Going international

Taking the first few steps to gain a foothold in a new territory can be a daunting process
Charles Schofield

One of the major trends shaping businesses around the world over recent years is globalisation. The pace of international trade has continued to grow, with countries forming regional trading blocks and entering into numerous bilateral trade deals. It has been said that there are no purely domestic industries anymore. In each sector, there are either competitors shipping in products and services from abroad or domestic industries growing strong enough to export. There can be many reasons for a business to expand internationally. It can offer access to new customers and provide a lower cost operation through access to cheaper labour and materials or through economies of scale. International expansion may also provide a company with new opportunities to exploit core competencies or spread business risk over a wider market base.

While all these are good enough reasons to expand outside home country, taking the first steps to translate that hard won experience to success in a new country can be a daunting process. Strategies to compete in a new market have to be situation driven. Cultural, demogra-phic and market conditions vary significantly among various countries of the world. This article considers the key legal issues that should be considered prior to any international venture.

Making the move
Any prudent business expanding into another country will undertake a thorough due diligence of the new market and the opportunities it holds. A part of that process should include consideration of the legal environment in the new country. The laws of the new country may mean that a business cannot be conducted in the way it is being done in the home country, or that unforeseen costs or restrictions may affect the viability of the business. The following consi-derations should be addressed in any prior assessment of the new country's laws.

Foreign ownership
Almost all countries have some level of foreign ownership restrictions. Such laws can restrict the level of shares that can be held in a local company or, in some cases, even require a local partner to be involved in the business in the new country. This is a key structural issue that may impact on the way the company is established and has to operate in the new market.

Corporate vehicles
Most businesses moving into a new market will seek to establish a local corporate subsi-diary in the new country. This helps limit the risk of business activities undertaken in the new country, through the limited liability of a company, as applied in most jurisdictions.

Sometimes the choice of corporate vehicle will be restricted by foreign ownership rules or driven by tax considerations.

Tax
One of the key factors to consider while moving to a new country is the local tax regime. Taxes, which a business should consider, are not only income tax on the business profits, but also sales taxes, customs duties and any capital gains taxes that may apply.

Taxes can have a significant impact on the viability of a business in a new market and may also impact heavily on how operations are structured. There may also be regional and bilateral tax agreements, which provide some benefit to the business. A lot also depends on the new country to which the business seeks to expand into, as some countries have a lower tax cost than others.

Another aspect to be considered is whether the new country provides any tax incentives that may be obtained for the business. Many countries offer tax advantages to sectors they are seeking to foster. The Sultanate of Oman, for example, provides some tax incentives for industries entering into the tourism sector.

Labour law
Businesses heading to a new country also need to carefully consider the labour laws that will apply to them. Labour laws will regulate the company’s relationship with employees and may impose additional costs and operating restrictions on a business. For example, there may be laws on minimum wages, mandatory employee benefits and employee dismissal rules, all of which need to be considered.

Other issues that might arise are local employment quotas or restrictions on visas for expatriate employees. These matters need to be assessed and factored into the cost of the international move.

Specific regulations
In the new country, there might be additional regulations applying to the specific business. This may take the shape of product regulations, mandatory standards or a licensing process that will apply to that business. In some cases activities that are legal in one country may be prohibited in others. There may also be a greater liability at law if things go wrong.

Again, these matters need to be carefully considered before the new business is established. They have the potential to add delay and cost to establishing the business in the new country and may also add to its ongoing operational risks and costs.

Other issues
By its nature, it is important for an international business to get materials and funds in and out of the new country. In the case of materials, the primary concerns are likely to be importing materials needed for the business in the new country and any restrictions on expor-ting finished goods outside the country.

In the case of funds, restrictions are most likely to exist (if at all) in relation to the repatriation of profits earned in the new country. It is therefore important to identify any exchange controls or other restrictions on repatriating funds. These types of local laws can also have a significant impact on a move into a new country and also need to be assessed early on.

Practical tips
Prior to expanding into a new country it is important to undertake a thorough due diligence of the legal framework in that country and assess how it will impact on the business. Contact should be made at an early point with a law firm and an accounting firm in the new jurisdiction. Lawyers and accountants can be a useful source of practical information about doing business in that country. Many such firms will also have pre-prepared materials, which provide further details on the key legal and tax related considerations for doing business in the new country. The legal environment, while being only one of a myriad of considerations for an international move, is nonetheless an important consideration that should be assessed at an early point in time.