Monday, January 22, 2018

Expanding Overseas: Legal Issues

The main international business structures are: direct exporting, local sales rep (distributor), branch office, subsidiary company and joint venture. Here are the basic advantages and disadvantages, legal issues of the main forms of doing business overseas.

Direct Exporting

Advantages: Full control over your product. Minimum initial investment. Local tax can be avoided, unless it is a permanent establishment.

Disadvantages: No local presence can result in substandard customer service, hurt competitiveness and expose you to liabilities of which you are not aware of due to lack of understanding of local laws and customs.

Verdict: good way to “test the waters” in the new market and see if your product is in demand. If it is, a more significant local presence is better.

Sales Representative (Distributor)

Advantages: Local distributor is incentivized to help your product succeed. Local party is more aware of local laws and customs and, as a result, can provide better market penetration.  Can set up a local warehouse. Less expensive than incorporating a foreign company.

Disadvantages: Must share profits. Less control over the distribution.

Verdict: Another great way to test the waters without major investments/commitments.

Branch Office

Advantages: Significant local presence. Better control over the distribution. Faster access and response to market trends.

Disadvantages: Higher costs of establishing a new office and hiring personnel. Parent company is vulnerable to liability incurred by the foreign branch or its employees.

Verdict: usually not so great because it opens up parent company to liabilities incurred by the foreign branch.

Subsidiary Company
(A foreign company that is fully owned by your domestic company)

 Advantages: Full control of operations, profits, IP and management.

 Disadvantages: No local partner to advise on customs and culture. Greater costs and liability than working with a local distributor or partner. You have to bet your own money on establishing and operating a company in a foreign country.

Verdict: good only if you really know what you are doing in a foreign country.

Contractual Joint Venture
(It's essentially a partnership agreement with a local party but no new company is formed)

Advantages: Can be formed quickly and inexpensively with just one contract. Share risks, costs and financing. Access to local partner's knowledge and market presence.

Disadvantages: Share profit, control, and strategies. Your trademark, IP and goodwill is in the hands of a local partner. Your company can potentially be liable for the actions of a local partner.

Verdict: another good way to test the waters and receive local knowledge but should only be used with a partner you really trust.

Corporate Joint Venture

(New operational company is formed in a foreign country. You and foreign partner are its co-owners)

 Advantages: Local partner is incentivized and, hopefully, invested.  Share risks, costs and financing. Access to local partner's knowledge and market presence.

 Disadvantages: Share profit, control, and strategies. 

Verdict: Good choice for a serious endeavor that is meant to last.

Other considerations
We have outlined the basic choices of forms of doing business overseas. Now, let's talk about other important issues that need to be considered.

IP Protection. Normally your trademark is only protected in the country where it is registered. EU-wide protection is a notable exception. However, your USPTO registered trademark is only protected in the US, although the US registration can serve as a basis for foreign application. But you do need to reapply in a foreign country if you want maximum protection there.

Localization. Engage a local party to tailor your product to local demands or tastes. There is more to it than translating your manuals into local language. Local customs, business practices, corruption levels need to be taken into consideration. US businesses abroad must abide by the Foreign Corrupt Practices Act. Failure to localize can lead to fines and/or local courts dictating what the terms of your agreements should be.

Transfer pricing refers to the regulations for pricing transactions between businesses under common ownership or control. Because of the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intragroup transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length. The OECD and World Bank recommend intragroup pricing rules based on the arm’s-length principle, and 19 of the 20 members of the G20 have adopted similar measures through bilateral treaties and domestic legislation, regulations, or administrative practice. Countries with transfer pricing legislation generally follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in most respects, although their rules can differ on some important details.

International Dispute Resolution.  You need to ensure that the chosen dispute resolution procedure is convenient for you and your partner(s). A good option for cross-border disputes would be to require good faith negotiation first. If that fails, arbitration is usually better than foreign courts for both parties. Arbitration is quicker, cheaper and more confidential that courts. Arbitration clause example:

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be determined by arbitration administered by the International Centre for Dispute Resolution in accordance with its International Arbitration Rules. The language of the arbitration shall be English. Except as may be required by law, neither a party nor its representatives may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of (all/both) parties.

Features of the International Expedited Procedures include: 
- Parties may choose to apply the Expedited Procedures to cases of any size;
- Comprehensive filing requirements;
- Expedited arbitrator appointment process with party input;
- Presumption that cases up to USD $100,000 will be decided on documents only, so neither party will have to travel to a foreign country or hire lawyers there.
- Expedited schedule and limited hearing days, if any; and

- An award within 30 calendar days of the close of the hearing or the date established for the receipt of the parties& final statements and proofs.

Foreign exchange regulationsChina has relatively strict foreign exchange regulations. Moving currency in or out of the country often triggers a settlement, registration or approval requirement, depending on the type of transaction. For example, a loan agreement between a foreign lender and a Chinese borrower must be approved by the State Administration of Foreign Exchange or its local branch to be legally effective. For a distributorship arrangement, in order for the local distributor to obtain the foreign currency required to compensate its foreign seller, the contract, invoice and certain customs documents must be submitted to a designated bank for verification that foreign currency is required to meet a valid contractual obligation. 

Employment laws, taxes, import restrictions, universal payment methods,  etc.

Read also:

International Joint Ventures (U.S. Law)

Alternative Dispute Resolution