As businesses expand into international markets, the appeal of using Employer of Record (EOR) services is clear. They offer a quick, hassle-free way to hire employees in new countries without the need to navigate complex local regulations or set up a legal entity. For many, it seems like the ideal solution—fast, efficient, and cost-saving. But beneath the surface, this approach carries risks that could come back to bite you.
The purpose of this article is to highlight the potential legal and financial pitfalls that come with depending on an EOR, rather than setting up a proper legal entity abroad. While an EOR can appear to simplify international hiring, it can expose companies to significant risks—most notably, the danger of being classified as having a permanent establishment (PE) in another country. This can lead to unexpected tax liabilities, penalties, and even legal action.
At weConnect, we’ve seen this play out many times.
As experts in helping businesses set up legal entities and maintain compliance in over 80 countries, we’ve worked with companies that have been blindsided by tax authorities enforcing PE rules. These companies often find themselves in a situation they could have avoided had they taken a more strategic approach to their global expansion. We’ve also helped companies switch from EOR to fully established and operational entities in local markets, enabling them to hire, sign contracts, send and receive payments and conduct their international business activities without the risk of potential EOR backlash.
What is Employer of Record (EOR)? And how is it different from Permanent Establishment (PE)?
An Employer of Record (EOR) is a third-party service that hires and manages employees on behalf of a company in a foreign country where the company doesn’t have a legal entity. The EOR handles payroll, benefits, and compliance with local labor laws, making it a go-to solution for companies looking to test new markets without the time and cost of setting up a full legal entity.
However, using an EOR doesn’t fully protect a business from Permanent Establishment (PE) risks. PE occurs when a company has enough presence or activity in a foreign country—such as making sales or managing operations—that it becomes subject to local taxes. Even with an EOR, if employees are conducting core business functions like negotiating contracts or generating revenue, the company could still be considered to have a PE and face tax obligations.
What Types of Business Activities Are Safe from PE Risk?
Certain activities carried out through an EOR are less likely to trigger Permanent Establishment (PE) risk:
- Market research and data collection
- Basic customer service and support roles
- Non-revenue-generating activities (e.g., administrative tasks)
- Temporary or incidental activities not integral to core operations
However, watch out for red flags that could signal PE risk, such as:
- Negotiating or signing contracts
- Concluding deals or generating revenue
- Managing operations or making key business decisions locally
Let’s break this down in more detail and go over some examples.
Why EOR Poses a Risk to International Businesses
When expanding internationally, using an Employer of Record (EOR) might feel like the perfect shortcut. It lets you hire talent quickly without needing to establish a legal entity in every country.
But here’s the thing—just because it feels easier doesn’t mean it’s safer.
One of the biggest risks with relying on an EOR is the possibility of being classified as having a permanent establishment (PE) in another country, which can have serious financial and legal consequences.
Permanent Establishment Risk
So, what’s the real risk? Well, using an EOR to hire employees in another country doesn’t necessarily shield you from tax obligations. In fact, depending on what those employees are doing and how closely they’re tied to your core business operations, tax authorities could decide that you’ve established a permanent presence in their country. That’s when things get tricky—because with PE status,overlooking PE risk can lead to unexpected tax liabilities, directly impacting profitability.
Look at what happened to Google in France. They ended up paying nearly €1 billion in taxes after French authorities determined that their operations constituted a permanent establishment. Or the story of Dell in Norway, which I’ll go into more detail on later, where the company was found to have a PE because of the activities of a subsidiary. In both cases, what started as a seemingly routine arrangement escalated into major tax disputes.
What triggers an investigation into your EOR set-up?
You might be wondering, “How would tax authorities even find out?”
There are multiple ways and, unfortunately, a lot of them are outside your control. Unhappy employees—current and former—can blow the whistle on what’s happening inside your company. Routine tax audits by local authorities in the country can also reveal that your EOR setup looks a lot more like direct employment than you intended.
It’s not always as obvious as you might think, and unfortunately, a lot of it can happen under the radar—until it doesn’t. Here’s a breakdown of example red flags that can trigger local tax authorities to look under the hood of your EOR set-up:
Client Audits
One common trigger is through your clients. If you have local employees or contractors playing key roles in managing contracts or delivering projects, that could put your business on the tax authorities’ radar.
During an audit of a client where your company name is appearing on the books, it can become clear that your team is more embedded in the local market than it should be for an EOR. This is where things can quickly unravel.
