A foreign employer is a company based in one country that directly employs workers in another country without establishing a local legal entity. In practical terms, it means you're the employer on record in your home jurisdiction while your employee works and resides somewhere else entirely.
For example: A company registered in one country hiring a software developer who lives and works in a different country (where the company has no office, subsidiary, or legal presence) is acting as a foreign employer.
This arrangement sounds straightforward, but it creates a web of compliance, tax, and legal considerations that vary significantly by country. Some jurisdictions permit foreign employers with proper registration. Others effectively prohibit the practice by making compliance requirements so onerous that establishing a legal entity becomes the only practical option.
Why the Foreign Employer Model Exists
The traditional employment model assumes employer and employee occupy the same jurisdiction. Your company registers locally, hires locally, and operates within one legal framework. Simple.
But the modern workforce doesn't work that way. Talent is global. Remote work is standard. Companies want to hire the best person for the role, regardless of where they live.
The foreign employer model emerged to bridge this gap, allowing companies to employ people across borders without the time and expense of establishing entities everywhere they have employees. It's a response to the reality that a company with 50 employees might have those employees distributed across 15 countries.
How Foreign Employer Arrangements Work
When you operate as a foreign employer, you remain the legal employer in your home country. In most cases, this means you::
- Enter into an employment contract governed by your home country law (with significant caveats)
- Pay the employee from your home country entity
- Handle payroll through your existing systems
- Report employment income to your home tax authorities
But here's where it gets complex: Even though you're the employer, the employee is subject to the employment laws, tax obligations, and social security requirements of the country where they actually work and reside.
This creates a dual compliance burden. You need to satisfy:
- Your home country requirements as the employer of record
- The employee's host country requirements as someone conducting employment activities in their jurisdiction
Different countries handle this tension very differently.
The Legal Framework: What Countries Actually Require
Registration Requirements
The foreign employer landscape varies dramatically by jurisdiction.
Employer-friendly jurisdictions allow foreign employers to operate with streamlined registration processes. You register with the relevant tax authority, obtain necessary identification numbers, and can compliantly employ residents without establishing a legal entity. These frameworks recognise that modern employment crosses borders and provide clear paths for foreign companies to comply.
Complex jurisdictions make foreign employer arrangements functionally difficult, even if theoretically possible. The compliance requirements around local social security, employment protection, and reporting make foreign employer arrangements so challenging that most companies establish a local entity or use an EOR instead.
Restrictive jurisdictions effectively require a local entity or fiscal representative, making pure foreign employer arrangements impossible or impractical.
The critical question before attempting foreign employer registration: Does this jurisdiction have a clear, workable framework for foreign employers, or will compliance be so complex it defeats the purpose?
Tax and Social Security Obligations
This is where foreign employer arrangements often break down. Even if a country permits foreign employers, you're typically required to:
- Withhold income tax according to local rates and brackets
- Contribute to local social security schemes
- Make employer contributions to healthcare, unemployment, and pension systems
- File monthly or quarterly reports to local tax authorities
- Provide local-format payslips in the local language
- Comply with year-end tax reporting
This requires either building substantial in-house expertise or hiring local payroll providers in each country—which quickly approaches the cost of entity formation anyway.
The administrative burden multiplies with each additional country. Managing payroll compliance in one foreign jurisdiction is challenging. Managing it in five creates significant overhead and risk.
Employment Law Compliance
Here's a critical point many companies miss: the employee's local employment law applies regardless of where the employer is based or what the contract says.
Your employment contract might be governed by your home country law and state that your local courts have jurisdiction. But if your employee works in another country, that country's employment law—with its specific worker protections, termination requirements, and mandatory benefits—still applies.
This means you must provide:
- Statutory minimum benefits required in the employee's country
- Minimum holiday entitlements per local law
- Mandatory sick leave and pay
- Statutory parental leave
- Proper termination procedures (which can be extensive in employee-protective jurisdictions)
- Workplace protections and anti-discrimination compliance
You can't simply apply your home country employment practices to a foreign employee. Their local law governs, even if you're a foreign employer.
The Permanent Establishment Risk
Operating as a foreign employer can inadvertently trigger permanent establishment (PE) tax obligations in the employee's country.
Permanent establishment means tax authorities consider you to have a taxable presence in their jurisdiction, subjecting your company's profits (not just employment) to local corporate taxation.
