You’ve decided to expand internationally, but are you aware of all the steps involved in the process? When considering international business expansion, it’s crucial to understand the myriad steps involved. From legal structures to compliance demands, this guide covers everything you need to know.
1. Permanent establishment and legal entity options
One of the first factors you need to consider is your planned business functions, whether you require personnel engagement to render business activities, and what forms of business presence options are optimal from operation and cost perspectives.
Business presence options generally include a broad range of forms, some involving legal entity registrations.
If you operate a business without legal entity registration, your options include contractors, non-resident employer registration, Employer of Record, etc., to the extent allowed by local country regulations. EoR is a popular selection, enabling a business to hire personnel in a local country without legal entity registration formality and ongoing compliance liabilities.
EoR allows a business to operate in another country without a legal entity and provides a wealth of benefits. These include flexible business operations, mitigated risks, and access to fresh talent pools in their chosen market.
Permanent Establishment (PE) risk could be associated with the chosen business options despite no formal legal entity registration. The company should take due care in its selection to understand and mitigate any adverse PE exposure to the head office that may cause double taxation or hidden compliance liabilities.
Legal entity registration options:
- Representative office—This is typically limited to non-trading activities such as market research and liaison activities and does not have the legal capacity to engage in commercial transactions.
- Branch office—This acts as an extension of the parent company, allowing the business to operate in its chosen market. It will be treated as part of the parent company and will not have a separate legal identity.
- Subsidiary—This is a form of separate legal identity. It can either be wholly owned or have local partners/shareholders. Subsidiaries are subject to the local laws and regulations of the host country.
2. Tax and compliance requirements for international business expansion
One of the most important considerations for international expansion is the tax and compliance requirements—one wrong move could derail the entire expansion operation or result in hefty fines for the business.
Compliance complexities
The primary challenge lies in the complexity associated with varying rules and regulations across different countries. Each country has its own rules, and dealing with these diverse regulations amplifies the complexity. Businesses must comprehend and adhere to the laws in all the countries where they operate. They must also have a deep understanding of how these rules affect their operations in each jurisdiction.
Businesses also need to remain compliant with regulatory changes, which can occur without warning.
UK/EU considerations
While there are compliance requirements worldwide, the EU/UK gold standard for data protection is particularly demanding, perhaps more so than US companies realize.
With an intensified approach to data protection and with EU/UK regulatory authorities having the power to pursue any organization anywhere in the world for breaches of the GDPR, businesses must rely on outside expertise to ensure they get every detail right.
Here are some examples of specific documents to be carefully considered:
- External privacy statement
- Internal data privacy policy
- Data retention policy
- Fair processing note (FPN)
Tax considerations
And finally, there are all the tax requirements. This can include:
- Tax residency and nexus
- Corporate taxation
- Transfer pricing
- Withholding taxes
- Value Added Tax (VAT)
- Tax treaties
- Tax incentives and exemptions
- Tax planning and structuring
As you can see, this section alone contains many requirements that must be met compliantly to ensure the conduct of international business expansion activities.
3. Transfer pricing requirements and compliance
Any business expanding internationally is subject to transfer pricing (TP) requirements on their related parties’ transactions and the associated compliance regulations.
Transfer pricing refers to the pricing of goods, services, or intellectual property transferred between affiliated entities within a multinational enterprise. Such transactions should be completed as if the entities were independent and unrelated to the parent company, i.e., on an “arm’s length basis.”
Businesses should aim to acquire detailed transfer pricing documentation, such as an overview of the company’s global operations, inter-company agreements, business functions analysis, and/or local transaction documents that are specific to each jurisdiction’s TP rules and regulations to ensure they are compliant.
To ensure compliance, engaging experts who can assess the risks, develop appropriate policies, and assist with the overall process is advisable.
4. Cost of operating in your chosen market
Of course, businesses need to evaluate the costs of operating in their chosen market – the cost structure can vary drastically from country to country, as well as the industry, and so businesses should look into the following cost considerations to ensure that they are fully prepared and can make informed decisions about the growth of their company:
- Market research
- Legal and regulatory costs
- Infrastructure costs
- Human resources
- Taxes and duties
- Real estate and facilities
- Supply chain and logistics
- Marketing and advertising
- Currency exchange and international transactions
- Risk management and insurance
To navigate this area, businesses should put together a comprehensive business plan and financial projections, working with advisors who can inform businesses on the areas that may impact their financial variability and profitability in their chosen market.
5. Human Resources landscape
Expansion internationally involves many variables, and this level of business growth can also complicate global human resource administration.
Here are the three major areas to be considered from an HR perspective when expanding internationally:
- HR strategy – from the initial phase of talent acquisition, to benefits and package design aiming to attract and maintain the best talents in the market, structure of local compliance while ‘attractive’ HR policies, etc. are all important aspects to consider.
- HR compliance—From employment contracts and employee handbooks to termination notices, ongoing payroll, and employer social security reporting, there are so many employer obligations and compliance requirements to maintain. While they may seem mundane, failure to adhere to them can jeopardize a business’s presence in the market.
- Local HR—It’s common for businesses to opt for remote HR administration management, as paying for on-site HR staff is a significant expense. However, this comes with challenges, such as lacking local expertise.
- Cultural considerations – different languages, local cultures, business customs, and unwritten rules can be a maze for international expansion newcomers. HR managers have an essential role to play here, but they must make sure they don’t lose sight of day-to-day HR functions in the process.
6. Repatriation of capital
Repatriation of offshore capital involves converting funds held in foreign currencies back into the currency of the corporation’s home country.
This process can often result in losses and comes with its own set of risks that a business needs to mitigate.
Here are some key points to understand about the repatriation of capital:
- Currency conversion – Businesses need to understand and manage currency exchange rates, transaction costs, and potential foreign exchange risks.
- Tax implications—Companies need to understand the tax laws associated with profit repatriation, such as withholding taxes, exemptions, bank clearance, etc., as applicable according to the repatriation rules of different countries.
- Legal and regulatory—Certain restrictions or regulations on the repatriation of funds may exist in some countries. You must comply with these and provide accurate documentation and reporting.
- Capital repatriation policies—Businesses must establish clear policies and guidelines regarding repatriation. Such policies should consider profitability, cash flow requirements, tax implications, regulatory restrictions, and the company’s overall financial goals.
As you can see, within these six primary considerations, there are also specific and niche elements that businesses must be aware of and action compliantly.
Expanding internationally is easy with HSP Group.
As you embark on your journey of international business expansion, keep these strategic insights in mind to ensure a smoother transition and successful global growth. We have a team of expansion experts well-versed in various markets to assist businesses with their international expansion journey.
Want to find out more about how we can help you? Get in touch with us today.
