Switching from a Subsidiary to an EOR Model in India

Subsidiaries are usually strong, strategic, and crucial business milestones for expanding your business in India. They offer you brand presence in local markets, control over all operations, and of course, ample business opportunities.

A subsidiary company is a business controlled by another company, called the parent company. The parent company typically owns over 50% of the subsidiary’s shares, giving it the final say in big decisions. While the subsidiary runs its day-to-day operations, it has to align with the parent company’s overall business goals.

While subsidiaries are great for expansion, they are not always the best of and perfect option for team expansion. In some cases, subsidiaries become a burden, a trap you find yourself stuck in. Increased costs, locked funds, lengthy and complex compliance web, and just more setbacks than benefits.

A strong, crucial, and strategic business milestone can quickly turn into a major business mishap in some cases. There are alternatives much better that make the whole process a lot easier. Alternatives that significantly reduce your costs, free up more funds for better allocation, and save you from the compliance web. The alternative I am talking about is becoming a popular choice for a growing number of companies. Instead of going for a subsidiary right away, they are opting for this alternative called employer of record or an EOR model.

In this blog, I talk about the situations when it’s suitable to consider switching to EOR services. The following is what you can expect from the blog:

• In brief, I explain what an EOR actually is and what it can do for you.
• When to set up a subsidiary, when to skip it, and consider EOR as an alternative
• Common reasons why companies switch to EOR and how EOR exactly helps
• The process of transition from subsidiary to EOR
• A case study where we helped one of our clients switch from their subsidiary to EOR
• A list of the top concerns our clients have had when switching and how we resolved them

If you are a business that has opened up a subsidiary but now wants to switch to an EOR model, this blog is for you. Through this blog, I aim to cover the whats, whens, and hows of switching to EOR. Let me start by making a point with an example.

Making a point with an example

Let’s take a hypothetical example. Say Jim Carrey wants to hire employees in India. He’s done his research and knows the employee market is strong. Real talented, skilled, and highly experienced professionals at affordable pay. To hire these Indian employees, he chooses to set up a subsidiary company, which becomes a back office team for Jim. But being a cost center does not spare him from the mountain of work he has to endure, including

• Understanding Indian laws and compliance
• Periodic accounting and taxation activities and maintaining books
• Bearing heavy costs, capital requirements, operational costs, etc.
• Recruiting early-stage employees, setting up office space, and IT infrastructure
• Building HR and admin teams to handle payroll, benefits, engagement, and the whole drill

All this, just to hire employees feels like a major overkill, doesn’t it? Especially when Jim here, had an easier, better way around this – an EOR model. A solution literally DESIGNED to simplify hiring for businesses like Jim Carrey’s. A solution with which he could just skip the entire subsidiary process and jump right into the actual goal – getting talented, skilled, and highly experienced professionals at affordable pay.

The point I want to make – choosing alternatives like EOR is a lot more beneficial, cost-effective, and time-efficient than setting up a subsidiary. When you first entered the Indian market, a subsidiary might have been the right choice, and that’s great. But if it’s now non-revenue generating, like solely for hiring employees, switching to an EOR would be a smarter move.

 

The EOR Solution

A renowned American author, Carl Bard says, 

Instead of worrying about the subsidiary now set up, you can start by switching to EOR services to give your business a better and brand-new ending.

So what is EOR and what does it do for you?

In a nutshell, EOR is a service provider that hires employees on behalf of your company. It manages local legal requirements, payroll, taxes, HR compliance, the employee lifecycle, etc.

Your EOR partner helps you build and manage your remote teams in the most cost-effective way. It eliminates your need for having a subsidiary, freeing you from the complexities of compliance, huge investment, and regulatory burdens. To simplify further, there are 4 main Cs of Indian EOR services that explain the scope of EOR better. These Cs are culture, compliance, communication, and connection.

 

 

Now while I say EOR gives you all these benefits, there are some cases when a subsidiary is mandatory. The next section talks about when a subsidiary is mandatory and when it’s best to switch to EOR instead.

When to Set Up a Subsidiary and When to Switch to EOR

Let’s first start with understanding when exactly you need a subsidiary and when you can operate in India without it. Setting up a subsidiary is a long, expensive, tedious, and exhaustive process. But not every business operation needs this process.

Yes, a subsidiary offers comprehensive advantages like complete control over operations, solid local presence, access to the Indian market, etc. Oftentimes, the business goals don’t align with the benefits and alternative solutions seem a better business decision. Let’s get into when a subsidiary is a must and when other alternative options like an EOR model are more practical and cost-effective.

