Throughout June, HSP Group is releasing a series of blogs that delve into the opportunities and challenges of expanding your business to Latin America (LatAm). In today’s fourth and final blog we discuss some of the complexities that arise in the region that can cause delays in establishing a legal entity.
Part 4 – Setting up an Entity in LatAm
In a region as diverse as LatAm, it’s important to be aware of operational red tape that can spring up during your expansion journey. With a spectrum of political leanings and varied technological infrastructure from country to country, the speed and efficiency of setting up shop can vary.
Using some key examples from Brazil, Colombia, and Mexico, this blog will expand on notable sticking points that can arise when setting up an entity in these territories.
Incorporation
Each LatAm country has a unique list of incorporation procedures that vary in complexity. Even countries that actively encourage foreign investment within their borders have somewhat complex procedures.
These range from:
- Seeking approval from various government agencies
- Lengthy company registrations
- Difficulty in opening a bank account due to Anti Money Laundering (AML) requirements, and inspections.
For instance, Colombia is seeing an influx of foreign interest since it’s talented and bilingual workforce is in the same time zone as the USA and is willing to work for lower salaries. The median wage is much smaller ($910 a month compared to $6,941 in the US) than that of US-based employees, offering great value to employers.
However, to operate in Colombia, companies need to register with a long list of agencies.
These include, but are not limited to, the following:
-Direccion de Impuestos y Aduanas Nacionales
-Caja de Compensacion Familiar
-Servicio Nacional de Aprendizaje
– Instituto Colombiano de Bienestar Familiar
– Caja de Compensacion Familiar
-EPS, Colpensiones
-Administradora de Riesgos Laborales
While some of these registrations can be done quickly, steps cannot be skipped, and it’s important to stay on top of all the requirements.
Resident Representation
Furthermore, the requirement for resident representation is common in LatAm. Both Brazil and Mexico dictate that you must have locally based legal representatives to represent your interests within their national borders.
In Mexico, such a representative is required to have power of attorney to carry out all the procedures relating to your company. Whereas in Brazil, you will need to have a locally based administrator or director to carry out key processes, and any foreign shareholders need to have their interests defended by a local attorney.
Additionally, in Brazil, you will be subject to local data protection legislation (LPGD). This means you’ll need a Data Protection Officer (DPO). The DPO could be a third-party provider or an employee of the company.
Tax Registrations
Tax registrations are often an important step towards establishing an entity in some countries in LatAm. Unfortunately, they can be particularly burdensome and time-consuming. While many countries in the region have moved to digitize several processes, not all steps can be done without in-person action.
Let’s look at some examples:
- Brazil: As detailed in blog #2, there are three layers of regulatory requirements. These can take around 2 months to complete across federal, state, and local government departments.
- Mexico: Here, all businesses require a unique 12-digit tax ID -, i.e., Registro Federal de Contribuyentes (RFC). The Mexican Tax Authority requires an in-person meeting to gather bio-metric data. During the height of COVID, the operating capacity was reduced to less than half of the staff. This created an extensive backlog. Massive wait times for appointments – ranging from weeks to several months – contribute to adding additional delays to becoming operational in-country.
An alternative to setting up an entity
Companies can resolve some challenges around entity set-up by creating an Employer of Record (EoR). As a quick-to-market, mitigated risk solution, EoR allows businesses to engage with a fresh pool of talent in various countries or jurisdictions without the need for an entire legal entity.
Set up correctly, it poses no risk of the violation of any local employment or tax laws. Note- it’s necessary to speak to a professional to determine whether EoR will be a compliant solution for your business.
Discuss your expansion strategy with HSP Group.
Global expansion is tricky. It requires a sound strategy and a capable advisor to help support the evolving needs your company will experience as you scale.
As an international company hiring in Latin America, you don’t have to solve all these challenges alone. HSP Group has turnkey people and entity solutions designed to scale with you, from initial hire to IPO. Contact us today to learn more.
ICYMI, here are the first three blogs in this series:
The Growing Opportunities within Latin America