Common PE triggers when operating as a foreign employer:
Dependent agent: If your employee has authority to conclude contracts on your company's behalf in their country, this often creates PE.
Fixed place of business: If your employee works from a home office regularly and exclusively for your company, some jurisdictions may consider this a fixed place of business creating PE.
Revenue generation: Employees who generate sales or revenue in their local market are higher risk for triggering PE.
Real scenario: A company employs a salesperson in a foreign country. The salesperson successfully sells to local clients. This likely creates PE in that country, meaning the company now owes local corporate tax on profits attributable to those sales—on top of handling local payroll taxes.
Once you've triggered PE, you're facing corporate tax obligations that often make establishing a proper subsidiary the more sensible path.
Foreign Employer vs. Other Models
Understanding what foreign employer is requires distinguishing it from related concepts:
| Model | Legal Employer | Local Entity Required | Complexity |
| Foreign Employer | Your home country entity | No, but registration usually required | High (dual compliance) |
| Local Entity | Your subsidiary in employee's country | Yes | Very high (full entity management) |
| Employer of Record | EOR's local entity | No (EOR owns it) | Low (EOR handles compliance) |
| Contractor | Self-employed individual | No | Low, but misclassification risk |
Foreign employer sits in an awkward middle ground: More complex than using an EOR, but without the control of owning your own entity. You bear all the compliance burden without the benefits of local presence.
When Foreign Employer Arrangements Make Sense
Despite the challenges, foreign employer models work in specific scenarios:
- Employer-friendly jurisdictions with clear frameworks
If you're employing people in countries where foreign employer registration is streamlined and well-supported, it can work—particularly if you're hiring in just one or two such countries.
- Very small headcount in a single country
The compliance burden, while real, might be manageable for one or two employees in a single jurisdiction. You can engage local payroll and tax advisors to handle the specifics.
- You already have tax obligations in that country
If you've already established that you owe taxes in a jurisdiction (perhaps you have customers there and triggered PE through other activities), adding employment through foreign employer registration isn't adding new complexity.
- You're testing the market very short-term
If you're hiring someone for a 6-12 month contract to test a market before deciding on entity formation, foreign employer registration might bridge the gap, though EOR services often make more sense even for short-term arrangements.
When Foreign Employer Arrangements Don't Make Sense
- Multiple countries
Foreign employer compliance multiplies with each country. Managing tax registration, payroll, and employment law in 5 countries as a foreign employer creates more overhead than strategic entity planning with EOR support.
- Employee-protective jurisdictions
In countries with complex employment law, trying to operate as a foreign employer puts you at significant risk of non-compliance—often without realising it until there's a dispute or audit.
- Revenue-generating roles
If the employee will generate local revenue, you're at high risk of triggering permanent establishment. At that point, you're facing corporate tax obligations that make a local entity more sensible.
- Long-term employment
If this is a permanent hire in a market you're committed to, the ongoing compliance burden of foreign employer arrangements often exceeds the cost of either establishing an entity (for larger teams) or using an EOR indefinitely (for smaller teams).
- Senior or high-value employees
The compliance risks of getting foreign employer arrangements wrong—penalties, back taxes, employment tribunal risks—increase with employee seniority and compensation. For executives or highly paid employees, the risk often outweighs any cost savings.
The Risks of Getting It Wrong
Operating as a foreign employer without proper compliance creates significant risks:
Tax penalties: Failure to properly withhold and remit taxes can result in penalties, interest, and personal liability for company directors in some jurisdictions.
Social security violations: Missing social security registrations and contributions can trigger substantial fines and back-payment obligations.
Employment law violations: Failing to provide statutory entitlements or follow proper procedures (especially around termination) can result in tribunal claims and compensation orders.
Permanent establishment consequences: Inadvertently creating PE without recognising it means years of unfiled corporate tax returns and potential penalties.
Immigration issues: In some countries, foreign nationals working for foreign employers face visa complications that don't exist when employed by local entities.
Personal liability for directors: Some jurisdictions can pursue company directors personally for unpaid taxes and social security contributions related to employees in their country.
Key Questions Before Operating as a Foreign Employer
Before deciding to operate as a foreign employer, work through these questions:
Regulatory: Does the employee's country permit foreign employer arrangements? What registration is required? Can you realistically comply with local tax and social security reporting?
Employment law: Do you understand the employee's local employment law well enough to remain compliant? Can you provide all mandatory benefits and follow proper procedures?