When is a subsidiary needed

Below is a quick list of cases where a subsidiary is not just the best option, but is necessary for long-term success in India.

1. Sell products and services directly in the Indian market
2. Import goods for local sale or distribution
3. Engage in manufacturing or production activities
4. Participate in government contracts or tenders
5. Create a long-term R&D or technology center
6. Form joint ventures or mergers with local firms
7. Build a comprehensive workforce with full internal HR control
8. Secure financial autonomy and control over funds

These are the scenarios where subsidiary formation is your best bet to thrive in the Indian economy. In these cases, an EOR would not be an ideal option for expanding your business. Let’s take a look at cases where a subsidiary becomes more a trap and less an effective strategy.

When to keep a subsidiary and when to consider switching to EOR services

While a subsidiary fully set up and in place might feel like a permanent commitment, I am here to tell you – that doesn’t have to be the case. The benefits an EOR can still provide outweigh the benefits you might get with a subsidiary. These subsidiary benefits come with a set of challenges and complexities – something Remunance can help you get rid of when you switch to an EOR model. In the long run, the costs incurred with an EOR are far less than with a subsidiary. That’s mainly because EOR helps you save on huge overhead and ongoing costs.

Let’s take a closer look at the types of businesses that should consider alternatives, such as an Employer of Record (EOR), rather than staying committed to a full subsidiary setup.

1. Companies that only wish to hire resources in India without generating revenue

As I mentioned before, if hiring resources is all you want to do out of your entity in India, why go through the complex hassles of a subsidiary? And it’s not just the process of setting up the entity but the wide array of additional resources that go into it.

For instance, let’s consider you have set up a subsidiary to hire IT professionals for your project. To hire say 50 of these professionals, you would have had to recruit a full body of accounts and HR staff to manage payroll, compliance, and employee relations. Not to mention, hiring legal and administrative support to deal with local regulations, tax filings, operational overheads, etc. 

For a team of 50 IT professionals, this is a huge increase in overheads  and an operational burden. Managing everything internally also increases the risk of non-compliance, were you to accidentally overlook any changes in labor or local laws.

Now let’s switch the perspective. If your goal is purely hiring and managing a team in India, you have alternatives like an employer of record to simplify the whole process. With an EOR by your side, you don’t need to hire any additional staff to manage your 50 IT professionals. We manage everything mentioned above. Not only that, but you now don’t need to set up a subsidiary to hire employees. Your EOR partner becomes your legal employer who will hire and onboard them for you. All you have to do is identify your 50 IT professionals and focus on your project. We make it that simple.

 

2. Evolved company goals from revenue generation to having a presence in India

Some businesses initially set up a subsidiary with generating significant revenue in India. Somewhere along the way, it doesn’t materialize itself. Maybe the company goals change or maybe companies realise the Indian market is not ideal for them. However, the ongoing costs of running a subsidiary still very much exist. And it can cause a real financial strain.

If this is your business and your revenue expectations are still slim or uncertain, switching to EOR services is a great option. Not only will this switch relieve your financial pressure, it will give you ample time to re-evaluate your strategy. Your EOR partner can also help you here with local market insights to create a better strategy all over.

3. Startups or early-stage businesses 

For startups with limited resources, a subsidiary can be a major strain financially. In the early stages, it is most important to allocate your funds mindfully. Between the regulatory hurdles, infrastructural costs, and management complexities, you’ll find your resources being locked, limiting your flexibility.

Because you’re at an early stage, switching to an EOR model will be immensely beneficial. You will still have your presence in India where you can analyze the local markets to find your best fit. With an EOR, you get the opportunity to test the waters. You can research and gather data about the Indian market before you make any long-term plans. And all of that by committing the least resources and having better flexibility.

4. Limited back office employees hired in India

EOR is the absolute best-suited model for companies who wish to hire a small number of employees in India. Anywhere less than 100 employees and your optimal fit is an EOR. This is because a subsidiary in this case becomes disproportionate to your needs. Why continue to invest costs in local directors, fulfill payroll obligations, and handle the legal infrastructure for a small team? An EOR takes care of all of these things while you can focus on managing your team. This will also keep your business financially liquid and make it easier to increase the size of your team.

