1 – The legal framework: what each option imposes before you even hire
Setting up a subsidiary and signing with an offshore service provider are two legal acts that do not entail the same responsibilities, the same timelines or the same risks on the French side. Here is what each structure truly implies.
1.1: Setting up a Malagasy-law SARL or SA: formalities, timelines and pitfalls
Malagasy law requires a minimum share capital of 2,000,000 MGA (approximately 400 euros) for a SARL and 10,000,000 MGA for an SA. On paper, this is accessible. In practice, incorporation takes between 6 and 12 weeks if you know the process: drafting articles of association compliant with law 2003-036, registration with the Antananarivo Trade and Companies Register (RCS), obtaining a Tax Identification Number (NIF), filing with CNaPS (the social welfare fund) and registering with OMIT (the inter-company occupational health body).
You will need a resident legal representative or a local proxy. Malagasy banks (BNI, BOA, BMOI) require certified, translated documents and an initial deposit that can delay account opening by an additional 3 to 6 weeks. Add the commercial lease: areas of Tana suited to BPO (Ankorondrano, Ivandry, Andraharo) charge rents of between 8 and 15 euros per square metre, payable in ariary but indexed to the dollar or euro.
The main pitfall: unfamiliarity with the Malagasy Labour Code (law 2003-044). Probationary periods, notice periods, specific leave entitlements, employer CNaPS contributions at 13% of gross salary, OMIT, IRSA (wage income tax). You become a local employer with all the associated obligations.
1.2: Contracting with an offshore service provider: contractual framework and sovereignty
When you work through a service provider, you sign a service agreement between two legal entities: your French company and the provider's company (registered in Madagascar, in Mauritius, or both). No local registration on your part. No Malagasy employer obligations. No commercial lease. The provider recruits, employs, houses and pays the staff.
The legal question on the French side concerns how the contract is characterised. URSSAF and the labour inspectorate can reclassify the relationship as disguised employment if three criteria are met: a subordination link, exclusivity and integration into the client's organisation. To explore this risk further, see notre analyse complète sur la requalification en salarié déguisé.
In practice, a well-drafted contract specifies: the subject matter of the service (a deliverable or a capacity, not a job title), the absence of any disciplinary authority by the client over the staff member, invoicing by the provider (not a salary paid by the client) and the provider's ability to replace the staff member. Sovereignty over tools, processes and day-to-day management remains a point of negotiation. Some providers allow it; others do not. That is where the models diverge.
1.3: France-Madagascar tax treaty and the concept of permanent establishment
The tax treaty between France and Madagascar (signed in 1983, still in force) defines the concept of permanent establishment in Article 5. If you set up a subsidiary, it is a separate entity: no permanent establishment of your French company in Madagascar. The subsidiary's profits are taxed locally, and you only pay French corporate tax on repatriated dividends, with a double taxation elimination mechanism (tax credit).
If you have no subsidiary but send a French employee to supervise a team on the ground for more than six months, or if you have a fixed office in your company's name, you risk being characterised as having a permanent establishment. Consequence: the Malagasy tax authority may tax the profits attributable to that establishment, and the French tax authority may adjust accordingly.
With a third-party provider, this risk disappears: you have no physical presence in Madagascar. The premises belong to the provider. The employees are employed by the provider. Your company has no outward sign of local establishment. The tax treaty applies only to financial flows between the two entities: the provider's invoice is a deductible expense against your French profit, subject to the usual deductibility rules. To go further on tax compliance, read notre guide sur la TVA, la retenue à la source et la déductibilité des prestations Madagascar/Maurice.
2 – The tax mechanics: what each model truly costs your SME
The cost is not limited to the staff member's salary. Between local corporate tax, transfer pricing, VAT and Malagasy social charges, the two models produce very different cost structures. Here are the figures.
