EwE provides an elegant and comparatively cheaper solution for employing staff in SEE countries that are already EU members (Bulgaria, Croatia and Slovenia). There are, however, a few rules to keep in mind.
Employment without legal entity or permanent in-country establishment
In the European Union (and Switzerland as well) authorities allow foreign companies to employ people without establishing a legal entity, which is a provision governed by a unified European Union Directive. The first thing to note is that this applies both to the so-called posted employees as well as such employees as are hired on the ground, meaning those already possessing a local status.
Certain administrative and cost-related advantages are immediately obvious: there is no need to open a branch, representative office, or a subsidiary, which means that both legal and bookkeeping costs will be avoided. Registration with payroll-related authorities, such as the social security and tax office, tends to be rather painless; the one thing to bear in mind is that the Company’s contractual relationship with and obligations towards the employee(s) cannot be less favourable than stipulated by the Labour Code of the country in question.
A bit of SEE context
Within Southeast Europe – and for our purposes here by that we mean Bulgaria plus the countries that used to be part of former Yugoslavia – this means that companies may have recourse to this solution in Slovenia, Croatia and Bulgaria, but not elsewhere. In other words, a Serbian company without Establishment in, say, Croatia may hire people in such a fashion, but the same is not true the other way around; a Bosnian company may do so in Slovenia, but a Slovenian company may not in Bosnia; a Macedonian company may do so in Bulgaria, but a Bulgarian may not in Macedonia; and so on. Naturally, what this means for international companies deciding to enter multiple regional markets at the same time is that different solutions will have to be applied on a case-by-case basis. Outside of the EU, companies can go the way of staff leasing, the cost of which at this moment and in the SEE region revolves around 10-12% of the salary gross; this is why Employment without Establishment, in those (EU) countries where it is possible, is not only a comparatively elegant solution, but also a significantly cheaper one.
A solution for the well prepared
Before anything, all companies entertaining the notion of having recourse to employment without establishment should ‘arm’ themselves with proper legal (and tax) advice. The governing principle to have in mind is the principle of auxiliary activity: for instance, if employees engage solely in promotional, marketing and/or information gathering activities, a company will be allowed to operate without establishment. If, on the other hand, we’re talking about manufacturing or sales – or if employees in any way have the mandate to negotiate contracts – the principle of auxiliary activity will have been forfeited and the company will be forced to establish a legal entity.
To illustrate: in Slovenian legislation, for example, all agreements on avoidance of double taxation provide what is not considered as a permanent establishment:
1) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise
2) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery
3) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise
4) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise
5) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character
6) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs 1) to 5), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.
In Croatia, in addition to the abovesaid being fully applicable as well, the main thing to look out for is the so-called NKD registered activity (NKD is a classification of all economic activities of the Republic of Croatia), which is what will in essence define the nature of business being conducted locally and thus define the status of the company engaging in it. This is why proper legal advice is of utmost importance.