A small legal team sitting in a conference room discussing international business law and considerations for expanding their business abroad

International Business Law: Understanding the Legal Aspects of Doing Business Abroad

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Navigating international business law is one of the most challenging aspects of global expansion.

Choosing a corporate structure, familiarizing yourself with local employment regulations, and ensuring compliance with data protection and intellectual property laws are complex tasks that pose unique risks.

Fortunately, international business law isn’t as complicated as it seems. With some due diligence, organizations can streamline the main legal hurdles of expanding overseas and open the door to success on a global level.

Read on to discover eight examples of international business law that all global employers should know and find tips on mitigating risk. 

8 examples of international business laws to consider when expanding abroad

International business law covers everything from corporate structures, employment regulations, and tax law to trade compliance, payment controls, and business termination.  

We break down the key aspects of international business law below to help demystify global expansion and set your company up for success as you enter new markets.

1. Labor and employment

Labor and employment laws cover everything from payroll and worker’s rights to employee classification. Global companies must comply with the local regulations in each foreign market where they do business.

Common labor and employment regulations include the following:

  • Minimum wage
  • Leave entitlements
  • Working hours
  • Statutory benefits 
  • Payroll cycle
  • Probationary periods
  • Severance pay
  • Bonuses
  • National holidays

Ensuring compliance with statutory benefits regulations and running global payroll are two of the biggest challenges companies face when navigating international employment law.

Statutory benefits vary worldwide but often include healthcare, retirement, worker’s compensation, and paid sick leave. Some countries, such as Sweden, offer generous paid parental leave entitlements of up to a year and a half. Others, such as the US, don’t require paid parental leave at all.

You must also withhold income taxes from employees' monthly earnings. Depending on the country in which you do business, you may also face unique levies, such as earthquake or rural education taxes.

Summarize the details of your work arrangements in your international employment contracts and ensure compliance with any relevant collective bargaining agreement (CBA) provisions. Remember to include any additional terms you and your employees agree to, such as supplemental benefits or fringe benefits.

If you hire contractors instead of full-time employees, be aware of your misclassification risk. Familiarizing yourself with local worker classification regulations is critical for avoiding fines, benefits arrears, back taxes, and legal injunctions.

2. International trade compliance

Whenever companies trade internationally, their business activity invokes the national security and economic interests of at least two countries. If you import or export goods, you’ll have to acquire proper trade licenses, classify your products, and pay applicable duties and taxes.

You’ll also have to complete customs declarations and keep track of invoices, bills of lading, and packing lists to ensure smooth clearance. Remember, some countries have trade agreements that can reduce or eliminate tariffs. Understanding tariff rates in your target markets is critical for developing a competitive pricing strategy for your overseas products and services.

Trade with some markets and regions is restricted or forbidden due to sanctions. Consider Iran and North Korea, for example—trade with these countries is mostly off-limits. Assess where you plan to do business and consider how sanctions could affect your operations there.

In the age of globalization, sanctions can have rippling effects across the global marketplace—for instance, commodity export restrictions on one country can disrupt supply chains and lead to rising commodity prices worldwide.

Global companies must also be aware of corruption in international markets, as corruption can increase trade friction and reduce trade capacity. Properly vet your international business partners, familiarize yourself with local regulations, and assess common practices in your trade network to ensure you can efficiently conduct trade in those markets and enforce your contracts. 

3. Corporate structure

Choosing the right corporate structure is an important decision that drastically impacts the success of an overseas venture.

Different structures involve unique costs, timelines, capital requirements, and tax consequences. The ideal approach for any business depends on its target market, goals, cost concerns, global expansion strategy, and willingness to take on risk.

Common structures companies use to establish overseas operations include representative offices, foreign branches, foreign subsidiaries, and joint ventures.

We briefly define each of these below:

  • Representative office. A representative office is a general overseas point of liaison for product sourcing, quality control, market research, promotions, and other non-transactional operations.
  • Foreign subsidiary.  A foreign subsidiary is a separate business entity that can conduct profit-generating activity in the local market. While the parent company owns the subsidiary, the subsidiary has financial obligations to minority shareholders, answers to its own management teams, and is independent of the parent in terms of liability and taxes.
  • Wholly-owned foreign subsidiary. A wholly-owned foreign subsidiary is similar to a subsidiary, except that the parent company has 100% ownership and control over the subsidiary’s business operations. 
  • Foreign branch. A foreign branch is an extension of the parent company and doesn’t offer the same legal protection as a subsidiary. Should a branch face litigation, it can create a ripple effect that negatively impacts the rest of the organization.
  • Joint venture. A joint venture is when two or more organizations combine resources to form a separate business entity. Joint ventures share investments, costs, and risks.

Remember, establishing the above corporate structures in your target market is time-consuming and often involves long-term investments, such as setting up local infrastructure and undergoing lengthy banking and incorporation procedures.

