6 Key Considerations when Expanding Internationally

You’ve decided to expand internationally, but are you aware of all the steps involved in the process?

When expanding to any new market, you should consider the following six points before initiating your hiring strategy:

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.

In general, business presence options include a broad range of forms, some involving legal entity registrations.

If you carry on a business without legal entity registrations, 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 set up in another country without the need for a legal entity and provides a wealth of benefits such as 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 so as to understand and mitigate any adverse PE exposure to the head office that may potentially 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 and allows the business to conduct business activities in their 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

One of the most important considerations for international expansion is the tax and compliance requirements – one wrong move could see the entire expansion operation derail or land the business hefty fines.

Compliance complexities

The primary challenge lies in the complexity associated with varying rules and regulations across different countries. Each country has its own set of rules, and dealing with these diverse regulations amplifies the existing complexity. It is crucial for businesses to comprehend and adhere to the rules in all the countries where they operate. They must also have a deep understanding of how these rules affect their operations in each jurisdiction.

There’s also the matter of regulatory changes, which can change without warning, that businesses still need to remain compliant with.

UK/EU considerations

Whilst there are compliance requirements across the globe, 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, in this section alone, there are so many requirements that must be met, and compliantly to ensure international expansion activities can be conducted.

3. Transfer pricing requirements and compliance

Any business expanding on an international scale is subject to transfer pricing (TP) requirements on their related parties’ transactions and the compliance regulations associated with this.

Transfer pricing refers to the pricing of goods, services, or intellectual property that is 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, etc. that are specific to each jurisdiction’s TP rules and regulations to ensure they are compliant.

To ensure compliance, it’s advisable to engage with experts as they can assess the risks, develop appropriate policies, and assist with the overall process.

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

There are so many variables associated with international expansion, and this level of business growth can also cause complexities for global human resource administration.

Here are the three major areas to be considered from a 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 and on-going payroll and employer’s social security reporting, etc. there are so many employer’s obligations and compliance requirements to maintain with. Whilst they may seem mundane, failure to adhere with these can entirely 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 large expense. However, this comes with some challenges, such as lack of 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 important 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 repatriation of capital:

Currency conversion – businesses need to understand and manage currency exchange rates, as well as 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, or bank-clearance, etc. as applicable according to the repatriation rules of different countries.
Legal and regulatory – in some countries, there may be certain restrictions or regulations on the repatriation of funds. 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 overall financial goals of the company.

As you can see, within these six main considerations, there are also specific and niche elements that businesses must be aware of, and action compliantly.