Whistleblowing
Another risk can come from within. Disgruntled team members can report what they see as improper practices to the local authorities.
Maybe they’re unhappy with how things are handled, or maybe they just know too much about your operations. Either way, whistleblowing can trigger a deeper look into how your business is really operating abroad.
Online Presence
Then there’s the very public world of social media. Places like LinkedIn have made it easy for employees to share their titles and responsibilities, which is great for visibility but can be risky for compliance.
If your team members are publicly claiming roles like “Country Manager” or “Sales Director” in a foreign market where you don’t have a legal entity, that’s a red flag for tax authorities in that country. It suggests that those employees are doing more than just support work—they’re driving the business, which could be enough to trigger an investigation into whether you’ve established a permanent presence.
Government Collaboration
Tax authorities aren’t working in silos anymore. Cross-border cooperation between governments has become more streamlined, especially under initiatives like the OECD’s efforts to tackle tax avoidance.
This means if you’re operating in multiple countries, the odds of getting flagged for closer scrutiny are higher, especially if something doesn’t add up between your operations in different regions.
High-Profile Brand Visibility
Let’s not forget general publicity and brand visibility. If you’re a well-known, high-profile company, your activities will naturally draw more attention—both from the public and from regulators.
Being a recognizable name can sometimes work against you when it comes to staying under the radar. Tax authorities are more likely to keep a close eye on bigger brands. So if your international operations are making headlines or gaining significant traction, it’s more likely that your EOR activities will face heavier scrutiny.
When Big Brands Get Hit By EOR Risks: Case Studies from Across the World
It’s not just small companies that find themselves facing permanent establishment risks. No business is immune, and some of the world’s biggest brands have been caught out by these issues.
Let’s take a look at a few examples where EOR arrangements led to serious financial consequences, the penalties each company incurred, and what triggered the investigation in the first place.
Dell and Norway
In Dell’s case, the Norwegian tax authorities were alerted to potential permanent establishment issues during a routine audit of their local operations.
The investigation revealed that Dell’s subsidiary wasn’t just involved in basic sales support. It was also managing client relationships, negotiating contracts, and effectively running sales operations for the region.
Ultimately, this meant Dell had an established presence in the country that triggered a Permanent Establishment (PE) classification. The company was taken to court in Norway and the ruling went in favor of the tax authorities. Dell ended up with a large tax bill, including back taxes and penalties for underreporting.
Kering (Gucci) in Italy
Kering, Gucci’s parent company, learned the hard way what can happen when local tax authorities believe a business is underreporting its operations. In 2019, Kering agreed to pay €1.25 billion to settle a dispute with Italian tax authorities. The authorities claimed that Gucci’s activities in Italy were significant enough to establish a permanent establishment (PE), despite the company using a Swiss subsidiary to manage operations and take advantage of Switzerland’s lower tax rates.
The case, which covered the years 2011 to 2017, focused on whether Kering’s use of a foreign subsidiary was an attempt to avoid paying Italian corporate taxes on the profits generated by Gucci’s operations in Italy. Although Kering initially contested the claim, they eventually settled, marking one of the largest tax settlements in Italy’s history.
Satyam Computers in Australia
These activities were deemed core to Satyam’s business operations in Australia, prompting the ATO to rule that the company had established a permanent establishment. The case serves as a warning that even project management roles can push a company into PE territory.
Get Ahead of Your Employer of Record Risk
The message here is simple: if you’re using an EOR to manage employees in international markets, you need to be aware of the risks. It might seem like the faster, easier route for global expansion, but if your team is carrying out core business functions in a foreign country, you’re walking a fine line. The consequences of crossing that line—whether intentional or not—can be severe, both financially and legally.
At weConnect, we’ve seen firsthand the impact that permanent establishment rulings can have on businesses that weren’t prepared. My advice? Don’t gamble with your international operations. If your employees are managing clients, making decisions, or driving revenue in another country, it’s time to seriously consider setting up a legal entity. It might take more effort upfront, but it’s a solid investment in the long-term security of your business.
The last thing you want is for tax authorities to catch you off guard. Don’t wait for an audit or a whistleblower to force your hand—take control of your international expansion strategy now for both established and planned international presence. Reach out today to see whether you need (or could benefit from) legal entity establishment rather than relying on an EOR.