CORPORATE TRANSACTIONS & COMPLIANCE BLOG

What to Consider Before Expanding Your Business into Other International Jurisdictions

By: Pushkala Sivaramakrishnan, COGENCY GLOBAL, on Aug 18, 2021 8:06:00 AM

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Expanding your business globally is complicated. Different countries around the world have varying rules for setting up an enterprise and they can be difficult to navigate on your own.

This can be even more confusing when areas within those countries have unique regulations of their own, such as the differences between states in the U.S.

To anticipate these challenges, there are certain points you should consider when moving your company to another jurisdiction. This article delves into the main things you should look out for.

The Type of Legal System in the Jurisdiction

The first question you should ask is: what kind of legal system does this particular jurisdiction follow? Is it a civil law jurisdiction? A common law jurisdiction? Civil law is a legal system that originated in Europe and was later adopted by different parts of the world. The distinct feature of the Civil law system is its codification, as opposed to Common law, which is largely uncodified.

In the process of selecting an international jurisdiction to do business, due consideration must be given to its legal system, which in turn, influences the ease of setting up and doing business in said jurisdiction. For instance, you could look at Germany and France as comparable countries from the point of view of the legal systems they follow and then decide which country fits better into your business plans.

One must also be aware that some countries follow a religious legal system, for example, Islamic Sharia law is followed in Saudi Arabia. Another variant of this is a mixed legal system, such as the one followed by the United Arab Emirates (UAE). UAE has a dual legal system where the legal principles are based on both Sharia law and Civil law. Recently, due to the influx of foreign investment in the country, particularly in Dubai, a robust and dynamic legal regulatory framework has been established. Several free zones have been set up, which include common law practices, along with the Dubai International Financial Centre Courts for governing civil and commercial disputes. It is essential to bear these distinctions in mind when selecting your next jurisdiction for business.

It's important not just to know the rules at the national level but to drill down to provincial, state, or territory levels. In Canada, for instance, the country as a whole follows common law systems, but each province works differently in terms of how corporate laws have been adopted.

As you can see, once you have identified the country you want to expand into, you should then identify the specific rules of the state, province or territory that you want to incorporate in and if they have further rules of their own.

The Purpose of Your Business

The next thing to consider is whether the business purpose is legally permissible to be conducted in the other jurisdiction as a foreign enterprise. Each sovereign country has the right to determine how much foreign investment to permit in their country and in what sectors. This may also vary over a time period based on the destination country’s foreign policy at the given time, diplomatic and economic ties with your country and their political environment.

Before embarking on your expansion, it would be expedient to find out if your business objective is freely available for investment by a foreign company, even if it is completely legal in your country. As a foreign investor, you may have limitations on how much investment is permissible or required, you may have additional licensing requirements, or you may need to partner with a local sponsor, which might make your venture risky or infeasible. For example, the telecommunication sector is still largely regulated in emerging markets for foreign investment.

Legal Advice and Local Service Providers

General legal advice on which countries would suit your business is not all that is required; jurisdiction-specific legal advice is also warranted. Finding partners or legal advisers to help structure your company in a new jurisdiction can be incredibly helpful.

An adviser at a corporate level can help you determine which countries to expand into, but there could still be specifics for a jurisdiction that only a local adviser would be able to inform on.  Hiring local legal advisers to help with the structuring of your company in their area can be the difference between a successful or failed enterprise.

Additionally, finding a global service specialist that has knowledge of multiple countries can also simplify things. Forming an international corporation will be a much smoother process if you have access to a global advisor as well as a local service provider.

Local Directorship and Shareholding Requirements

To form a company, in most countries, you will require a director and shareholders, by whatever name they are called. A director is the person responsible for managing the affairs of the company. Shareholders are the owners of the company. The requirement originates from the corporate law of the jurisdiction where the business is being established.

As a foreign owned enterprise, you should check for any requirement in the corporate law to appoint a local director responsible for local compliances. For instance, in Ireland there is a requirement to allocate at least one European Economic Area (EEA) resident director in Irish companies. A U.S. or a post-Brexit U.K. company setting up in Ireland needs to appoint a local EEA resident director to be responsible for the compliances of the company.

Similarly, some countries require a level of local shareholding. In Indonesia, for instance, your company must have local shareholders attached before you can invest in certain sectors. In such cases, you would need to partner with somebody locally (as a joint venture) to be able to offer the service or product to that market.

The beneficial ownership of a company is public information in most EU countries. Similar legislation is being adopted by other countries worldwide to increase corporate transparency. It is no longer possible to hide ownership information beneath a corporate structure.

Another interesting example can be seen in South Africa, where an ownership law called Broad-Based Black Economic Empowerment (BBBEE) was put in place post-apartheid to ensure that there is a certain level of black representation in the management of a company.

These are the sort of rules that a global service provider or local expert will be able to identify for you before you expand into a new jurisdiction.

Taxation in the Jurisdiction

Another thing to take into account is what kind of taxes will apply to your business and how high or low they will be. General corporate tax will apply to all businesses across the board, but there may be specific taxations at the state level, at the local level, or just for trading — such as VAT. These may be a significant factor in terms of your decision making and whether a jurisdiction is viable or not.

Conversely, it may just not be worth it to take your business to a specific jurisdiction in other countries because of the combined effect of all the taxation on your potential profitability in that region.

Local Employees

If you plan to hire people locally, it would be prudent to analyse what the local labour laws look like and if there is a requirement to have a local branch manager or a local representative for the company.

There could be a requirement to have a local company secretary in addition to a local director, in which case you may need to hire a third-party service provider to help source viable candidates.

Investment and Capital

There are some countries where minimum capital is required to be invested. If you are setting up a company, it may be the case that in order for you to complete the setup, you will need to bring in a certain amount of money first.

Whereas in some cases, like in the U.K., you can set up a company at any time without needing to commit to a capital investment, in other countries, like India, you will need to bring in a minimum amount of capital into the country to be able to complete the incorporation, and for the bank account to be set up. Only once the money has been brought in will an incorporation certificate be issued.

This is something that needs to be planned in advance, as you will need to commit to that minimum investment upfront — before you set up the business and before you have your first client or customer.

Taking Your Business to a New Jurisdiction

As you can see, there are a lot of factors to consider before setting up a new business in, or moving an existing business to, a new jurisdiction. Internal aspects, such as staffing, business ownership and the industry you are in, may well affect how and where you can set up. As can external laws and regulations related to a specific country or area within a country, like the legal system, taxation system and capital investment required there.

After consulting with your legal and tax advisor on the above factors, reaching out to an experienced service provider for assistance when expanding into a new area can make the process easier and will help you to navigate different business practices throughout various jurisdictions.

 

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This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: U.S. Corporate Services