Companies that want a more agile, budget-friendly approach to global expansion should consider partnering with an employer of record (EOR) instead. An EOR is a third-party entity that streamlines global expansion, making it easy for companies to expand globally without establishing legal entities or worrying about compliance.

We discuss the topic of partnering with an EOR in greater detail later on.

Factors to consider when choosing a corporate structure

The first step in deciding on a corporate structure involves researching the local business environment in your target market and determining which structure aligns with the local norms and regulations. Then, determine the ideal structure according to your needs and goals.

Consider the following factors when deciding on a corporate structure for your overseas operations:

  • Operational control. Foreign subsidiaries offer the parent company more control, while joint ventures involve shared decision-making. 
  • Personal liability. Different structures offer varying degrees of personal asset protection. For instance, foreign subsidiaries offer greater protection than foreign branches. 
  • Tax implications. Confirm your tax obligations at home and in your target market. For example, foreign subsidiaries usually pay taxes only in the host country, while foreign branches often pay taxes in both countries. 
  • Reporting and compliance requirements. Different structures face different reporting and compliance requirements at home and abroad. For instance, American holding companies must report foreign-branch-earned income in their domestic annual tax filings.
  • Intellectual property (IP) protection. Different corporate structures, such as dual companies, offer unique opportunities for IP protection. 
  • Administrative burden. Each structure involves varying levels of administrative burden and operational requirements related to record-keeping, accounting, management, reporting, and compliance. 
  • Exit strategy. Different structures offer different exit mechanisms. Consider your level of commitment abroad and determine which corporate structure offers the most ideal exit strategy according to your circumstances and needs.

Remember to stay abreast of local regulations and market conditions—such changes can also impact the viability of different corporate structures in your target market.

4. Taxes

Navigating foreign tax regulations is one of the most complicated aspects of ensuring compliance when operating internationally. Global companies must clarify their corporate tax liability in their host country and run compliant global payroll for their local team.

We discuss employment and corporate taxation in detail below.

Corporate tax

Some of the greatest costs and opportunities in global business arise from corporate taxation. If your overseas operations constitute a permanent establishment, your business will face a local corporate tax liability.

Clarify your local tax obligations abroad to avoid noncompliance penalties, such as back taxes, fines, and limited business opportunities. Tax treatment can often be the difference between the success or failure of a venture.

Remember to identify tax treaties between your target market and your home country as well. Tax treaties can help you avoid double taxation and lower your overall costs.

For instance, foreign companies operating in Singapore face low corporate tax rates and only pay tax on locally generated income rather than global income. They also gain access to the country’s Tax Treaty Network. As a result, doing business in Singapore can help international organizations reduce their global tax burden. 

Employment tax

Employers must also run compliant payroll in each of their target markets. As previously mentioned, payroll taxes and contributions in most countries include income tax, healthcare, pension, and worker’s compensation.

However, payroll contribution rates and structures vary drastically worldwide. Plus, some countries manage employment taxes only at the federal level while others implement taxes at regional and local levels as well.

Employers must calculate taxes and withholdings as percentages of their employees' gross monthly earnings and remit timely, accurate payments to local authorities. Delays and inaccurate payments result in fines and can even reduce a business’s value and cause employee churn.  

Due to the complexities of navigating different rates and structures between countries, many global companies partner with a third-party tax specialist with local experience to ensure compliance.

Learn more in our complete guide to international payroll tax.

5. Intellectual property

A company's most valuable assets often include its intellectual property (IP), whether in the form of patents, copyrights, trademarks, or trade secrets. For most companies, IP protection is critical for maintaining a competitive edge. For others, it’s a necessity for survival.

For instance, fashion and media-based companies must protect their IP to maintain brand identity and reputation. However, companies with pioneering tech solutions often must protect their trade secrets to avoid going under.

IP laws and regulations vary drastically worldwide, creating a major risk for global companies. While some countries offer robust IP protections and enforceability mechanisms, others don’t, leaving it mostly up to individual companies to ensure protection.

The first thing to remember is that IP protections in your home country can’t protect you abroad, and securing and enforcing rights overseas can be expensive.

Keep the following considerations in mind when trying to safeguard IP in international markets:

  • Audit your IP assets to determine their value, clarify vulnerabilities, and identify opportunities for protection
  • Catalog all IP assets, such as inventions, industrial designs, and computer code, to establish an overview of what you need to protect
  • Consider copyrights, patents, trademarks, and trade secrets to protect your assets, depending on the nature and vulnerability of each asset
  • Collaborate with local players and legal entities to navigate the legal landscape, gain insights into local regulations, and identify effective ways to protect your IP

Remember, there’s no universal approach to IP protection. Global companies must develop strategies tailored to their individual assets, industry, and markets. 

6. Data protection

The digitization of the modern world has made global trade easier. However, it has also resulted in the mass dissemination of consumer data. Regulators worldwide have established data protection laws to limit the information organizations can legally collect from consumers and regulate how companies use and share this information.