5. Companies overcoming fraud aftermath

In some unfortunate cases, subsidiaries fall prey to fraud, especially if they lack extensive local oversight. At Remunance, we have helped a few clients overcome this aftermath better. A client switched to EOR after being defrauded. We were able to help them not just gain their trust back, but also assist with local insights they needed to make safer decisions.

If you want more information, this blog does a wonderful job: EOR or Subsidiary: Which One to Choose for Global Expansion?

This about covers the list of when a subsidiary is a good business decision and when it becomes a trap. And, what you need to do if you find yourself in this trap – switch! We’ve seen a growing trend of companies making this switch to employer of record (EOR).

Now, I don’t mean to preach numbers here, but let’s take a quick look at the trend of EOR becoming a popular choice with global companies. According to Global Growth Insights, in 2023, the EOR market was valued at USD 4,423.6 million, on its way to reach USD 4,711.13 million. By 2032, the valuation is expected to reach a whopping USD 7,800.75 million. The kind of growth observed here clearly talks great potential. With that potential in mind, let’s have a look at the WHYs. 

 

Reasons Why Companies Choose EOR Over Subsidiary

This section comes straight from Remunance’s experience with our clients. I sat down with one of Remunance’s company leaders to understand the pain points of our customers better. The intention was to give you a better, clearer idea of what companies face with subsidiaries that make them consider switching to EOR services.

Listed below were the primary reasons that made clients switch to EOR and today they are better off for it. And how this transition can lead to greater flexibility, cost savings, and operational ease.

1. Managing overwhelming compliance and regulatory burdens

Subsidiaries need constant attention to legal and regulatory requirements. Almost like a pot of milk kept on stove. These requirements include the massive documentation and process to set up your subsidiary, tax filings, audits, and a lot more. For many businesses, the administrative load becomes unsustainable, especially if they lack local expertise or have scarce resources to hire expert help.

According to Chartered Online, following are the statutes and regulations a company must comply with while setting up a subsidiary:

• Companies Act 2013
• Companies (Registration of Foreign Companies), Rules, 2014
• Income Tax Act 1961
• GST 2017
• SEBI Rules and Regulations
• FEMA (Foreign Exchange Management Act) 1999 Foreign Exchange Regulations
• RBI Compliance Requirements

On top of these compliance requirements, subsidiary companies are also required to comply with a bunch of labour laws. Now, some of these laws vary depending on the number of employees. For instance, companies don’t need to comply with the The Employees’ Deposit Linked Insurance Scheme, 1976 if the number of employees are less than 20. However, these are the mandatory laws a subsidiary must comply with, irrelevant of the number of employees:

• The Payment of Wages Act,1936
• Equal Remuneration Act 1976
• Child Labour Act, 1986
• The Sexual Harassment of Women at Workplace Act 2013
• State Tax on Professions, Trades, Callings and Employments Act, 1975
• The Shops and Establishment Act

You’ll also notice in India that the labor laws and employee rights are significantly different as you move across different regions. It is almost easy to find yourself at risk of non-compliance if these laws are not navigated properly. 

The one-stop solution for this is switching to EOR. When you switch to an EOR, the first thing that happens is no compliance related to the subsidiary. You can, without any stress, offload employment compliance-related responsibilities on your EOR partner. They take on the regulatory burden, ensuring employment compliance without the need for in-house teams. This frees up time and resources for core business functions.

2. High operational and maintenance costs

You can expect significant overheads when you’re operating a subsidiary. This includes everything from hiring local employees to maintaining offices, handling payroll, and keeping up with local legislation. The cost of setting up and running a subsidiary can quickly outweigh the benefits it offers.

If you have to do a cost comparison between an EOR and opening an entity, switching to an EOR takes the win. This is because it helps reduce these costs by managing the workforce and operations remotely. This allows you to focus on expanding your business rather than maintaining your subsidiary.

3. Simplicity in payroll and employee benefits management

Managing payroll and employee benefits in a foreign country can be complex. You need to deal with local tax laws, social security requirements, varying labor laws, etc. Subsidiaries need an in-house team to manage these tasks, which is both time-consuming and costly.

An EOR as subject matter experts handle all of this for you. It ensures employees are paid on time, receive benefits, and comply with local laws. This way you end up saving the company from the hassle of managing it internally.

4. Mergers and acquisitions flexibility

In the case of mergers or acquisitions, if a company is acquired, its subsidiary may need to be dissolved or merged with the acquiring company.

