You’ve probably started to notice that those monthly Employer of Record (EOR) invoices, once just a cost of doing business, come with more questions than answers.
Yes, they’re usually deductible as business expenses. But somewhere in that comfort lies a catch: cross-border tax quirks, GST or VAT surprises, and the stubborn risk of inadvertently setting up a permanent presence abroad.
Here’s why it matters: every global hire via EOR shows up as a line item on your ledgers, and while deducting it makes sense, the tax treatment doesn’t happen in a vacuum.
You’ve got income-tax rules, then there’s VAT or GST, and the ever-present question of permanent establishment, does your newly hired rep transform into a local legal footprint?
This article walks through how EOR fees weave into your tax story: what gets deducted, how value-added taxes apply (or don’t), and what triggers a PE risk. Think of it as a friendly but street-wise guide, so when that next invoice lands, you know exactly where it fits and what questions to ask.
The Quick “Yes, But”
Usually, yes but there’s a catch:
If you’re in the U.S., the IRS lets businesses deduct expenses that are “ordinary and necessary.” EOR invoices, basically third-party payroll, benefits and compliance services, typically fall into that category when they’re tied to earning business income.
Across the pond, the U.K. uses the “wholly and exclusively” test: if the cost is incurred solely for the trade, it’s allowable. Properly documented EOR fees generally clear that bar.
Likewise, other common tax regimes have parallel hooks: Australia’s section 8-1 requires that an outgoing be incurred in producing assessable income, and Canada lets businesses deduct reasonable current expenses incurred to earn income. So the language changes, but the bottom line is similar; these are normally deductible operating costs.
Now the catch: treating EOR fees as deductible is one thing; handling consumption taxes and cross-border tax exposure is another.
VAT/GST rules (reverse charge, place-of-supply) can affect cash flow and compliance, and the Big one, permanent establishment, can turn a tidy deduction into a larger local tax obligation if your remote hires create a taxable presence. The OECD’s BEPS work tightened those PE rules for a reason: tax authorities are watching.
So yes, but don’t stop at “can I deduct it?” Ask how it’s invoiced, who accounts for VAT/GST, and whether those hires are quietly opening a local tax door.
What Exactly Are You Deducting?
Most EOR invoices contain three chunks:
- Pass-through employment costs in the host country (gross wages, employer social contributions, statutory insurance).
- EOR service fee (often per-employee monthly plus setup/onboarding).
- Taxes on the service (VAT/GST/consumption tax) depend on where you and the EOR are located.
From a corporate income tax angle, companies typically book this as outsourced staffing/HR services or contracted services, a normal operating expense.
Where rules say “ordinary and necessary,” “wholly and exclusively,” or “necessarily incurred,” the case for deducting is straightforward when the spend supports your revenue activities (engineering, sales, support, operations).
How Different Regions Treat The Income-Tax Deduction
Across most places that tax businesses, you can generally deduct EOR fees, so long as they’re tied to legitimate revenue-generating activity.
What differs is how each jurisdiction phrases its test for deductibility: think “ordinary and necessary” in the U.S., “wholly and exclusively” in the U.K., or language like “incurred to earn income” in Canada or Australia. Each jurisdiction phrases it differently, but the principle is consistent: only genuine business costs qualify.
United States
As long as the expense is ordinary and necessary for your business, it’s deductible. If your EOR invoice includes foreign employer taxes (e.g., social contributions), those are typically rolled into your deductible business expense.
The IRS consolidates guidance on deducting business expenses in its “Guide to business expense resources.” Keep records, like amounts, dates, and business purposes.
United Kingdom
The “wholly and exclusively” test governs. If the EOR costs are for your trade and not dual-purpose (i.e., not personal, not capital), they’re allowable for corporation tax. HMRC’s Business Income Manual explains and gives examples.
Canada
CRA’s guidance on business expenses centers on incurring costs to earn income. Well-documented third-party staffing/admin services fall under normal deductible expenses.
Australia
The general deduction rule under s 8-1 ITAA 1997 covers losses and outgoings incurred in gaining assessable income (unless capital/private). EOR invoices used in the business are usually deductible.
India
Section 37(1) of the Income-tax Act allows a deduction for business expenditure not of a capital or personal nature and incurred wholly and exclusively for business. EOR service fees used for business generally qualify. (GST/VAT on the invoice is a separate topic below.)
The Consumption-Tax Wrinkle (VAT/GST): Who Charges Whom?
It’s helpful to know why VAT or GST can get tricky when you’re paying an EOR in another country. Sometimes you don’t pay tax upfront; your company does the accounting via a reverse-charge mechanism, which can impact cash flow and how that invoice gets recorded.
EU (B2B services)
The default rule sets the place of supply where the customer is located (Article 44 of the EU VAT Directive). Often, the reverse charge applies, meaning the recipient self-accounts for VAT instead of the supplier charging it (Article 196).
In practice: an EOR in Country A bills your company in Country B without VAT, and your finance team posts reverse-charge VAT locally
United Kingdom (post-Brexit)
The U.K. mirrors the B2B “place of supply = where the customer belongs” rule; reverse charge often applies when the supplier is overseas. HMRC explains this in VAT Notice 741A.
India
If your Indian entity buys EOR services from a provider outside India, it’s usually an import of services. Place of supply defaults to the recipient’s location when one party is outside India (IGST Act s.13(2)), and reverse charge can apply under Notification 10/2017-IGST (Rate).
If the service supports your taxable business, you may be able to claim input tax credit (ITC), neutralizing the IGST cash flow over time. (Flip the scenario, Indian provider serving a foreign company, and you may have a zero-rated export of services if statutory conditions are met.)
