There comes a time in every organization’s life when it must make the decision: Should we consolidate where we are, or should we start to look across the border for new markets and new opportunities? Those with a little ambition can easily be swayed by the lure of international growth, but even those with a simple corporate structure will have to pay particular attention to the way they structure the group for international growth.
Establishing an entity in a new market – whether that’s a new jurisdiction, a new country or just a second entity in an existing country – can bring its own set of challenges. Entity managers must pay attention to the local rules and regulations of establishment, which can govern everything from the type of entity best suited to operations to the relationship of the local board to the parent board.
Push through the challenges, though, and you can expose your organization to the many benefits of international expansion and new markets: establishing new revenue streams, accessing a global talent pool, finding new customers, gaining a competitive advantage, and utilizing the range of incentives and grants that some governments make available to foreign companies entering the local markets.
These benefits can have a knock-on impact to the rest of the subsidiary group and can raise both the profile of the company and shareholder value.
Another reason organizations opt to establish and expand legal structures for international entities is to create a structure to protect business assets. If this is the case, the legal structures for international entities become absolutely crucial to the organization’s ability to remain in good standing.
Legal structures for international entities
There are thousands of financial and environmental variables that impact the risk profile of a legal entity, says Thomson Reuters in its Mapping the Corporate Genome report. “The nature of intricate ownership and governance structures between entities can create an endless amount of corporate relationships which adds further complexity of risk assessments,” they write.
Those looking after international entity support must pay careful attention to the interactions between markets, liquidity, valuations, correlations and prudent risk management. When creating legal structures for international entities, make sure you bear in mind factors concerning flexibility, complexity, liability and control. Consider the tax implications of how you structure for international entity support, and ensure all necessary licenses, permits and regulations are purchased and included in workflows.
If you’re obtaining funding from an external source, this can place additional pressures on legal structures for international entities. Your investors and shareholders may have certain requirements, and these must be met while also ensuring local regulatory requirements are not contradicted.
Creating an entity relationship diagram can help governance and compliance managers to understand the full picture across all entities, and shine a light on any potential risks or pitfalls before the international expansion begins in earnest.
Challenges for international entity support to keep in mind
While every organization will handle its international entity support in different ways, there are some common best practices that should be considered. Some aspects the legal operations and compliance team will want to pay particular attention to – factors that can sometimes be overlooked in the rush toward international growth – include the following.
Local labor laws
International markets can have some pretty complex and complicated labor laws – and not just in those markets that are outside of Western practices. Some European countries, including Germany and the Netherlands, have requirements regarding Works Councils for employee representation; elsewhere in the world, particularly in Asia, you may need to fulfill local employee hiring numbers before you can bring in foreign workers. Ensure you’re fully versed in local needs before establishing an international entity.
Another often overlooked aspect of international trade is that of intellectual property, or IP, which can be worth more to a company than any actual property they own. Not every country enshrines IP protection in regulation in the same way as, for example, the US does, and it can be complicated to keep track of how each country handles the question of IP. Some countries even assign copyright protections to contract workers, and confidentiality agreements and employment contracts must be carefully vetted and worded by someone with intimate knowledge of local laws.
Shifting the tax burden and trying to achieve tax efficiency is one of the reasons many organizations establish entities abroad, and why robust international entity support becomes so essential. Global regulators have been cracking down on the practice of shifting profits around an international legal structure to avoid or evade corporate tax burdens, and the result has been a movement around the world toward requiring transparency in corporate financial operations. The OECD’s Base Erosion and Profit Shifting (BEPS) project, the Common Reporting Standard (CRS) and the US’s Foreign Account Tax Compliance Act (FATCA) all mean an automatic exchange of information between international financial institutions, such that there are fewer places to hide from international tax, which, in turn, means company accounts must be handled carefully.
Finally, some jurisdictions have specific requirements around the makeup of a board that international entity support should keep in mind. The composition of the local entity’s board, its relationship with the parent board and any shared resources must be carefully tracked. Some jurisdictions require the local board to have full independence while others will allow entities to share board resources, which means the way entities communicate and the data that makes up the corporate record needs safe and secure storage in a central repository that anyone can access, and that enables easy reporting whenever regulators or auditors need information.
Leverage entity management software for robust international entity support
One of the best ways to ensure your international entity support can be handled in a robust and efficient way is to work with entity management software, which helps to reinforce processes and bring clarity to complex operations.
Entity management software, such as Diligent Entities, helps to create a single source of truth for an organization’s corporate record, meaning those responsible for international entity support can draw on entity data from anywhere in the structure. Boards across the organization can access any information that HQ deems necessary, while the parent boards can see the compliance and governance status of any subsidiary in real time.
Using Diligent Entities also enables an organization to integrate its international entity support with Diligent Boards, a robust, cloud-based board management portal, and a secure file-sharing platform to create the Governance Cloud, an all-in-one ecosystem to drive modern governance practices.
Get in touch and request a demo to see how Diligent Entities can help you to build your legal structures for international entity support and enable healthy cross-border growth.