In this case, during the brief period of acquisition, companies often prefer shifting the employees to an EOR. An EOR offers a huge help in making sure the day-to-day activities of the employees are as less disrupted as possible.

At Remunance, we understand the severity and importance of this step. Any potential errors in this transition can risk the loss of employees and good talent. So we make sure to be as transparent, attentive, and proactive as possible. We make sure none of the employees feel threatened by the changes happening in the upper management of the company. We ensure smooth continuity of work and job safety and as little disruption as possible.

These constitute the main reasons why companies have been preferring switching to an EOR from a subsidiary. Let’s now move from the whys to the hows. In this next section, I break down the process of how to switch from a subsidiary to an EOR.

 

The Process of Transition from Subsidiary to EOR

So, after the big decision to switch from a subsidiary to an EOR, the question now arises: how? The transition may seem daunting from where you’re standing, but it doesn’t have to be. The process basically just involves evaluating your current operations, understanding what roles an EOR can take on, and making sure everything aligns with your business goals. Let’s understand the process in detail.

1. Understand your business requirements

Before you dive into the whole transition, it is necessary to take a step back and understand what exactly are your business needs in India. When you’re clear on what you want to achieve by switching to an EOR, you’ll be able to set realistic goals for your EOR partner. Do you want simplified operations, improved compliance, or payroll management? Having the initial goals in place will guide you through the process and ensure that your partner is aligning with your business goals.

2. Define and lay down your EOR terms

Once your business goals are in place, the next step is to find the best-fit EOR partner. Once you have your EOR, you need to create and establish a clear EOR agreement with them. Here, you would get into a contract that would lay out the roles, responsibilities, and liabilities of both you and your EOR. This helps ensure everyone is on the same page from the very start.

Read: How to Choose the Right Employer of Record (EOR)?

3. Finalize employment documentation and terms for transitioning team

Once you’ve agreed on the EOR terms, it’s time to shift focus to your transitioning team. This step is all about ensuring the legal, financial, and practical aspects of the transition are airtight. Begin by finalizing the employment documentation. This means drawing up new employment contracts that comply with local laws and align with the EOR framework.

Your EOR partner will take the lead in creating compliant contracts, but your involvement is key to maintaining consistency with your company’s ethos and goals. Clearly outline salary structures, benefits, and other employment terms. This documentation needs to reflect the promises made during the transition and reassure your employees that their compensation and benefits remain intact.

4. Address employee sentiment and align employee policies

During this switch, it is of the utmost importance that your employees feel safe and valued. It’s crucial to manage employee expectations during the transition. You along with your EOR have to ensure that employee policies, benefits, and overall sentiment are addressed. It is important to maintain continuity and minimize uncertainty/disruption in the team.

At Remunance, we manage this step smoothly and with patience. We, in detail, explain all changes happening and assure them that they still work for the same company. We address every single doubt employees have and make sure they fully understand the terms of the switch and how it impacts them.

5. Transition employees from subsidiary to EOR

The next step involves transitioning your current employees to your EOR structure. This typically means ending the employee’s contract with the subsidiary and setting up a new contract under the EOR. We make sure to help employees understand that the terms of their salary and their benefits are all going to remain the same. The only change is that of the payroll they are on.

6. Hire new employees through the EOR

If there are any new hires, the EOR takes the lead in sourcing, hiring, and onboarding new team members globally. Through a co-employment arrangement, the EOR becomes the legal employer while your company manages the day-to-day supervision of the employees.

7. Closing your subsidiary company in India

With the EOR managing payroll and compliance for your local team, you can safely proceed with the  subsidiary company closure procedure. With the help of the right local consultants, you can ensure all everything is wrapped up smoothly and in compliance with local regulations.

And voila! At the end of this process, you’ve now successfully switched to EOR. This wraps up the whole switching to the EOR process. I’m almost certain that if this switch is something you are seriously considering, your mind is full of doubts and questions. And I have an answer to that too. In the next two sections of the blog, I aim to show you the real example of this switch made by our clients and the common queries, doubts, and questions we answered for them.

How Remunance Helped Adaptive Insights

So, this story starts with a company called Adaptive Insights, today known as Workday Adaptive Planning. A great software service-based company that extended its services in finance, sales, and workforce planning.

It all started with them wanting a service provider to handle their software development work. The option they initially chose was outsourcing their work to a software development company. However, this company would go on to constantly change its hired resources which naturally disrupted the work of Adaptive Insights.

