There has been a rising trend in companies pursuing global expansion strategies by either deciding on a total company relocation to a foreign country, or simply offshoring certain business processes. Some of the prominent US companies following offshoring strategies with their labor force include Carrier, IBM, Morgan Stanley, and GE – to name only a few. Others have moved their headquarters to foreign jurisdictions. These include Burger King, Budweiser, and Seagate Technology.
There are several important benefits to global expansion. Most decisions to offshore or relocate are motivated by a combination of the following three factors:
Labor and workforce issues
A desire to reach new markets
A desire to lower cost or to increase cash flow
Offshoring can achieve all of these objectives, but not automatically. Company relocation presents many opportunities, but also several significant risks. There are important legal factors to consider before you set out your global expansion strategy:
Offshoring or relocating: some legal considerations
Foreign tax laws:
Many businesses decide to offshore to lower their tax liability. There are many jurisdictions that compete for foreign investments by offering low tax rates–the Bahamas, the Cayman Islands, and the United Arab Emirates, for example.
The tax implications of the global expansion of your business might not be immediately apparent, however. Many jurisdictions offer low or no corporate taxes, but high sales taxes or high personal income taxes. Many countries are also revisiting their tax policies with regard to foreign nationals, and have instituted limits on the amounts of money that can be extracted from their jurisdiction without central bank approval. It is highly advisable that you consult with a foreign tax expert before making a decision based on what seems like lower taxes.
Global expansion will almost necessarily require that you incorporate your business offshore. In most cases, this will be a prerequisite for obtaining tax and other benefits. Corporate law differs dramatically between jurisdictions, however. Be sure to research the various corporate structures that are recognized in the target jurisdictions–and to choose the one that best serves your strategic objectives.
Importantly, familiarize yourself with the regulatory framework and reporting duties that are tied to specific corporate structures. In certain countries, for example, directors of registered companies can be held criminally liable for negligence. In others, reporting and audit requirements represent a significant cost – remember to take this into account.
Many companies decide on offshoring to save on labor costs. However, a save on labor cost should never be pursued without a clear understanding of the labor laws of the country you are relocating to. Many jurisdictions have much more stringent requirements for the lawful termination of employees than the US, for example. At-will employment contracts are often not lawful abroad. This means that you might face significant obstacles to maintaining an efficient and agile labor force.
Another consideration that should not be overlooked is the country’s labor laws with regard to collective bargaining. If unionization and collective bargaining regulation makes it very possible for your operations to be suspended for long periods of time, this should be taken into account in your global expansion strategy.
Import and export laws, trade communities
If your business depends on the import and/or export of goods, it is very important to have a thorough understanding of the customs and trade regulations of the jurisdiction you want to move to. Find out whether there are any tariffs and restrictions on exports or imports that will impact your business.
Another factor to keep in mind is that many countries form part of trade communities and trade treaties. These agreements make it significantly cheaper and convenient to trade with treaty countries than with other non-treaty countries. Formulate a clear idea of where you want your business to grow, and relocate to the optimal trade community for that.
Some types of intellectual property, such as copyrights, are somewhat universally protected by international treaties. Others, such as patents, are only protected in the jurisdictions that you applied for protection. Never offshore your business in a way that could harm your intellectual property portfolio. Decide what types of intellectual property protection you will need, and apply for that before company relocation.
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