hold licences or sign leases, can force the move earlier.
Does using an employer of record create a permanent establishment?
In ordinary employment arrangements it usually does not, because the provider is the legal employer. Risk rises if your local people conclude contracts or make business decisions on your behalf, and scrutiny generally increases as headcount grows.
Sources
Primary sources for the rules described above. Regulatory dates change; check the source before acting on anything here.
Written by the Nexus Notabu team. If this raises a question about a market you are considering, tell us where you want to grow.