5 things to know when expanding a business internationally
ComplianceSeptember 23, 2020

5 things to know when expanding a business internationally

Expanding a business into new markets can bring many opportunities for growth and increased competitiveness. However, companies getting ready to establish their presence within new jurisdictions must be prepared to manage legal and regulatory obligations to mitigate some of the risks that come along with expanding a company internationally. Often general counsel are called upon to assess the overall risks to a business and provide guidance through an expansion opportunity.

In this article, we explore five areas that general counsel and their teams should keep in mind when assessing the benefits and risks to a business entering into a new market, the legal obligations it will have to comply with in any jurisdiction, and how it may affect the company’s overall operation abroad.

Five Things to Know About Expanding Internationally
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Five Things to Know About Expanding Internationally

Determining the best location to incorporate is the most important step in the process

Once the country to expand into has been identified, the next step is to narrow down which region, state/province, or city to locate the entity. Deciding where to incorporate an entity within a specific country is typically based on several important factors, including the business strategy, regional benefits for the business, tax and legal implications, as well as labor and employment regulations.

Capital cities often come to mind first, but are they always the best suited for the business’ operations? Even within the same country, many regions, states, and cities may have individually unique rules and regulations around size and type of company, industry, employment, taxes, etc. and may also have specific incentives for companies establishing operations within their jurisdiction.

Because each jurisdiction has its own incorporation process, taking time to understand what is required within that specific locality can help avoid delays that can be detrimental and costly. For instance, timelines for incorporation can vary depending on each location’s individual requirements. In some countries, it can take a quick 24 to 48 hours. Other countries, however, may require that certain steps be completed beforehand, such as having a bank account set up, payment of the minimum share capital, local representatives identified and registered, etc. This can cause delays to the incorporation process by several weeks or months. Other jurisdictions may require that company bylaws be signed in front of a local notary or that at least one member be a resident or citizen and may have certain capitalization rules to consider.

Finally, you must also consider what are the know your client rules (KYC) and ultimate beneficial owner (UBO) documentation requirements. These are essential to establishing good standing and complying with local regulations – and some locations have very strict guidelines to follow.

To ensure that the incorporation process goes on without a hitch, gather all required documents and plan ahead!

Choosing the right business structure for your international entity is imperative to its success

Determining the type of business entity and establishing the appropriate governance structure based on entity guidelines is one of the most important compliance decisions made. Companies must understand the different entity options available in that country and what is required to maintain compliance. These can include initial investment requirements, specific governance structures, local presence requirements, local employment levels, tax implications, and so on. This information helps the company weigh the benefits and challenges of each and how each aligns with an overall global organizational structure.

Oftentimes businesses establish their overseas operations as a branch office or wholly-owned subsidiary, sometimes these provide operational and fiscal advantages in certain countries.

The time it takes to set up a branch office or subsidiary depends on the country and how quickly local requirements can be met. Each entity type may have different governance requirements such as the number of directors required in each location, the need to present shareholder resolutions or the type of licenses or filings required. Most invariably have local residency requirements.

Other things to consider include if the entity will have local employees, if it’s a large operation or a small sales office, and if licenses and audit support will be needed based on the business’ size or industry.

Being mindful of cultural and political considerations goes a long way

While economic factors are the main drivers for decisions about entering new markets, it is critical to not overlook the country’s cultural and political environment. Consider how the country’s history, culture, traditions could affect the way you do business or how your product or service may be perceived. Language differences can also present challenges to your operations and any inter-company synergies. Not only think about what business you do, but how you do business. Customs and business etiquette that are commonly followed in the U.S. may be uncommon, unacceptable, or even frowned upon in other countries or regions.

Furthermore, the country or region’s political stability also plays a major role in ensuring a business-friendly environment. Research what impact the country’s laws, rules, and regulations may have on your business or industry.

Even during situations of emergency, such as a global pandemic, it’s important to keep an eye out and understand how the country reacts and handles these situations and how that could affect business operations.

Understanding business license requirements can help the process go smoother

As is true for most countries, to do business within a locality, companies must apply for and be granted a license before the start of any economic activity. Licensing requirements vary from country to country and among industries; and the cost and time it takes to acquire licenses can be daunting without local expertise. Some countries issue licenses during the incorporation phase. For example, in Dubai, business licensing and incorporation procedures occur at the same time. In other countries, however, these processes will have to be completed separately.

Every country regulates local industries differently, so while some industries are more heavily regulated or protected, as is the agricultural sector in Switzerland, others are less so. It’s important to understand the requirements that apply to the business’ industry which can help discover if any specialized permits are needed. It is also wise to consider the type of structure being used for doing business as it can often affect the licensing process.

Be aware of local employment laws

Staffing your operation is a critical decision. Will you use local talent or expats? Whatever your decision, be aware of local employment laws and how your human resources plans will need to abide by those requirements.

It is best to assume that U.S. employment policies and templates will not translate locally. Most countries don’t have the same “at-will” labor laws that the U.S. does and many mandate written employment agreements. While not all countries require employment agreements, it’s a good idea to develop them.

Those agreements should reflect local requisites and terms such as probationary periods, grounds for termination, or working time provisions. Some jurisdictions, including Belgium, France, and Saudi Arabia, also require employment agreements to be translated into the local language before they are enforceable.

Another requisite is employee handbooks. Many countries don’t require these until the business reaches a certain growth milestone. In France, for example, the milestone is 20 employees. Belgium requires them at one employee, and Japan and Korea require work rules at 10 employees. As a best practice, you can use a more limited set of policies in your handbook in line with what’s mandated by local law. Always consult an expert to understand in-country requirements.

If you use a payroll partner, be sure they provide compliance support in-country and can communicate in the local language. Keep in mind that many countries pay employees once a month as opposed to the U.S. weekly or bi-weekly model. A global expert can help you set up and manage international payroll and ensure you are aware of all the legal and tax implications.

Conclusion

Doing business internationally can be complex. It takes strategic planning, time, and resources to set up or expand operations abroad. A plan of action and taking into account the above five key considerations can help mitigate any challenges that may arise during the process. Having the support of a trusted global partner, who can provide the local expertise to address your needs in any country or jurisdiction can also ensure your organization grows globally in an efficient way.

CT’s team of global experts aid in the incorporation process and implementation of annual compliance processes for each entity in each jurisdiction, through a single point of contact. Our world-class entity management system acts as a central repository for all entity data, documents, and can be a single source of truth for entities in the U.S. and abroad. We’ll set up a compliance calendar to help keep track of tasks such as renewals, auditing of financial statements, as well as any documentation required, director obligations, and due dates.

To learn more about our Global Corporate Services and how we can better manage your global compliance needs, contact a CT representative at (855) 444-5358 (toll-free U.S.).