2.1: Subsidiary: Malagasy corporate tax, employer contributions and unavoidable overhead costs
The corporate income tax rate in Madagascar is 20%. A minimum collection threshold applies: 0.5% of turnover, even if the subsidiary is loss-making. This point is critical for an SME: your Malagasy subsidiary invoices the French parent company (transfer pricing), so it generates turnover from the very first month, and the minimum corporate tax applies immediately.
Employer contributions represent approximately 18% of gross salary (13% CNaPS, 5% OMIT depending on the category). IRSA (the employee income tax withholding) is the employee's liability, but you must calculate it, withhold it and remit it monthly. A local accountant or accounting firm costs between 200 and 600 euros per month depending on the size of the structure.
The unavoidable overhead costs of a subsidiary in Antananarivo for 3 to 5 staff members: office rent (300 to 600 euros/month), electricity with UPS or generator (150 to 300 euros/month), fibre internet connection plus backup (100 to 200 euros/month), IT equipment (800 to 1,500 euros per workstation as an initial investment), local accountant, bank charges, local public liability insurance. Total monthly fixed costs excluding salaries: between 800 and 1,500 euros at a minimum. These costs exist whether your staff are productive or not.
2.2: Service provider: a single invoice and the elimination of hidden costs
With an offshore service provider, you receive a monthly invoice per staff member. This invoice includes the salary, social charges, infrastructure (office, workstation, connectivity, UPS), local management and the provider's margin. No local accountant to pay. No lease to manage. No generator to maintain. No CNaPS declaration to file.
The market rate for a full-time dedicated staff member in Madagascar ranges from 800 to 1,800 euros per month depending on the profile (admin assistant at the lower end, senior developer at the upper end). This rate is an all-inclusive price. You have no additional costs on the French side, with one exception: if the provider is established in Madagascar (not in Mauritius), French VAT on intangible services rendered by a non-EU provider may apply through the reverse charge mechanism. In practice, you declare the VAT on the invoice and deduct it simultaneously: the cash flow impact is nil if you are a VAT-registered business.
The accounting cost of the service is an operating expense deductible from your French taxable profit. No equipment depreciation. No capitalisation. No redundancy provision. Your balance sheet stays clean and your cash flow remains readable. To compare pricing models, see notre analyse des 5 modèles de tarification offshore.
2.3: Transfer pricing: the issue your accountant underestimates
If you set up a subsidiary, invoicing between your French company and the Malagasy subsidiary falls under the transfer pricing regime (Article 57 of the French Tax Code on the French side, and equivalent Malagasy regulations). The French tax authority can challenge the price charged by the subsidiary if it considers that it does not correspond to an arm's length price.
In practice, a Malagasy subsidiary that invoices 1,200 euros per month for a developer whose full local cost is 600 euros shows a 50% margin. The tax authority may consider this margin excessive or insufficient. You must document your transfer pricing policy: the method used (cost-plus, comparable uncontrolled price, profit split), the economic justification and a market benchmark. For an SME with fewer than 50 employees, this documentation is not mandatory below certain thresholds (consolidated turnover below 400 million euros), but the obligation to comply with the arm's length principle remains. A tax reassessment is always possible.
With a third-party provider, this problem does not exist. The invoice is a market price between two independent entities. No equity link, no transfer pricing to document, no risk of reassessment on these grounds. The expense is deductible at the invoiced price, full stop. This is one of the most underestimated structural advantages of the service provider model for an SME.
3 – The operational reality: what each model requires on a day-to-day basis
Law and taxation say nothing about your ability to recruit, manage and retain talent from 8,000 km away. Yet that is where most projects fail or succeed. Here is what each option concretely demands.
3.1: Recruitment and local HR: the difference between managing and delegating
Setting up a subsidiary means recruiting yourself in Antananarivo. You need to understand the local labour market: salary levels (a junior developer costs between 400 and 700 euros gross per month, a senior profile between 800 and 1,200 euros), sourcing channels (LinkedIn works poorly in Madagascar; Facebook groups, partner universities and word of mouth dominate) and candidate expectations (transport, meals, performance bonuses). The Malagasy Labour Code requires written contracts, a regulated probationary period, paid leave of 2.5 days per month worked and a notice period that varies with seniority.
