Five Questions to Ask When Setting Up Shop Abroad

Once you’ve decided that expanding internationally is the right next step for your organization, you need to think carefully about how that single decision can affect other areas of the business. The steps following your decision to move into the international realm, may seem less ‘exciting’ than the original decision, but they’re no less important. Here are five questions to ask that will help you get your footing when taking your company global.

1. Do You Know the Territory? There is really no substitute for having a real strategy for setting up shop abroad, starting with a solid business plan. As part of that, do some significant research on the country or region in which you plan to set up your presence. It helps to get a sense of the country or region’s culture, business practices, regulations and strength of the rule of law. For example, research on the level of corruption in the country or region will give you a sense of the risk level for compliance with the U.S. Foreign Corrupt Practices Act, and similar local laws.
2. Is Your Intellectual Property Protected? If your company has valuable patents, copyrights, trademarks or trade secrets (collectively called “intellectual property”), and you haven’t done so already, you need to make sure that your intellectual property is protected in the foreign markets you are targeting. The rules can be significantly different from U.S. laws and regulations. For example, in the U.S., trademark rights are based on use, and although registering your trademark is advisable, your legal ownership rights derive from using the trademark. By contrast, in most other countries, trademark rights are primarily based on registration, so that a foreign company could pre-empt you simply by registering your trademarks before you do. Patent laws are starting to converge, but in that area also, careful attention needs to be paid to disclosure and filing rules and time limits.
3. How Will Local Laws Restrict Your Options? Under the foreign country’s laws, there may be a maximum set for the percentage of foreign ownership in a joint venture. There may be onerous registration and government approval processes for joint ventures or wholly-owned subsidiaries. Even if you are planning only a manufacturing license agreement, there may be minimum local content requirements, regulations restricting the technology owner from imposing certain terms on the licensee, caps on royalties, or limits on the time period of the license, after which the licensee may even acquire full rights to the technology. Know what you may be getting yourself into before you start filing papers or hiring local employees.
4. Does Your Entity Choice Match Your Business Plan? Depending on the country, there are a range of entity choices, from the minimal presence of a Representative Office, to a Branch, where your branch manager may solicit sales and sign contracts, to a contractual or equity Joint Venture, to a Wholly-Owned Subsidiary. These entity choices need to be matched to the projections under your business plan.
5. Have You Included Your Tax Advisor? This one gets overlooked a lot and can be very expensive! A classic mistake of U.S. companies setting up abroad is to send a salesman to the new territory, rent him an apartment, and tell him to just get on with it. Big mistake. Under most tax treaties between the U.S. and foreign countries, having someone signing contracts for your company without a registered presence or entity to cover that person, adds up to what is called a “permanent establishment,” which can expose your company’s profits to tax in both the U.S. and the foreign country! Beyond this particular issue, the I.R.S. will also be looking carefully at how you set transfer prices between the U.S. parent company and its controlled joint ventures or subsidiaries. So it is absolutely critical to pull your tax advisor into the planning as early as possible.

Implementation

You can choose outside advisors who are based in the U.S. but have a foreign office or correspondent in the country you are targeting, or well-recommended advisors based in that country.  Either way, it is important to have someone with deep country expertise.

An effective way to do all of this research and planning is to form a cross-functional team at your company, including all of the key support functions, such as Legal, Tax, Accounting, Treasury, Export Control/Customs, and Human Resources. Make sure that they thoroughly explain how your company is structured and how it does business to outside foreign advisors at the front end, so you get the best advice. Consider keeping that cross-functional team going after you have set up your foreign presence.