By Charlotte Lahaije-Hultman, Global Sector Head, Corporates at Vistra as featured in Insight Out Magazine #25
I’ve spent much of my career helping organisations expand and operate internationally. There have been many changes during that time, particularly in the last decade. Businesses and investors have had to adapt to the rise of digital commerce, emerging ESG demands, the normalisation of remote work, rising protectionism, inflation and other challenges.
Despite these ongoing shifts, some best practices related to expanding and operating internationally have remained intact. Any growing organisation should understand these practices, or steps, so they can lower risk and promote efficiencies. Private Equity and Venture Capital firms can also benefit by increasing their ability to provide sound guidance to growing portfolio companies.
Keep in mind that expanding and operating internationally in an efficient, compliant way requires expertise in many complex areas. This brief article can only address a few steps at a high level, but they’re important ones. And whether you’re expanding for the first time or the third, the challenges and risk-mitigation strategies will largely remain the same.
1. Establish an international expansion and operations oversight team
No matter what size the organisation, if it’s operating in or considering expanding into a new country, it should establish a team of experts to oversee international activities. The team should have representatives from finance, tax, HR, general counsel and risk management. Most organisations will also want to hire a third-party international expansion provider to obtain ongoing information and advice.
The team should vet any proposed expansion plan to understand: how it aligns with corporate strategy; the nature of the activities; all related compliance obligations and costs; and the target country’s culture in relation to the organisation’s culture (which shouldn’t be underestimated). This kind of thorough research should be conducted well in advance of any expansion.
The team should also regularly review existing international activities in light of changes to corporate strategies, budgets, compliance obligations and other relevant factors. Finally, it should develop and update international expansion and operations policies.
2. Understand and continually address cross-border compliance obligations
In recent years there has been some regulatory cooperation between countries. Many jurisdictions, for example, have implemented the OECD’s Common Reporting Standard. But we’re a long way from global regulatory convergence. Organisations that operate in only one or a handful of jurisdictions often fail to appreciate the extent to which tax, labour, immigration and other rules vary by country.
To take an example, many organisations underestimate the risks of permanent establishment, or what constitutes a taxable presence. Broadly, if a company generates revenue in a country, or establishes a physical presence over a sustained period, it typically risks triggering a permanent establishment, or PE. PE determination is a grey area, and authorities in different countries interpret and enforce PE laws in their own ways. Unfortunately, the risks of non-compliance are high.
We had a client that approached us because they’d breached PE laws in Sweden. They’d been paying two employees who worked from home and didn’t generate significant revenue. After a year, local authorities informed the company that it had triggered a PE, in part because one of the employees had the word “sales” in his title. The situation was complicated, but essentially the organisation should have more formally registered its legal presence in Sweden and paid more employer payroll taxes. In the end, the client had to pay over US$20,000 in taxes and fines.
This is one example of the countless ways non-compliance with local rules can lead to unforeseen costs. Keeping up with new and changing tax, HR, immigration and other obligations in all countries of operation is one of the most difficult, and essential, tasks of any multinational organisation.
3. Understand how to pay workers in another country
When an organisation expands into a new jurisdiction, it usually considers hiring contractors. This is a quick solution, but misclassifying workers as contractors rather than employees is a risk. We had a university client that hired local workers as contractors to run a study abroad program. After many years of this arrangement, the contractors sued, claiming they’d been de facto employees all along. They prevailed, and the university had to pay more than US$500,000 in back taxes and damages.
One increasingly popular option for quickly hiring workers in another country is through an employer of record, or EOR. This is a third party with a local legal entity in the target country that can make payrolls and provide benefits while the expanding company directs the workers. It’s important to understand that while EOR is a great low-risk option for certain situations — including paying workers after an M&A carve-out deal or to get up and running quickly — it’s not intended to be a permanent solution.
The most flexible solution for hiring workers across borders is to establish a local legal entity (such as a subsidiary) and pay local employees through that. Establishing an entity can be expensive and time-consuming, so the organisation should be committed to its target-country activities.
There are other solutions to paying workers abroad, such as paying through a non-resident payroll. Each country has its own set of options with related benefits and risks, so due diligence is essential.
4. Optimise your entire organisation
When I started my career, many clients were primarily interested in our tax services. Over the years, tax has remained critical, but our clients have also demanded more varied services. They need help navigating an increasingly complex global economy that includes cross-border remote work, ESG reporting requirements, disrupted supply chains and other challenges.
To better compete in this volatile environment, companies are now optimising their entire organisations. They’re implementing updated corporate governance frameworks, reviewing HR policies and practices to ensure effective and efficient global workforce management, developing robust data protection and IT controls, conducting legal entity rationalisations to optimise their global footprints, and more.
This kind of holistic optimisation creates operational and financial efficiencies while lowering risk. If properly documented, these kinds of steps will appeal to customers and investors and can significantly increase valuations.
5. Know what it takes to wind down operations
One area of planning that’s often overlooked is the cost and time it takes to wind down, or dissolve, a legal entity. Here again, rules vary by country, but often include stopping trading, having an external audit performed and not having local tax liabilities. The timelines for winding down also vary, but typically the process takes at least six months.
If an organisation’s strategies or circumstances change, it may have to wind down an entity unexpectedly. If it hasn’t accounted for the time, costs and requirements of a dissolution, the organisation may face budget shortfalls, compliance risks and other pitfalls.
If there’s one overriding truth about international expansion and operations, it’s that “you don’t know what you don’t know.” Don’t assume that one country’s laws and regulations are like another’s and seek authoritative information and advice to understand what you’re getting into and to keep compliant once you’re established.