Growing into new geography is a big decision considering the number of admin tasks that need to be performed. It is important to note that a considerable amount of valuable time is spent on managing administrative tasks than focusing on the core business,
PARTNERING WITH A GLOBAL PEO WILL ACCELERATE YOUR GLOBAL EXPANSION IN A MUCH SIMPLER WAY.
Setting up a Foreign Subsidiary in India Vs/ Professional Employer Organization
March 23, 2022
Since the beginning of the pandemic, companies have been trying to adapt to the unprecedented Covid-19 situation while ensuring the operational costs are controlled. From reducing the real-estate footprint to looking at adopting remote hiring practices, businesses across the world are watchful about where and when they incur costs.
While growth is the agenda, the route for growth has become important. When to set up an entity (usually set up of a wholly-owned subsidiary) or instead hire a PEO or Third party payroll services. According to NAPEO, “A professional employer organization (PEO) or Third party payroll services provides comprehensive HR solutions for small and mid-size businesses. Payroll, benefits, HR, tax administration, and regulatory compliance assistance are some of the many services PEO companies provide to growing businesses across the country.
The question today, for small and medium enterprises, is which route would be both cost-efficient with minimum risks. There are many aspects to consider before the final route is determined. Below are some points worth checking in case, you are considering extending footprints to India.
| Setting up a Foreign Subsidiary in India | Professional Employer Organization | |
| Set-Up and Operation Costs in a New Geography | Setting up a new entity in India can take somewhere around USD 7,000-10,000 and exit takes, even more, ~ USD 10,000-20,000. | Third party payroll services or PEO on the other hand comes with one-sixth of the costs involved in setting up an entity in India. When the companies are just planning to test the waters, they want to do it with a limited budget. Since setting up entities involves heavy investments, MNCs are more comfortable with the PEO/EOR route. PEO facilitates the best services on a limited budget. |
| Maintenance Cost and Effort | Maintaining a full-fledged entity would not be ideal for companies that do not plan to have big operations initially or hire more than 10 employees. | Hiring a PEO saves a considerable amount of time and money on running an entity that involves bookkeeping and compliance management (withholding, payroll taxes, transfer pricing, board meetings, audit to name a few). |
| Banking | To register a subsidiary in a new country, you must open a bank account. However, rigorous Know Your Customer (KYC) regulations have complicated the process of opening and operating a foreign bank account. Further, you are required to disclose financial information, leading to a time- and resource-consuming process. | PEOs manage these banking needs for all their clients. |
| Local Director | When foreign entities are setting up a company in India, they also need a full-time Local Director. Trusting a local director would act as a trusted advisor in the interest of the company can be difficult. Also, companies may not want to disclose confidential information to the local director.
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With a PEO, you don’t have to reveal confidential information and can ensure the security of your company. |
| Scaling-up | Scaling operations in a new location in India need months of planning, approval, and execution. | PEO/EOR facilitates Extremely fast Set up/Scale-up. Post signing the agreement, the first round of onboarding takes 2-3 days and then just a day for any number of employees in any location for the same client. |
| Exit | Exiting an entity in India is neither quick nor easy. There are several compliances that need to be adhered to before getting a NOC.
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PEO/EOR promotes flexibility as there is an easy exit. In simple words hiring a PEO can always be put on plug-in plug-off mode in case the services are not required at any point in time. |
| Compliance Management | The leadership must get involved in the management of the entity and see that the entity Is fully compliant. Lack of compliance can attract heavy penalties. In addition to this, the tax compliance in India keeps changing and companies need to be updated and prepared to ensure that they are not missing anything
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Companies hiring PEO/EOR are not worried about compliance as PEO takes call of all the tax and legal compliance |
While the above pointers just give a basic insight on what route to follow, the final decision depends on the immediate goals, long-term objectives, and the changing dynamics. It is interesting to know whether a PEO is the right fit for Your Business?
It is true that due to the pandemic-induced situation, work from home has become a new normal, leading to a surge in hiring people remotely. According to Blueweave Consulting, The India Professional Employer Organizations (PEOs) market reached USD 1,232.8 million in the year 2020 and it is expected to reach USD 2,710.5 million in the year 2027 while growing at a CAGR of 12.4% during the forecast period (2021-2027). Also, there has been an increase in demand for tech talent from India. In recent times, we have seen a definite shift in companies hiring talent beyond their geographical boundaries. Using a PEO brings many benefits including, cost efficiency, time savings, risk mitigation, compliance assurance for the business.
However, depending on the need of the business, companies may compare the advantages of setting up an entity with that of hiring a PEO. These factors could vary from
1: Size of the team: If you plan to hire more than 20 employees, establishing an entity would be more advantageous. However, if the initial plan is to hire less than 15 employees, partnering with a PEO will be economical and fast for entering in new geography.
2: Certainty of the Business: As mentioned above, if you are just testing a new market, PEO would best work for you. However, if you are sure about your long-term plans, and want to establish great brand awareness, establishing an office will expedite the process of expansion in the new geography.
3: Business Activities: A PEO can help you hire employees with a technology background or another remote talent at a much lower cost than hiring in the home country. However, if your business involves getting local permits and trading or bidding on government contracts, you should establish a local legal entity.
