Create a Subsidiary or Use a PEO? Guide to Choosing the Best Market Entry Strategy

Should you set up a subsidiary or use a PEO? A guide to deciding the best way to enter a country

Expanding operations to a new country is a strategic decision that involves defining how the legal and operational presence will be established. The two most common alternatives are setting up a subsidiary or using a PEO (Professional Employer Organization), which allows you to hire staff without having your own legal entity.

Choosing one option or the other has a direct impact on costs, entry speed, operational control, and legal or tax risks, so it is advisable to evaluate their differences and recommended uses in detail. We tell you all the details in this article.

What does setting up an international subsidiary involve?

A subsidiary is an independent legal entity controlled by the parent company that operates under local law. Although the subsidiary is part of the corporate group, it has its own legal personality and operates independently in many respects.

Advantages of a subsidiary

The biggest advantage of a subsidiary is that it allows you to open bank accounts, hire staff directly, sign commercial contracts, invoice local customers, and own physical or intellectual assets.

In addition:

-Strengthens your image and credibility with customers, suppliers, and public agencies.

-It allows for more flexible tax planning, taking advantage of double taxation treaties and local tax optimizations.

-Protects the parent company’s liability by separating legal and financial risks.

-It provides much greater legal certainty in all countries that respect the “principle of legality.”

-Reduces the subsidiary’s operating expenses, as these become variable costs related to personnel, resulting in lower costs than a PEO agreement.

Disadvantages of a subsidiary

-There are initial costs associated with setting up a subsidiary, including administrative fees, legal fees, share capital, and licenses. Biznelp offers a solution to significantly reduce these costs.

-The timeframes for incorporation and registration vary depending on the country and the operational complexity of the business.

-Managing a subsidiary involves a greater administrative burden, as it requires local accounting, taxation, and labor management. This is why delegation services for  subsidiary management are the most effective solution for having a subsidiary.

What is a PEO and when is it used?

A PEO or Professional Employer Organization acts as the legal employer of staff in the destination country. It is also known as an EOR (Employer of Record). This service provider hires and manages payroll, taxes, and labor compliance for staff who are legally its employees and who are assigned to you at the operational level. The parent company directs the team’s activities, but without creating a local company.

Advantages of a PEO

-Fast market entry, with contracts that can be signed in a matter of days or weeks.

-Significantly lower initial cost, as it is limited to the guarantees required by the service provider to cover the risk associated with possible non-payment and the management of the end of temporary staff contracts.

-Guaranteed compliance with local labor and tax regulations, avoiding penalties in countries whose legal framework allows or does not prevent this type of labor transfer.

-Ideal solution for pilot projects, market testing, or small teams that do not require a physical structure, always in countries where labor laws permit.

Limitations of a PEO

-In many countries, the legal framework prohibits the transfer of personnel, with risks that may even lead to criminal consequences.

-There is a risk that local tax authorities will recognize the existence of a “permanent establishment” in countries where legislation allows or does not prevent this type of work assignment.

-This situation limits certain key actions, such as:

Acquire assets.

Significantly increase local staff.

Maintain a prolonged commercial or productive presence in the country.

Issue local invoices directly.

Open your own offices.

-Control over certain procedures is reduced due to the indirect contractual relationship.

-Scalability is limited; for large teams or complex activities, it is usually necessary to migrate to a subsidiary structure.

How to decide between a subsidiary or a PEO?

The choice between a PEO or a subsidiary depends on various factors, including:

-Type of activity: Areas such as marketing and support can be effectively managed through a PEO, while functions such as sales, production, R&D, or asset ownership typically require the establishment of a subsidiary.

-Budget, timing, and urgency: If the priority is rapid market entry and tight cost control, PEO represents an agile and efficient solution for projects or missions with a limited duration.

-Hybrid model: In countries where legislation allows or does not prevent labor leasing, a combined strategy may be most appropriate. This involves starting operations with a PEO to hire and operate quickly, especially in markets where foreign companies may be reluctant to set up a subsidiary from the outset, and then migrating to a subsidiary structure when the operation requires it for any of the reasons mentioned above.

How does Biznelp help in this process?

At Biznelp, we support foreign companies looking to enter or grow in Spain and Latin America. We offer:

Opening and comprehensive management of subsidiaries: legal incorporation, taxation, licenses, payroll, accounting, and reporting tailored to the parent company with the EasySubsidary service.

PEO-type delegated management solutions: local hiring and administration of personnel without a separate entity, ensuring compliance and cost control. In Latin American countries where permitted, the Team in Latam service is offered.

Are you considering entering a new country and don’t know whether to set up a subsidiary or work with a PEO? Don’t hesitate to contact us and we will help you define the most effective strategy for your international expansion.