Foreign Subsidiary vs EOR: Setup, Costs and When to Switch

A foreign subsidiary is a local company your business owns, which employs your staff directly. With an Employer of Record, a provider's local entity employs them for you and charges a fee per employee each month. Employment costs (salary, employer social security and benefits) are the same either way, so the comparison is EOR fees against what your own company costs to set up and run.

In our German example, a small GmbH costs about €8,850 a year in fixed costs set by official fee schedules (including set-up spread over 3 years), against EOR fees of about €6,333 per employee a year at the most common published price. On those figures the subsidiary is cheaper from 2 employees, or from 3 against the lowest published EOR price. Costs with no official figure, such as an office address, legal advice and your own management time, push the break-even higher.

Step-by-step fees for the German example are in our GmbH setup costs guide.

The table compares annual EOR fees with a small GmbH's costs at different headcounts. The GmbH figure is the fixed part of the running costs in our GmbH running costs guide (tax adviser at the midpoint of the statutory scale for a company with €600,000 revenue, plus chamber, register and other official fees), set-up of €1,051 spread over 3 years, and payroll at the midpoint of the statutory €6–€30 per employee per month.

EOR fees use the most common published starting price for Germany among the providers we track, US$599 per employee per month (4 providers), and the lowest, US$349, converted at €0.881 per US dollar.

In some countries the law limits how one company can place its employees with another, which is how an EOR works. In Germany an EOR arrangement is usually treated as employee leasing under the AÜG: the provider needs a leasing licence, and the same worker can generally be placed with the same client for no more than 18 consecutive months (AÜG § 1(1b)). If you want to keep someone longer, you need your own subsidiary or another compliant structure, whatever the cost comparison says. See AÜG and EOR in Germany.

Our EOR vs local entity guide lists the other countries where the law limits EOR arrangements, with links to each country's rules.

• Selling locally: an EOR can employ your staff but can't invoice your customers, sign local contracts or hold licences for you.
• Permanent establishment: if staff habitually conclude or negotiate contracts for you, your company may have a taxable presence in the country whoever employs them (OECD Model Tax Convention, Article 5). Get tax advice for sales and leadership roles.
• Control: your own contracts, benefits, policies and employer brand.

• You're testing a market and may leave: an EOR needs no liquidation.
• You have one or two people in many countries, rather than a team in one.
• Your finance team has no capacity for another set of accounts, filings and payroll.
• You need to hire before a subsidiary could be registered.

If you start with an EOR and plan to move staff to your own company later:

• Read the EOR agreement's exit terms before signing: notice periods, any conversion fee and minimum terms.
• Start the subsidiary early: incorporation, registration as an employer and payroll need to be in place before the first transfer date.
• In Germany, plan around the 18-month limit: the move has to happen before each worker reaches it.
• Agree how leave, service and benefits carry over, and get local legal advice on the new contracts.