Country Set-Ups, Corporate Structures and Groups
If you are looking to expand operations or restructure your group, we can draw on wealth of experience. Among others, we can set up and grow country operations for complex operating businesses or implement business relocations
Setting up, or expanding, business in new territories is an important task that requires a careful approach.
A business could cover new territories with or without setting up a new local entity; but even in the latter case, the applicable rules should be examined. Regulations on licencing and taxation may apply irrespective of whether or not a new local entity is involved.
The nature of the new business will often point to key areas of concern during country due diligence: will any licencing be involved? Will any specific arrangements in connection with import / export be needed?
Many states have now restrictions or clearances in connection with national security interests. These clearances are often difficult to obtain. If a clearance of this type is needed, the new business may well not be viable.
Additionally, the ‘home’ authorities of the expanding group may prescribe that a notification is made to the tax authorities when a new overseas business is established.
Of course, states vary on treatment of foreign investment. Depending on the circumstances, one must consider how the investment should be routed, whether any relevant bilateral investments treaties offer relief on dividends and/or interest and whether the tax authority offers any transfer pricing guidelines. Naturally, the most efficient funding for the new business may involve both equity or loans.
Where a new entity is intended, the natural starting point to study the applicable local regime is relevant corporate law. Here, the requirement for a minimum percentage of local ownership may be prohibitive. Other matters of priority to consider include, among others, accounting, employment and taxation. With reference to taxation, the business might need to consider any rules on substantive presence, such as the need to conduct management of the new local company from within the host state.
Depending on the jurisdiction, local rules may be incomplete or contradictory.
For example, import licencing requirements may conflict with rules on foreign exchange controls. Resolving cases such as this will take time, so leaving some headroom will be prudent.
A practical example of an interesting local complication is hedging as many developing jurisdictions were hostile to the concept. As a result, the new local business might be unable to have any hedge in place or might be unable to recognise hedging losses.
Local counterparties of the new business will generally expect to deal on familiar terms under contracts governed by local law. It may be difficult to reconcile the commercial traditions of the expanding group with such terms / local laws. Accordingly, our recommendation is to start work on any material local contracts, such as distribution agreements, logistics, warehousing, customs clearance contracts, early.
The key to success in setting up new country operations is thorough planning: work carried out in early stages will pay off handsomely in the future.
