When a company decides to hire in a new country, it faces a fundamental choice: use an Employer of Record, or set up a local legal entity. Both approaches achieve the same end goal (legally employing workers in the target country) but they have very different cost profiles, timelines, administrative requirements, and strategic implications. Getting this choice right can save significant time and money.
This guide compares EOR and subsidiary across the dimensions that matter most for business decision-making, using Spain as a concrete reference point for what each approach actually involves.
What Setting Up a Subsidiary Actually Involves
When people say “set up a local entity,” they usually mean incorporating a local company in the target country, opening local bank accounts, registering with tax authorities, setting up local accounting, and hiring or outsourcing the ongoing compliance function. In Spain, the most common structure for foreign subsidiaries is a Sociedad Limitada (S.L.), equivalent to a private limited company.
The process of setting up a Spanish S.L. as a foreign company involves: obtaining a tax identification number (NIE) for the directors, drafting articles of association, notarizing the deed of incorporation before a Spanish notary, registering with the Spanish Companies Registry (Registro Mercantil), opening a Spanish bank account, registering with the Spanish Tax Agency (AEAT), and registering with Social Security. The total timeline is typically three to five months if everything goes smoothly. Legal and registration fees typically run between EUR 3,000 and EUR 8,000, depending on the complexity and the lawyers involved.
After incorporation, the company has ongoing obligations: monthly or quarterly VAT filings, annual corporate tax returns, employee-level payroll compliance, annual accounts deposited with the Companies Registry, and potential local tax obligations depending on where the company operates. This typically requires either a part-time financial controller, an outsourced accounting firm, or a dedicated compliance service.
What Using an EOR in Spain Involves
With an EOR, you sign a service agreement with the provider and they handle everything else. Employment contracts are issued under Spanish law. Employees are registered with Seguridad Social before their start date. Payroll is processed in euros each month, with the correct income tax (IRPF) withheld and the correct employer Social Security contributions made. You receive a monthly invoice covering total employment costs plus the service fee.
There’s no incorporation process, no Spanish bank account to open, no annual accounts to file, and no ongoing entity maintenance. You can start hiring within two to three weeks of selecting a provider.
Comparing the Two Approaches
Timeline to First Hire
EOR: two to four weeks in most cases. Subsidiary: three to five months for a standard Spanish S.L., longer if complications arise with bank account opening or notarial processes.
Upfront Cost
EOR: typically no setup fee, or a modest per-employee onboarding fee. Subsidiary: EUR 3,000 to EUR 8,000 or more in legal, notarial, and registration fees, plus the time cost of directors and management involved in the process.
Ongoing Administrative Cost
EOR: included in the monthly service fee. Subsidiary: accounting firm fees (typically EUR 500 to EUR 2,000 per month for a small entity), corporate tax filings, payroll administration, and compliance monitoring.
Control and Flexibility
EOR: you retain full operational control of employees, but you’re dependent on the provider for employment-related decisions and processes. Subsidiary: complete control over all aspects of the employment relationship, but you bear all compliance responsibilities.
Employer Brand
EOR: employees are legally employed by the EOR provider, not your company. Some candidates, particularly senior hires, prefer direct employment. Subsidiary: employees are employed directly by your company, which can be important for employer brand and culture.
Scalability
EOR: per-employee pricing means costs scale linearly with headcount. At small team sizes (under 10), EOR is almost always cheaper. Subsidiary: fixed overhead costs become more efficient as the team grows.
The Break-Even Analysis
The question of when a subsidiary becomes more cost-effective than an EOR is worth modeling carefully for your specific situation. As a rough rule of thumb, for a country like Spain, the EOR model tends to be cheaper for teams of up to 8 to 12 people. Above that size, particularly if you plan to be in the country for the long term, the fixed costs of a subsidiary start to amortize across more employees and the per-employee cost comes down below EOR pricing.
The analysis should include not just the direct financial costs but the management time required to set up and maintain the subsidiary. Director time spent on incorporation, bank account setup, and ongoing compliance is rarely free even if it’s not invoiced.
When to Choose EOR
- You need to hire quickly and can’t wait three to five months for entity setup
- You’re testing a market and aren’t ready to commit to a permanent local presence
- Your team in this country will remain small (under 10 people) for the foreseeable future
- You want to avoid the ongoing administrative overhead of maintaining a local entity
- You want flexibility to scale down or exit the market without entity dissolution costs
When to Choose a Subsidiary
- You’re building a large team (10 or more) and plan to be in the country for the long term
- Your employer brand and the direct employment relationship are important for attracting senior talent
- Your business requires local contracts, local billing, or a local presence for regulatory or commercial reasons
- You want complete control over HR processes and employment decisions
- The long-term cost analysis shows the subsidiary becomes more cost-effective at your projected headcount
The Hybrid Approach
Many companies start with an EOR and transition to a subsidiary once they’ve validated the market and built a large enough team to justify the overhead. This is a sensible and common path. A good EOR provider will support the transition, not resist it. If a provider seems reluctant to discuss the subsidiary transition scenario, that’s worth noting.
For a detailed comparison tailored to your specific hiring plans in Spain, visit the Employer of Record Spain page and speak with an advisor who can model both options for your situation.
Tax Implications of EOR vs. Subsidiary
The entity setup choice has tax implications beyond employment costs. When you hire in Spain through an EOR, your company has no taxable presence in Spain. You are a foreign company purchasing a service from a Spanish EOR provider. There is no Spanish corporate tax exposure, no Spanish VAT registration requirement (in most cases), and no obligation to file Spanish tax returns. The EOR pays Spanish taxes on their own profits.
When you set up a Spanish subsidiary, you have a legal entity that may be subject to Spanish corporate income tax on its profits, may need to charge VAT to Spanish customers, and has ongoing tax filing obligations. This creates more administrative overhead but also more flexibility: you can have local contracts with Spanish customers, deduct local business expenses, and potentially benefit from Spanish R&D tax credits or investment incentives.
For companies that are primarily using Spain as a talent pool with no local customers or revenue, the EOR route keeps the tax situation simple. For companies with Spanish customers or significant local business activity, a subsidiary may be necessary regardless of the team size.
Employee Experience: EOR vs. Subsidiary
From the employee perspective, working for an EOR is slightly different from working directly for their operational employer. The payslip says the EOR company name. Benefits are administered through the EOR platform. When administrative questions come up, like payslip corrections or leave balance queries, they go through the EOR system rather than a direct HR team. Most employees adapt to this quickly and find the difference minimal in practice, but some senior candidates or those with experience at larger companies prefer the directness of being employed by the company they actually work for. For strategic or executive hires, the subsidiary route may be preferable purely for employer brand reasons.