Permanent establishment: Does the employee's role risk triggering PE? Are they generating revenue, signing contracts, or creating a fixed place of business?
Payroll capability: Can you run compliant local payroll, or will you need local payroll providers in each country? What does that cost?
Risk tolerance: What are the penalties for non-compliance in this jurisdiction? Are you comfortable with the risk if you get something wrong?
Scale and duration: Is this one employee short-term, or the start of building a team? Will this arrangement make sense in 12 months or create technical debt?
Alternatives: Have you compared the true cost and risk of foreign employer vs. EOR services vs. entity formation for your specific situation?
The Compliance Reality
Many companies underestimate what foreign employer compliance actually requires. Let's be specific about what you're taking on:
Monthly obligations:
- Calculate and withhold correct income tax per local rates
- Calculate and pay employer and employee social security contributions
- Generate compliant local-language payslips
- File wage tax returns or equivalent in each country
- Remit payments to multiple government agencies by specific deadlines
Quarterly or annual obligations:
- Year-end tax reporting and reconciliation
- Annual tax certificates for employees
- Social security annual declarations
- Updates for changing tax rates and thresholds
- Compliance with new legislation and regulations
Ongoing monitoring:
- Changes in employment law affecting entitlements or procedures
- Tax law changes affecting withholding or contributions
- Updates to reporting requirements or formats
- Jurisdiction-specific deadlines that vary by country
For each country. For each employee.
This is why many companies who start down the foreign employer path eventually migrate to either entity formation (for scale) or EOR services (for simplicity)—the ongoing compliance burden becomes untenable as you grow.
What This Means for Your Business
Operating as a foreign employer is legally possible in many jurisdictions, but practically complex in most. It requires deep understanding of the employee's local tax, social security, and employment law—and the capacity to comply with those requirements monthly and annually.
The foreign employer model works best in limited scenarios: small numbers of employees in employer-friendly jurisdictions with clear registration frameworks, where you have the resources to handle dual compliance or engage local expertise.
For most global hiring scenarios, it's not the optimal path. The compliance burden often exceeds the alternatives:
- If you're hiring 10+ people in a market: Establish a local subsidiary. The control and local presence justify the investment.
- If you're hiring 1-10 people across multiple countries: Use an Employer of Record. They handle all the compliance complexity through their owned infrastructure.
- If you're hiring in a single employer-friendly country: Foreign employer registration might work, but compare the true ongoing costs vs. EOR before committing.
At Boundless, we frequently work with companies who started as foreign employers and realised the compliance burden was unsustainable. We own our infrastructure in every country we operate, which means we handle all the complex registration, payroll, tax, and employment law compliance—while you focus on managing your team.
Considering hiring internationally? Our team can help you assess whether foreign employer registration, entity formation, or EOR services make the most sense for your specific situation. We'll be straight with you about the compliance requirements and risks, so you can make an informed decision.
Get in touch today to discuss your global hiring plans and find the approach that gives you compliant, sustainable international employment without unnecessary complexity or risk.
Frequently Asked Questions (Foreign Employer)
What is a foreign employer?
A foreign employer is a company that directly employs workers in a country where the company has no legal entity or physical presence. The company remains the employer of record in its home jurisdiction while the employee works in a different country.
Can I hire someone in another country without a company there?
It depends on the country. Some jurisdictions allow foreign employers to register and employ people without a local entity. Others make it functionally impossible through complex compliance requirements. An Employer of Record provides an alternative that works in most countries.
What are the risks of being a foreign employer?
The main risks include tax penalties for incorrect withholding, social security violations, employment law non-compliance, inadvertently triggering permanent establishment tax obligations, and personal liability for directors in some jurisdictions. The consequences can significantly exceed the cost of compliant alternatives.
Do I need to follow my employee's local employment law if I'm a foreign employer?
Yes. Regardless of where your company is based or what law governs your contract, the employee's local employment law applies to matters like minimum benefits, termination procedures, working time, and workplace protections. You cannot simply apply your home country employment practices.
What's the difference between a foreign employer and an EOR?
As a foreign employer, your company directly employs the worker and bears all compliance obligations in both your home country and the employee's country. With an EOR, the EOR's local entity becomes the legal employer, handling all local compliance while you manage the employee's day-to-day work. EOR typically involves less risk and complexity for most companies.
