As we enter 2023, many U.S. based companies anticipate an increase in international business activity.
Many C-Suite executives believe that global expansion is necessary in order to maintain long-term growth, as well as keep pace with the competition. The prevailing view is that the most usable and attractive markets for U.S. companies today are in Western Europe and China. U.S. companies should also consider other emerging markets, such as Mexico, Brazil, and India.
Although international expansion may remain at the forefront for many companies, one of the major risks associated with such expansion is the mandated regulatory compliance that may be required by a foreign jurisdiction.
Below are some items that should be considered regarding global expansion:
- Some countries may require a physical presence for certain business activities that may be conducted. Depending on the country, a branch representative or registered agent may be sufficient. However, some countries require an actual subsidiary to be established, which comes with a very different set of compliance, regulatory, and tax considerations.
- Whenever a company is establishing a foreign location or forming a subsidiary, the company may want to determine the type of entity structure that may be required, and the requirements for shareholder [or member] meetings, and as well as the number of shareholders [or members].
- It should be noted that certain countries may require import and/or export licenses in order to move technology and products between the U.S. and the designated foreign entity.
- Depending on the type of service, product or facility, regulatory compliance may be very complex.
- Some countries have very complex tax laws depending on the type of entity this is established. One entity could provide a more favorable tax structure than another type of entity.
- A company may face strict regulations regarding certain activities that may be conducted in a foreign country, such as conducting business in a country that has been sanctioned by the U.S., or direct taxation rules or anti-deferral rules.
- When an employee is hired in a foreign country, the company may need to enter into a local employment agreement with its employees, as well as enter into or adhere to applicable collective bargaining agreements.
- There may also be concerns regarding acquiring work permits for non-local nationals.
- Employees in certain jurisdictions may be entitled to benefits and rights that may not be required in the U.S.
- Company privacy is of great concern, especially involving, trade secrets, compliance, privacy, and non-compete agreements.
- Another consideration is that certain securities laws in certain countries may restrict the grant of corporate equity distributions. In addition, certain countries may have unique fund remittance limits, reporting or repatriation requirements, that may cause restrictions, or affirmative requirements that apply to corporate equity distributions.
- From an accounting standpoint, there may be tax benefits or replacements for awarding equity to employees.
Data privacy; intellectual property, technology and information law
- Certain countries may have its own requirements regarding data privacy, data transfer, customer/employee notifications, data monitoring and payment obligations.
- In certain jurisdictions, local laws may have different requirements to validate and enforce intellectual property assignments by employees and independent contractors.
- Some jurisdictions may have unique rules regarding trade secrets protection, and local employees may require special training in order to understand how to effectively protect corporate trade secrets. Appropriate intercompany agreements should be in place in order to permit the use of relevant intellectual property by newly formed subsidiaries or affiliates.
- There may also be regulatory restrictions regarding accessing third-party technology due to territorial restrictions.
As U.S. companies navigate the complex rules and regulations regarding international expansion, a complete and thoroughly due diligence review should take place prior to any proposed global expansion.
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