Australia
Cross-border B2B services can trigger the Division 84 reverse charge when the recipient is registered and the acquisition isn’t solely for a creditable purpose. The ATO and Treasury materials outline when the recipient, not the foreign supplier, accounts for GST.
In practice, most companies can deduct EOR fees for income tax, but VAT/GST requires separate treatment and careful documentation.
At-A-Glance: Deductibility & VAT/GST Treatment
| Jurisdiction | Corporate income-tax deductibility | VAT/GST on the EOR service |
| United States | Generally deductible if “ordinary and necessary.” | No federal VAT. State sales taxes typically don’t apply to cross-border EOR services; confirm state rules. |
| United Kingdom | Allowable if “wholly and exclusively” for the trade. | B2B place of supply: customer location; reverse charge often applies on overseas services. |
| European Union | Deductible under local “business purpose” rules. | Article 44 (B2B = customer location) and Article 196 (reverse charge). |
| India | Deductible under s.37(1) if wholly/exclusively for business. | Import of services → IGST under reverse charge; exports of services may be zero-rated if conditions are met. |
| Australia | Deductible under s.8-1 ITAA 1997 in the ordinary course. | Division 84 reverse charge can apply to cross-border B2B services. |
| Canada | Deductible if incurred to earn income (CRA guidance). | GST/HST rules vary by customer location and registration; check whether self-assessment applies. |
What About Permanent Establishment (PE)?
EORs reduce hiring friction; they do not erase PE risk. If your team in Country X habitually concludes contracts, manages key sales, or otherwise creates a “dependent agent” footprint, tax authorities may assert a PE, regardless of EOR.
The OECD BEPS Action 7 updates broadened those “agent” rules; law-firm and Big Four analyses echo the point. If you have real revenue-generating activity on the ground, talk to tax counsel before assuming “EOR = no PE.”.
A country-specific example: Germany tightly regulates staff leasing under the Arbeitnehmerüberlassungsgesetz (AÜG), separate from tax, but relevant to compliance.
EORs working in Germany typically need a labor-leasing permit through the Federal Employment Agency. It’s a compliance prerequisite, and non-compliance can cascade into tax and payroll headaches.
Paperwork That Saves Money (A Mini-Checklist)
Keeping clean records and clear invoices is the simplest way to avoid tax complications and prove deductions during an audit. With proof in hand, you’ve got your bases covered on deductions, VAT/GST quirks, and even audits.
- Contracts + SOWs: The agreement with the EOR should clearly describe services, pricing, and who the “employer” is in-country (it’s the EOR). This supports the business-purpose test and VAT/GST treatment.
- Invoices that separate service fees from pass-through employment costs help downstream audits and transfer-pricing reviews (even if not strictly required).
- Reverse-charge evidence (VAT/GST): Keep your tax coding, ledger entries, and returns showing self-assessment and any input credits claimed. EU: Article 196. India: IGST reverse charge via Notification 10/2017. Australia: Division 84.
- Activity logs for PE analysis: Who’s doing what locally? Are they negotiating or signing contracts? Save this. It’s your first defense if a tax office asks hard questions. (OECD BEPS Action 7 widened the net for “dependent agent” PEs.)
When EOR Costs Can Get Messy (And How To Avoid It)
When EOR costs get messy, it’s usually because something didn’t get quite right, like VAT that’s been misapplied, an unwelcome VAT liability you didn’t budget for, or suddenly waking up to find out a local office has unofficially sprouted.
All of a sudden, what looked like a clean, simple service feels like a compliance headache.
- Dual-purpose or personal benefit: If you’re paying for something that isn’t purely for the business (e.g., a personal relocation perk routed through the EOR), expect disallowance for that slice. U.K. calls this the “wholly and exclusively” problem; other countries have similar rules.
- Misapplied VAT/GST rules: Common misses: supplier charges VAT when the reverse charge should apply, or vice versa. Fix the tax code, request a corrected invoice, and adjust your returns. EU Articles 44 and 196, HMRC 741A in the U.K., IGST reverse charge in India, and Division 84 in Australia are your maps.
- Assuming EOR eliminates PE risk: It doesn’t. If local staff function as a sales office in all but name, you may have a PE, and with it, local corporate tax filings. Read the room and get a PE assessment if your team is revenue-facing.
- German labor-leasing rules ignored: If your EOR arrangement in Germany lacks an AÜG permit, you might face non-tax compliance penalties that spill into tax territory. Vet the provider’s license.
A Simple Way To Think About Budgeting
When finance asks, “What’s our after-tax cost of using an EOR?”, use this mental model:
- Operating expense (service fee + pass-through employment costs) → generally deductible against corporate income tax.
- VAT/GST → often reverse charge with potential input credit (net cost ≈ zero) if you make taxable supplies in that jurisdiction. Timing can create cash-flow friction.
- PE risk → separate decision tree; if PE exists, expect local profit attribution and filings. Cost isn’t the invoice; it’s the tax on profits allocated to that country.
If you’re comparing EOR vs. entity setup, remember to include hidden items: local accounting, payroll software, statutory audits, bank fees, directors, and the very real cost of your team’s time.
Conclusion
If your EOR setup ties directly into how you earn revenue, its cost is generally deductible where you pay corporate tax. VAT or GST? Handle that separately, often via reverse-charge accounting and input credits, so it won’t block your write-off.
But don’t let the ease of EOR lull you into skipping a deeper look at permanent establishment. When your local hires start driving deals or anchoring your operations, it’s time for a formal PE check.
In practice, the smart move is this: keep your paperwork tidy, get tax coding right, and mark “PE review” on your calendar once you go beyond a couple of hires. That way, an EOR stays a nimble, clean, tax-safe bridge, not a surprise drain on your bottom line.