Most countries allow companies to collect consumer data if they obtain it via lawful consent and use it for specific purposes, such as performing the duties of a work contract, complying with legal obligations, or protecting vital interests.

Data privacy laws also limit the free flow of personal data across borders. For instance, the U.K.’s Data Protection Act limits personal data transfers to legal entities outside the U.K. Overseas data transfers are legal only if the recipient is located in a country that British authorities deem to have sufficient data protection laws and the transferring entity uses appropriate safeguards.  

Penalties for violating the Data Protection Act include fines of up to £17.5 million or 4% of annual global turnover—whichever is greater. Familiarizing yourself with data protection regulations in your target markets is critical for avoiding fines and other noncompliance penalties. 

7. Payment, finance, and exchange controls

Payment processing in domestic transactions is relatively simple—both parties understand the currency involved and can easily facilitate the transaction. The same isn’t always true for international payments.

Moving money across borders adds complexity to an otherwise simple exchange. Financial regulations, geopolitical risk, and exchange rate volatility can present unique challenges. Establishing secure, compliant, and efficient international payment methods is critical for any business operating in the global marketplace.

Some challenges companies face with international transactions include the following:

  • Currency exchange volatility. Currency conversions in international transactions expose companies to exchange rate risk—the currency value may change between initiation and completion.
  • Compliance. All participating parties must comply with regulations in the originating and receiving jurisdictions when making international payments.
  • Processing time. International transactions take longer than domestic payments since they must pass through more banking systems and checkpoints.
  • Cost. International payments are usually more costly due to currency conversion fees, wire transfer fees, and commissions from intermediaries and receiving banks.
  • Risk. International payments involve added risk related to geopolitical instability, sanctions, exposure to payment fraud, and accidental non-compliance.

Global companies use international payments for various reasons, such as purchasing raw materials, paying dividends, making investments, or acquiring assets. Image a Columbian business taking a loan from a bank in the U.K., for example. In this case, the Columbian business would pay interest using an international transaction.

Global companies must also pay their global workforce, which involves legal challenges and compliance risks. Global HR teams must navigate payroll regulations in multiple countries and ensure compliance with minimum wage requirements, statutory contributions, income tax regulations, and severance payments.

Companies can easily mitigate international payment risks using foreign currency exchange controls and more secure payment methods, such as letters of credit, international checks, and split payments by wire transfer. However, these risks can be costly if a company doesn’t exercise due diligence. 

8. Termination of the business

While establishing an exit strategy may not be the most exciting aspect of global expansion, it can help you avoid major legal troubles, costs, and delays should you decide to close your foreign operations.

An exit strategy is a detailed roadmap that outlines how business owners intend to exit a market and close up their foreign entity while ensuring a smooth and profitable departure that safeguards the organization’s future and financial security.

Shutting down a foreign entity involves choosing an exit mechanism, such as a sale, merger, or management buy-in. You’ll need to establish clear goals to maximize profits, avoid operational disruptions at home, and facilitate a smooth ownership transfer. 

Business valuation and preparation will also play a critical role in your exit. You’ll want to assess your business’s worth and maximize its appeal to potential buyers or investors. Be prepared for considerable legal and financial paperwork as well, such as acquiring government approvals and ensuring compliance with creditors’ and employees’ rights upon termination.


Starting your global expansion journey? Download our essential global expansion checklist that offers key tips on developing your strategy, conducting market research, hiring global talent, and mitigating risk along the way:

The essential global expansion checklist - Get the checklist

Simplify doing business abroad with a global expansion partner

While global expansion opens up a world of lucrative business opportunities, it involves serious risk. Eliminate the risk and streamline your expansion by partnering with Velocity Global.

Our employer of record (EOR) solution makes it easy for companies to expand to over 185 countries without establishing local entities, navigating complex legal procedures, or risking non-compliance.

Our team of international legal experts handles everything from corporate taxation and trade compliance to IP protection and global payments on your behalf. With our global infrastructure network and a suite of workforce management solutions, we also streamline global HR—we handle everything from hiring and onboarding to running compliant global payroll and offering ongoing support to your team in their native language.

Whether you are interested in testing the waters of a new market or you’re looking for a bridge solution to engage local talent while facing banking delays or lengthy incorporation processes, we can make it happen.

Contact Velocity Global today to learn more about how our EOR solution accelerates and simplifies global expansion while reducing risk.

 


Legal Disclaimer: The information available in this guide does not, and is not intended to, constitute legal advice and is for general informational purposes only. You should contact your attorney to obtain legal advice on any particular legal matter. Only your individual attorney can provide assurances that the information contained in this guide – and your interpretation of it – is applicable or appropriate to your particular situation. All liability with respect to actions taken or not taken based on the information in this guide is hereby expressly disclaimed. The content in this guide is provided "as is," and no representations are made that the content is error-free.
 

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