4 Compliance Challenges When Setting up Your Own Entity

Registering a business can be complex enough even within the borders of your own country: getting the paperwork right, obtaining permits and licenses, transferring capital, hiring a team, paying various processing fees.

Now imagine doing all this in another country—one whose legal requirements, employment laws, and culture you know little about.

However, compliance is a non-negotiable in global expansion and not something you can fudge: you’re either fully compliant or risking a damaged reputation, lawsuits, financial fines and penalties and potentially even criminal liability.

This guide will clarify the four key compliance challenges you will encounter when registering your own legal entity overseas and shed light on how using EOR services can help solve them.

• Legal and regulatory compliance
• Financial compliance
• Employment laws
• Data protection and privacy

#1 Legal and regulatory compliance

When opening an entity in a foreign market, you must adhere to local corporate, labor, and tax laws, business licensing requirements, and other similar regulations within the applicable legal framework.

As laws and regulations frequently evolve, they require constant vigilance to ensure full compliance. This is why for most companies the main challenge is the lack of local expertise in all countries they operate in, which exposes them to non-compliance risks.

For example, the government in the Netherlands made work from home a legal right. There are also more law modifications upcoming in 2024. The UK government is expected to officially approve flexible working as a “day one right” through the Flexible Working Act. Minimum wages in Mexico will increase by 20% as of January 2024.

Failing to inform yourself timely and comply with such local laws can lead to considerable fines, legal complications, damaged brand reputation, or even business closure and criminal liability in extreme cases.

The complexity and variability of employment and tax laws across different regions and countries can be overwhelming and financially burdensome for employers, as they likely need to hire legal and financial professionals to help them navigate new jurisdictions as they grow globally. This can significantly hinder international expansion efforts.

How can an EOR help?

An EOR service provider specializes in understanding the legal complexities of establishing business operations in a new country. These organizations offer expertise in local regulations, ensuring that your entity adheres to the correct legal requirements.

In accordance with its definition, an EOR assumes legal responsibility as the official employer of your foreign workers, significantly reducing your exposure to risks related to employment laws, ensuring that your entity operates within legal boundaries.

Many EORs also have dedicated in-house teams that stay abreast of legal changes. They adjust your entity's operations and documentation accordingly, reducing the burden of keeping track of regulatory shifts.

To show you how frequent these law changes can be, we’ll share an interesting detail: in 2022 only, there were over 60,000 laws updated across 190 countries, and Deel’s continued compliance capabilities are tracking and therefore keeping you compliant on a daily basis.

#2 Financial compliance

When doing business in a foreign country, companies also need to ensure financial compliance with local tax laws, adhere to local accounting standards, and ensure accurate and timely financial reporting.

Understanding and meeting tax obligations, such as income tax, VAT, or payroll taxes, can be complex and vary based on business type and location. Maintaining ongoing payroll and tax compliance can even vary within one country, between different jurisdictions (like in the US).

For instance, all LLCs set up in the European Union (EU) must monitor their business health through financial statements, ensuring “a true and fair view of their financial performance and financial position” and consistent financial reports across the EU.

Setting up efficient tracking of income, expenses, and financial transactions while maintaining records compliant with local regulations requires hiring at least one local expert who can ensure deadlines and requirements are met at all times.

How can an EOR help?

EORs have in-house experts who have the local tax know-how, ensuring accurate tax calculations, deductions, and filings and minimizing the risk of tax-related penalties.

An employer of record can implement robust financial systems and processes to track and maintain accurate records, streamlining financial reporting according to local accounting standards and reducing the risk of errors or non-compliance.

EORs also conduct regular compliance audits, reviewing financial records and processes to identify and rectify any discrepancies or potential non-compliance issues.

When you hire employees with Deel, we take on all of the responsibility to make sure you’re compliant with local laws.

• We make sure all the right payroll taxes, social contributions and other government fees are paid
• All mandatory local benefits, like health insurance and pensions, are handled for you
• We handle payroll, payslips and all things HR admin so you can focus on your business

#3 Employment laws

When hiring local talent in a new country, you need to ensure that every employment contract you sign accurately reflects applicable local laws, including:

• Minimum wages
• Working hours
• Statutory employee benefits (social security and health insurance)
• Termination
• Leave policies
• Intellectual property rights, and more

Administering payroll, benefits, and contributions in compliance with local regulations can be intricate and time-consuming—you must follow specific guidelines regarding payroll schedules, deadlines, and more, for each country you operate in.

Here’s an example of a potential risk. Correct worker classification is one of the most complex questions in global employment, as definitions of employees and independent contractors vary by country. There are usually strict penalties for the wrong classification of employees as independent contractors, ranging from a few thousand dollars to even jail time, if an audit proves the misclassification happened intentionally.

📑 Read more about employee misclassification.

Many companies have already paid hefty fines for breaking worker classification laws.

The US Department of Labor (DOL) investigated Holland Services in 2021. The company misclassified 700 employees, which led to around $43,277,000 owed in back wages and damages.

In 2023, the DOL investigated Arise Virtual Solutions and filed one of the largest misclassification cases in its history. The ongoing case alleges that the outsourced customer center service provider hired more than 22,000 workers as independent contractors but did not provide them full autonomy in their work.

📑 Read more about California independent contractor laws.**

Addressing the right hiring practices and contracts isn’t only important for employment compliance in this case but also for maintaining a positive working environment with local employees who are motivated and productive.

How can an EOR help?

EORs legal teams have expertise in local labor laws and can provide advice on your entity's hiring practices and workplace policies that align with these regulations. These legal experts assist in creating employment contracts that meet legal requirements, safeguarding both the employer and the employee.

Employers of record also manage payroll, providing accurate salary payments, tax deductions, and compliance with benefits mandated by local laws. 

An EOR often provides support in managing employee relations and conflict resolution, ensuring compliance with employment laws during such processes.

#4 Data protection and privacy

Protecting company, employee, and customer data in accordance with all applicable laws can be a great challenge when expanding overseas, especially when you need to navigate diverse data protection laws across regions, each with its own set of requirements and compliance standards.

One such example is the GDPR in Europe, which requires robust data protection measures, explicit consent, and strict data handling procedures.

Not to mention keeping company, employee, and customer data safe from cyber threats and ensuring robust data security measures.

How can an EOR help?

EORs stay updated with local data protection regulations, ensuring that data handling practices, including storage, processing, and transfer, comply with these laws.

They also establish processes aligned with GDPR requirements, ensuring that personal data is collected and processed lawfully, transparently, and securely.

To protect your sensitive information (such as employee personal data), EORs implement robust cybersecurity measures, including encryption and regular security audits, to protect data from potential breaches.

Simplify cross-border growth with Deel

The often long incorporation process in a foreign country can slow down your international business expansion, causing delays in market entry. Delayed entry can result in missed business opportunities, allowing competitors to gain an advantage or capture market share before your entity is operational.

The inability to legally operate during the setup phase can disrupt planned business activities, affecting revenue generation, talent acquisition, and business growth, potentially leading to increased costs associated with ongoing overheads, administrative expenses, and potential penalties due to delayed compliance.

Luckily, there’s a simple solution: unlocking new markets with an employer of record.

Partnering with an EOR can mitigate these risks by providing a faster route to market entry and ensuring compliance while setting up operations in a new location.

With Deel’s vast in-house expertise, self-serve and easy-to-use platform, 24/7 in-app support, flat-rate pricing without hidden costs, and incredible flexibility to cater to your business needs, we can help you hire talent compliantly in over 150 countries and streamline HR and payroll regardless of location.

Learn why 20,000+ businesses trust us to support their global expansion; book a demo to discover how Deel works.