International expansion is one of the most significant strategic decisions a management team can make. Whether a business is entering a new market organically or through acquisition, the legal considerations that arise in a cross-border context are materially more complex than those encountered in a purely domestic setting. Early engagement with these issues – ideally well before any commitment is made – can be the difference between a smooth market entry and a costly misstep.
Businesses that invest time in understanding the following structural, regulatory, tax and workforce implications of operating across borders will be better positioned to protect value, maintain compliance and move at pace:
1. Initial corporate structuring
One of the first questions a business will face when expanding internationally is whether it needs to establish a local legal entity, and if so, what form that entity should take. The answer will depend on the nature and scale of the planned activities, but it is important to appreciate that a formal entity is not always required in order to operate in a new jurisdiction – and that the consequences of operating without one can vary significantly.
There are broadly three structural options to consider. First, a business may choose to operate in a new jurisdiction without establishing any formal local presence – selling goods or services into the market without incorporating a local entity or registering a branch. This may be appropriate for online businesses, one-off transactions or the export of goods, but it carries significant risk: a fixed or consistent presence in a jurisdiction – which may be as limited as a single employee working from home – can be sufficient to create a taxable permanent establishment, and the threshold for triggering this is often lower than management teams expect. Second, a branch offers a degree of local legal existence and will typically require a local manager, but is not a separate legal entity – the parent company remains directly liable for the activities and liabilities of the branch, and profits attributable to it will be subject to local taxation. Third, a subsidiary provides the greatest degree of formality and separation, with its own board and governance structure, and offers the most effective insulation of the parent from local liability. This is the most common option for businesses undertaking complex or regulated activities. Tax counsel should be consulted before hiring or relocating any personnel into a new jurisdiction, as the movement of people can independently create corporate tax exposure.
Beyond the choice of entity, management teams should be prepared for practical differences in how legal systems across the globe operate. Processes can move more slowly in certain jurisdictions, and additional time and cost should be built into expansions in jurisdictions with notarial requirements or where changes to corporate records may need to be filed before they take legal effect. In many European jurisdictions, constitutional documents – including articles of association – must be filed publicly, and information about directors and shareholders may be available online. Confidential commercial terms (such as exit multiples or strategic plans) should therefore be kept in a private shareholders' agreement rather than in the articles, and care should be taken to avoid material cross-references between the two documents that could trigger a requirement to disclose the shareholders' agreement. Pre-contractual liability is also recognised in many civil law jurisdictions, meaning that parties can incur obligations during negotiations even before a contract is signed – a risk that should be expressly disclaimed where possible.
It is essential to begin thinking about these structural and tax questions early. As soon as a business has people undertaking activities in a jurisdiction – whether through local hires, secondments or remote working arrangements – tax consequences can arise. Careful consideration should also be given to the residence of existing entities within the group, as changes to where decisions are made or where key personnel are located can have unintended implications for the tax position of the wider corporate structure.
2. Growth through acquisition
Where a business chooses to enter a new market through acquisition, thoughtful scoping of the legal due diligence process is essential. Representations, warranties and liability caps that are standard in UK or US transactions may require significant adaptation to reflect local market practice, and intellectual property protections may be materially weaker in some jurisdictions. Employee rights and exit costs are also likely to differ substantially from those with which the buyer is familiar. Sanctions and anti-corruption diligence should be treated as a priority workstream rather than an ancillary exercise – an unidentified sanctions issue can give rise to significant financial liability and reputational damage, and the relevant questions should be put to the sell side at the earliest stage of the process.
On the regulatory side, every country maintains its own antitrust and foreign direct investment regime, and both should be mapped before any transaction is signed. In the European Union, filings may be required at EU level and potentially in individual member states, and the EU Foreign Subsidies Regulation introduces an additional layer of compliance – including extensive information requests – even where no subsidies have been received. Transaction tax regimes are also in a state of flux across the world and can materially affect both closing costs and exit structuring of cross-border deals. Structuring decisions taken at the term sheet stage can make a significant difference to the tax efficiency of the deal and any future exit, so tax counsel should be engaged early rather than at signing. Regulatory counsel should similarly be embedded in the deal team from the outset to ensure that filing obligations and approval timelines are factored into the transaction timetable.
