Entity setup, EOR or contractor? Choosing the right expansion model

The three models, stated plainly

Local entity. The group incorporates, registers as an employer, and employs directly. Highest setup effort, and the only route that produces something the group owns: an entity that can hold contracts, register for VAT, invoice locally, obtain licences and employ without a third party.

Employer of record. A third party already established in the country employs the person and makes them available to the client. The client directs the work; the EOR runs the contract and payroll. Fast, and requires no entity.

Contractor. No employment relationship is intended. The lowest friction and the highest classification risk, because whether it is a contract for services is decided by the facts, not by the document.

Where the employer of record works

It genuinely solves a real problem: a small number of people, in a market the group is testing, where the alternative is a four- to eight-week incorporation before anyone can be paid. For one or two hires, with a defined horizon, and no intention to sell locally, it is often the right call.

Where it stops being the cheaper option

The arithmetic crosses over. An EOR charges per employee per month. An entity costs more to establish and then costs its running compliance. Below a handful of employees the fee wins; above it the fee keeps accruing while the entity's cost flattens — and at the end of it the group owns an entity, which is an asset, rather than having rented an arrangement, which is not.

It does not remove permanent establishment risk. This is the misunderstanding that costs the most. The EOR is the employer for labour-law purposes. Permanent establishment is a tax question, and it turns on the activity carried on in the country — under Article 5 of the OECD Model Tax Convention, a person habitually concluding contracts on the group's behalf can create a dependent-agent PE regardless of who issues their payslip. An EOR arrangement that puts a salesperson in a market is precisely the fact pattern that creates exposure.

In some markets the structure itself is regulated. Germany is the clearest case: an EOR arrangement is generally treated as employee leasing under the Arbeitnehmerüberlassungsgesetz (AÜG), which requires the provider to hold a licence from the Bundesagentur für Arbeit and caps an assignment at 18 months per worker per client. Without a valid licence, an employment relationship can be deemed to exist directly with the client company (§ 10 AÜG), with social security arrears alongside it.

Control over terms is limited. The employment contract is the provider's, not the group's. Benefits, notice periods, bonus mechanics and incentive arrangements follow the provider's template, and intellectual property assignment runs through a third party rather than directly from the person who created it — which needs explicit chaining, and is weaker than a direct contract.

There is no local footprint. No VAT registration, no local bank account, no ability to invoice customers, no entity to hold a licence. If the plan includes selling in the market and not only employing in it, the EOR does not get there.

Leaving costs something. Moving people from an EOR onto the group's own entity later is a change of employer: it needs consent, raises questions of continuity of service, and in some jurisdictions carries transfer-of-undertaking consequences.

Where the contractor route fails

It fails on substance. If the person works set hours, uses group systems, is integrated into a team and takes direction, authorities across Europe will look past the contract. Directive (EU) 2024/2831 on platform work — in force since 1 December 2024, transposition due by 2 December 2026 — introduces a rebuttable presumption of employment where the facts indicate control and direction. Its scope is platform work, but the direction of travel is not confined to it: the burden is moving towards the engager.

Reclassification is retrospective. It brings unpaid contributions, unpaid holiday and notice entitlements, and penalties, usually for the whole period.

The question that decides it

Not "which is cheapest to start", but what is the plan at 24 months. If the answer involves selling locally, more than a few employees, a licence, or anything the group wants to own, the entity is the destination and the only question is when. If the answer is a genuine short test with two people, an EOR is a reasonable bridge — provided someone has looked at permanent establishment before, not after.