You will also need to manage absences, disputes and resignations. Turnover in the BPO sector in Madagascar ranges from 15 to 30% annually depending on the organisation. Without local knowledge, you will spend months stabilising a team. To understand the impact of turnover, see notre analyse du coût réel de la rotation offshore.
A service provider absorbs this complexity. They recruit according to your criteria, manage local contracts and replace a departing staff member. You approve the profile; you do not handle the administration. The difference between "I manage a team remotely" and "I manage a team remotely while also being an employer in a country whose laws and customs I do not know" is enormous.
3.2: Infrastructure and service continuity: what you cannot see from France
Antananarivo experiences regular power cuts. Without a UPS and a backup generator, your team stops working. Internet connectivity has improved (fibre is available in business districts via Telma, Orange and Blueline), but redundancy requires two separate providers plus a 4G/5G backup. If you set up a subsidiary, these investments are your responsibility: generator (2,000 to 5,000 euros), UPS units (200 to 500 euros per workstation), dual fibre line (100 to 200 euros/month), mobile backup.
IT equipment imported into Madagascar is subject to customs duties (approximately 20% of the CIF value) and local VAT of 20%. A workstation that costs 800 euros in France comes to 1,100 euros once cleared through customs. Hardware maintenance is limited: few local service providers, and parts delivery times measured in weeks.
A well-structured service provider has already solved these problems. At Taram, every workstation runs on Ryzen 7, with fibre and 5G as backup. Premium infrastructure is included in the monthly billing. You do not deal with Tuesday morning power outages or a hard drive failing on Friday afternoon. You simply note the staff member's availability. Service continuity is not your operational problem — it is the provider's.
3.3: Scalability and reversibility: what happens when you want to grow or stop
Scaling a subsidiary means: finding a larger office, purchasing additional equipment, recruiting, training and absorbing fixed costs before new staff members are productive. The ramp-up takes 2 to 4 months per recruitment wave. If your activity declines, you have a lease, depreciated equipment and locally permanent employees. Redundancy in Madagascar is regulated: notice periods, severance pay proportional to seniority and the risk of challenges before local labour tribunals. Closing a subsidiary is a 6 to 12-month process involving liquidation, final settlement of accounts, deregistration from the RCS and closure of bank accounts.
With a service provider, scaling means requesting an additional staff member. Deployment time is measured in weeks, not months. To discover the concrete method, read notre guide pour passer de 1 à 5 ETP offshore en 90 jours. Reversibility is contractual: a defined notice period, a documented transition and you close the relationship. No lease to terminate, no equipment to resell, no liquidation procedure.
For a French SME that does not yet know whether it will need 3 or 10 staff members in 18 months, this flexibility is not a bonus. It is a condition for survival. Every month spent managing a subsidiary's administrative burden instead of steering your output is a month of lost growth.
Your decision costs more with every week you delay making it
Own subsidiary: total control, total complexity. Offshore service provider: operational simplicity, contractual dependency. Both work. But for a French SME with between 1 and 50 employees, the break-even point of a subsidiary is rarely reached below 10 staff members on the ground. Below that threshold, fixed costs, local HR management and the administrative burden eat away the economic advantage.
While you are comparing the two options in a spreadsheet, your competitor has already deployed three dedicated staff members through a service provider and has been producing for six weeks. Every week of hesitation is a week of capacity not deployed, quotes not followed up, tickets not handled, code not delivered.
Taram integrates dedicated staff members into your team, on local permanent contracts, with premium infrastructure and structured management. One staff member, one client. Never pooled. For the cost of one French employee, you deploy three people. The choice is no longer theoretical.
