A US company finds the right engineer in Lisbon, the right account executive in Munich. The candidate is ready to start. The company has no entity in either country, and opening one can take months the hire will not wait for.
Most leadership teams reach for one of three shortcuts: call the person a contractor, let them work remotely from home and pay them through US payroll, or put them on a local payroll provider and hope that settles it. Each one answers the ‘how do we pay them’ question. None of them answers who the employer is, which country's employment law applies, or whether the company has just created a taxable presence abroad.
Three routes, three different risks
Contractor
Quick to start, but if the working relationship looks like employment (set hours, company tools, a manager, one client), local authorities can treat it as employment regardless of what the contract says. Back contributions and employment-law claims can then fall on the company. Many European countries decide this on the facts of the relationship, not the label.
Remote employee on US payroll
The company is employing someone in a country where it is not registered. Local payroll registration, social security and employment-law obligations can still apply to the employer, and the employee may owe local tax on their pay. A US payslip does not remove any of that.
Own subsidiary
Often the clearest long-term structure, and potentially the right one once headcount and revenue in the country justify it. The cost is time and fixed overhead: registration, bank accounts, statutory accounts and local payroll before the first person can be paid. The appropriate structure and setup requirements depend on the destination.
Permanent establishment is the question finance will ask
Employing someone abroad can expose the company to corporate tax in that country if the employee's activity creates a permanent establishment (PE). The OECD adopted updated Model Tax Convention commentary on 18 November 2025 that speaks directly to home-based work. Under the commentary's home-working analysis, a home abroad is generally not a fixed place of business if the employee works there for less than 50% of total working time over a 12-month period. At 50% or more, a second step looks for a commercial reason for the employee being in that location, such as direct engagement with customers or suppliers, access to local markets or expertise. Personal preference, retention or general cost saving alone does not normally establish that commercial reason.
Two cautions. This commentary is not binding law, and each country decides whether to follow it; the applicable treaty, domestic rules and specific facts still matter. The 50% reference is not a universal tax safe harbour. And dependent-agent PE, where someone habitually concludes contracts on the company's behalf or plays the principal role leading to their conclusion under applicable treaty rules, is tested separately. Senior staff who negotiate and sign deals can carry heightened exposure.
For a US company, the practical point is that a sales lead or a director working from a European home office needs a documented position on PE before the contract is signed, not after the first tax enquiry.
Where an Employer of Record fits
An Employer of Record (EOR) is the legal employer in the destination country for an eligible arrangement. It issues the employment contract under local law, runs payroll, pays employer social security and handles statutory benefits and local filings. The US company directs the day-to-day work within the lawful arrangement. Where destination rules permit the model, the company does not need its own local entity to start the hire. Eligibility depends on the worker's immigration status, role, employing entity and any regulated labour-leasing restrictions.
That addresses the employment and payroll questions. It does not automatically solve PE. Commentary from US tax practitioners notes that EOR arrangements can still create PE risk, particularly where the company controls the staff closely or they sign contracts on its behalf. An EOR may be a sound route for a market test, a small team or a role that does not conclude contracts, subject to local assessment. It may be the wrong tool for a senior dealmaker who is effectively running a country from a home office; tax and legal advisers should assess the facts rather than assume that an EOR removes the exposure.
A decision test for US employers
Use these five checks before choosing a route:
- Will the person conclude contracts or lead negotiations for the company in that country?
- How many people will you have there in 12 months? One to three may suggest assessing an EOR. A growing team with local revenue may suggest an entity. These are planning considerations, not legal headcount thresholds.
- Does the person need a work permit? An EOR may employ an eligible worker locally, but it does not automatically provide sponsorship. The lawful permit route and processing time still decide the start date.
- Do they have customers, suppliers or premises in-country that give them a commercial reason to be there?
- Who inside the company owns the decision? Tax, HR and legal often each hold part of the answer.
How xpath.global supports US employers
xpath.global runs the hire as one programme: the employment route, the work permit where one is needed and a lawful route is available, tax and social security coordination, and relocation or settling-in where the person is moving. The structure is chosen against the role, destination rules and the headcount plan, so an eligible US company can start the hire without opening an entity and plan a move to a subsidiary when the business case justifies it.
Sources and editorial note
OECD Model Tax Convention update, adopted 18 November 2025, via Grant Thornton Belgium (5 June 2026) and Lewis Silkin (24 November 2025); The Tax Adviser, ‘Permanent establishment risk from remote work and the OECD's new guidance’ (31 October 2026). Commentary is not binding and country positions vary; take local tax advice before relying on any threshold.
This article provides general information, not individual legal, tax or immigration advice. Employment classification, EOR eligibility, work-permit routes and permanent establishment exposure require specialist review for the particular role, country and arrangement.
