Even as an experienced HR professional in your home country, entering a new territory and grappling with the nuances of local benefits provisions, payroll, labor laws, salary expectations and cultural practices can be daunting. All of your hard-earned knowledge about employing workers in the US — or whatever your domestic country of operations — must be reevaluated when your company is expanding to another country. What you do at home often does not translate as a template to other overseas locations.
Trust us: The stakes are high. We have too often heard from companies that are facing fines and reputational damage for noncompliance with local labor laws, or that are facing losing promising talent, all because they did not fully educate themselves on what they needed to do when hiring and sending workers overseas. Not only does each country have its own set of constantly evolving employment and immigration laws, they also have their own ways of doing business and their own practices that determine the correct salaries and benefits. Assuming that your global HR strategies and practices should be based on your domestic ones is, in short, a recipe for instability and surprise. Being prepared is critical. As the saying goes, "forewarned is forearmed.
The good news is that international expansion is an opportunity for HR experts to prove their mettle and value to their business. Those in HR have a unique perspective and skillset to offer when their company is going global. While rightly concerned with labor-law compliance, HR experts also focus on the "people element" of business, which can determine whether a foray abroad is successful or unsuccessful. HR is positioned to keep the discussion grounded on issues few, if any, in the rest of the company are considering, but are fundamental to a company's success, such as the crafting of job offers that are both enticing to new employees in another country and compliant with the host country's regulations.
With guidance from global expansion experts, HR should work closely with its organization's finance, tax and legal teams to meet obligations and expectations, both large and small, for employing expats and host-country workers and keeping them on the payroll — whether that payroll is based in the home country or abroad.
While overseas expansion can be a disorienting experience as you navigate a new set of labor laws and cultural expectations, it's also an exciting opportunity to get acquainted with a new environment and help your organization take full advantage of the fruits of international expansion. It might appear daunting, but it can be a hugely rewarding, interesting and diverse experience. This playbook will help you prepare for a journey of twists and turns by helping you ask the right questions about global HR policy and practices.
The Need to Hire Quickly vs the Need to Expand Smartly
Understandably, many companies new to international expansion start small. Such a company may want to test the global waters, for example, by hiring two sales reps in Germany. It may already have a pool of strong local candidates for the positions. All this sounds easy enough. But can you go ahead and hire someone tomorrow, or even in the next 30 days?
The hard truth is that in most countries, you need a legal presence before you can hire. It can actually be illegal to hire someone before the company has registered a legal entity in the host country. Tax authorities the world over are looking to increase revenues and are on the lookout for corporations that have triggered a taxable presence, or "permanent establishment" (PE), in their respective countries. Any activity that results in revenue being generated (like the activities of those hypothetical sales reps in Germany) will likely trigger a PE. Another trigger is an organization's sustained physical presence, or a "fixed place of business," in a host country. Some companies may be tempted to "fly under the radar" and forgo registering a legal entity while trying to evade detection from local authorities. But that strategy, if you can call it one, almost always entails taking on unacceptable levels of financial and reputational risks.
So, companies looking to legally pay workers in another country must first consider establishing an entity. Legal entity options vary by country, but generally speaking they fall into the three categories outlined below in this section. Probably needless to say, a company's internal and external legal experts and tax experts will have a large hand in determining the optimal legal entity to establish when expanding into another country. Still, it's important for HR experts to have a high-level understanding of typical legal entity types.
A representative office
This option presumes the organization will not be generating revenue in the host country. Acceptable activities may include brand promotion, market research or customer service. While a representative office severely limits the parent company's operations in the host country, it is fairly easy to set up a rep office, with four to six weeks typically needed for payroll registration.
A branch office
A branch office is treated like an extension of the foreign parent company and not considered a separate legal entity. As a result, a branch does not offer liability protection for the parent company. Furthermore, there may be negative tax consequences associated with registering a branch, relative to registering a subsidiary (described below). Still, there are situations where registering a branch is appropriate. For example, companies looking to beat the competition into a new market may consider a branch, as a branch may take less time to establish than a subsidiary
A subsidiary is typically the most expensive and time-consuming entity option, though the benefits often far outweigh the costs. A subsidiary not only provides flexibility with regard to acceptable activities, it is regarded as a separate legal entity from the parent company and therefore provides a layer of legal protection. Similarly, subsidiaries offer the parent company tax protection from host-country authorities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.