Already not so happy with their experience with a third-party service provider, they decided to set up their subsidiary. This was so they could hire their own software developers who could work on the terms of the company.

What they did not see coming was the interesting twist that was to follow. The subsidiary move backfired. Mainly because they did not receive the right guidance on subsidiary formation. This would include everything from the procedures right to the type of company that they needed to form.

The whole subsidiary setup took a big chunk out of their time and costs and they ended up setting up the wrong type of company altogether.

Post this experience, it is only obvious for a company to look for an industry expert who could help them understand the local nitty-gritty. Someone who would help them with the right guidance into the Indian market. This is when they started looking for alternatives like PEO/EOR and connected with Remunance.

After a brief discussion with the CEO of Adaptive Insights, a strategy was created and they started working with Remunance on the proposed plan of action. The plan of action was to help them close their subsidiary and move the staff of 8 core employees to EOR.

The result? Adaptive Insights spent the most successful 11 years in the Indian market before they got acquired by WorkDay.

This switch from their subsidiary to EOR not only helped them streamline their human resources, it helped them thrive in the Indian market for over a good decade. It saved huge amounts of costs that they would’ve incurred were they to not switch from their subsidiary.

Read the full case study: Adaptive insights: Perks of partnering with the right EOR

Top Concerns Our Clients Had When Switching to EOR

1. Will our employees’ roles, benefits, and policies stay the same after the switch?

Yes, nothing changes for your employees in terms of their roles, benefits, or policies as far as it is complying with Indian labor laws. It’s business as usual for them. At Remunance, we make sure all your existing employment terms are carried over as effortlessly as possible. We work closely with you to mirror your policies under the EOR setup, so employees don’t experience any disruptions or changes in their day-to-day work.

2. How will this transition impact employee morale and confidence in the company and how quickly can we complete this transition without major disruptions?

When handled well, the transition shouldn’t affect employee morale or confidence. And Remunance makes sure of that. We map out a clear, step-by-step plan to make the switch smooth and quick. We also help you communicate openly with your employees, reassuring them that their jobs and benefits are secure. By addressing all doubts and concerns upfront, we maintain their trust as you finish up your company closure procedure. And your EOR helping you wrap up the switch from your subsidiary in a smooth like butter manner.

3. How will communication with employees be handled?

Remunance makes sure your employees stay informed and feel supported throughout the process. Think of us as your communication partner. We keep employees in the loop, share updates in simple terms, and provide a dedicated point of contact for their questions. At no point will your employees feel left in the dark. And we take full responsibility for that.

4. How secure is our company data under the EOR’s management?

Your EOR partner does not get access to your company data. However, we safeguard all your employee data. We use secure IT systems, strict access controls, and follow global standards for data protection. Plus, we’re transparent about how this data is handled, so you’re never left wondering. Additionally, we also sign an agreement waiving all rights to any product or information being created by your employees in their tenure with us.

5. What kind of reporting and transparency can we expect from the EOR?

You’ll get clear, detailed reporting every step of the way. At Remunance, we provide regular reports on payroll, compliance, and employee updates. You’ll always know exactly what’s happening, and you’ll have real-time access to key information when you need it.

6. Will we lose out on our brand value in India?

Absolutely not. Your brand identity stays strong and intact. We make it clear to employees and stakeholders that this is just an operational change and that it doesn’t affect who you are as a company. We also help you preserve your work culture and ensure employees still feel loyal and connected to your brand.

Conclusion

At this point, it is safe to say that switching from a subsidiary to an EOR isn’t just about simplifying business operations. It can be the strongest, most strategic, and crucial decision for your business. It can help save a bundle of costs. It can help onboard the best of talents in the Indian market. And it can allow you to offload all major responsibilities on them while you focus on your core business.

At its heart, the switch to an EOR is about efficiency and quality without compromise and unnecessary hassles. It allows you to maintain control over your workforce, nurture your company culture, and safeguard your brand presence.

All of this while freeing you from the administrative and compliance burdens of running a full-fledged subsidiary. And the process does not have to be daunting either. An EOR partner like Remunance stands strong by your side every step of the way.

So, whether your current subsidiary setup feels like a misstep or a wrong decision altogether, the EOR model is your answer to it all. And Remunance as your EOR partner, cause we literally stick with you as long you want us to, helping you every step of the way. With Remunance, you’re not just getting a step forward, you’re getting a better and a whole brand new ending to your business.