3. Entering new markets
When entering a new market – whether organically or through acquisition – the integration of the new operation into the wider group requires careful coordination across legal, finance, tax and human resources teams from day one. From a tax perspective, the structuring of intra-group arrangements, repatriation of profits, tax grouping and transfer pricing all need to be carefully thought through at an early stage, and management teams should consider whether the new acquisition changes the existing tax position of the group.
On the corporate side, many cross-border businesses seek to bring contracts within a new jurisdiction or acquired business onto the global terms of the group in order to create consistency – this also simplifies the data room and strengthens the commercial narrative on any future exit. However, the legal framework governing the subject matter may differ materially across jurisdictions. Global employment contracts and policies will require local review and amendment, and four areas in particular will crystallise early: employment protections (including statutory rights around notice, dismissal and consultation that cannot simply be overridden by contract), immigration requirements (which may need to be refreshed when a business is acquired, with filing obligations triggered by a change of ownership), tax treatment of the workforce (including employment taxes, payroll obligations and social security contributions), and restrictive covenants (where enforceability and scope vary significantly between markets, and existing covenants may not extend to cover newly acquired territories).
4. Managing your global workforce
In a share acquisition, the buyer will step into the shoes of the current employer. While this can appear simpler in terms of business continuity, it also means that the buyer is inheriting any existing issues. This means that identifying and understanding hidden liabilities, ongoing disputes, misclassification issues and legacy obligations during due diligence is paramount.
In an asset transfer, the position is more complex. In many jurisdictions – including across Europe – the “Acquired Rights Directive” applies, meaning that employees transfer automatically on their existing terms, cerltain changes to those terms are prohibited or require consultation, liabilities (including pre-transfer claims) transfer with the employees, and dismissals connected to the transfer can be automatically unlawful. In jurisdictions where there is no automatic transfer mechanism, a consensual transfer or termination and re-hire may be required. Management teams should also be aware that even in a share sale, Acquired Rights issues may still arise where there has been a prior carve-out or a subsequent integration exercise when a change of employer takes place.
Where a business is hiring organically rather than through acquisition, there are several models to consider.
- Direct local employment – hiring under a local employment agreement in the target jurisdiction – is the most straightforward but may require a local entity and will require local compliance.
- Engaging a contractor carries lower commitment but introduces misclassification risk, with potential exposure to employment taxes and payroll obligations – an area that tax authorities globally are targeting with increasing intensity.
- Seconding an existing employee from the home base can serve as a useful bridge while local arrangements are established, though this too has tax and immigration implications.
- Finally, an Employer of Record arrangement, where a third-party entity employs the individual on the business's behalf, can offer a faster route into a market, but management teams should be aware that restrictions may apply to the supply of labour in certain jurisdictions, the duration of such arrangements may be limited by local law, and enforceability of business protection provisions (including restrictive covenants, confidentiality and IP assignments) against the individual may be uncertain.
Whichever model is adopted, a standard home-country employment template should not simply be re-headed and deployed internationally: mandatory minimum terms, including statutory notice periods, holiday entitlements and collective bargaining obligations, cannot be contracted out of, and in some jurisdictions courts will read mandatory terms into an employment agreement regardless of what it provides.
5. Employee Incentivisation
Management teams should consider their incentivisation strategy at the earliest possible stage. Equity-based arrangements are effective when implemented early, as the lower valuation of the business at that point means that a smaller proportion of equity is required to deliver meaningful incentive value, and the longer the incentivisation arrangements are in place, the greater the alignment between management and shareholder interests. Where a business is expanding into new jurisdictions, existing incentive structures should be reviewed to determine whether they operate effectively in the relevant territory – securities law restrictions, local tax treatment and regulatory requirements may render certain arrangements impractical or inefficient and so phantom equity or cash-settled bonus arrangements may need to be adopted as an alternative in order to deliver an economically equivalent incentive without the associated legal and tax complications.
Retention is equally important. Expansion through acquisition generates a period of uncertainty that can lead to attrition among key personnel. Management teams should consider putting in place retention arrangements, maintaining clear and consistent communication with the workforce, and ensuring that appropriate protections are in place for the business in the event of departure.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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