What Legal Risks Do Foreign Investors Take When Expanding into an Overseas Market?

If you’re running your own business and it’s been doing great in your own country, you might have looked into expanding its current reach to a foreign country so that you can share your products or services and amass a greater customer base. So, you’ve set aside a portion of the profit that you turned thus far with your business and have started investing in expanding your operations overseas. But of course, running a business is not without its share of risks, some of which are of a legal nature that might just take you and other foreign investors looking to expand their business overseas by surprise. To better prepare yourself for a massive part of what you’ll be facing once you decide to expand your business into an overseas market, you should make yourself aware of some of the legal risks you’ll be facing when doing business abroad.

Why Do Some Foreign Investors Expand into an Overseas Market?

Some foreign investors expand into an overseas market for any of the following reasons:

  1.   The product or service being offered by their business has a viable market abroad. Some foreign investors set their sights on other countries that they believe would also benefit from the product or service being offered by their business.
  •    They might have decided to invest in setting up their business in some foreign country after realizing that the product or service being offered by their business isn’t available there already.
  •    They might have also realized that their own product or service is far superior in quality compared to similar products/services that are available abroad.
  •    They might also be of the belief that as their product or service is successful at home, they could expect the same success in a new country.
  1.      The product or service being offered by their business is cheaper to produce and transport abroad.

Production and transportation costs may have gotten somewhat expensive in their home country which is why some foreign investors are outsourcing the production of their products or services.

  •    Foreign investors might assess the costs associated with the transportation of their products and choose to move their business endeavors to a foreign country that will allow them to ship their products for a reduced cost with minimized import/export taxes.
  •    Some foreign investors might also be able to acquire land and natural resources to set up their business in other countries at a fraction of what they would have spent in their home country.
  1.      Some foreign countries offer corporate income tax rates that are lower than that being charged to their business at home.

The corporate income tax rate being charged by the government in their home country for setting up a business there might be getting a bit too steep on their end.

  • Some foreign countries charge a slightly lower corporate income tax rate, or even none at all, whenever a business is set up there.
  • A lower or no corporate income tax rate at all means huge savings for their business.
  1.      The governments of some foreign countries allow them to be free to do what they want with their business.

Their home country might be enforcing anti-competition and labor laws that they find a bit too strict and overbearing for their business to thrive there.

  •         A foreign country that allows businesses to set up there with minimal government interference takes more significant risks.
  •         Less control from the government of a foreign country usually attracts them to set up their business there as it could grow limitlessly and innovate more.

What Are Some of the Legal Risks That Asia-Pacific Investors Might Run into While Expanding Their Business in California?

California has been noted as a preferred area of investment for businesses in the Asia-Pacific region. There is speculation that Chinese investment in California will reach more than $60 billion by the year 2020, with Japanese investment funds currently at a staggering $300 billion. Additionally, according to the United States International Trade Administration, more than 665,000 California workers are employed by foreign-owned companies as of 2014, with Japan having the biggest number of California workers employed at 120,500. California’s Chamber of Commerce said the state is also the largest-exporting among the United States in Asia. As of 2016, California has exported $68.7-billion worth of goods to the Asia-Pacific.

If your business originally operates in the Asia-Pacific region and you now want to expand overseas, to California or elsewhere, you have to be careful as an entrepreneur. For one, you have to innovate your products continually, so your new market will patronize whatever you’re offering to them, but aside from the products, you also have to be careful about the legal risks when expanding overseas.  To give you an idea of the legal implications you may face once you decide to expand overseas, you may consider the following:

  1.   Foreign Corrupt Practices Act or the FCPA: It is illegal anywhere in the United States to pay directly or indirectly the government to influence their decision of whether to retain or obtain your business. Once you start to operate your business within the United States, and in states like California, your business’ accounting and record keeping will also be subject to this act – along with your subsidiaries and employees. To ensure that your business is compliant with this act, you might want to design a policy, train your employees about this and of course, use due diligence. The training should be done at all levels in your company and it should be driven by the management team. Due diligence should not only include your staff but your business partners, potential acquisitions, agents, and distributors as well. Keep in mind that failing to ensure compliance from these third parties can put your business at risks and might hinder you from operate anywhere in the United States.
  2.   Restrictions on Sales to Embargoed and Sanctioned Countries and Individuals (Export Issues): Once your business is operating in the United States, you’re prohibited from making a sale to certain countries (e.g., Syria, Cuba, and North Korea).
  •    This law also addresses the sale of controlled items which require licenses. This varies depending on the buyer and the product. Thus, depending on the products sold and the customers and their location, you, as an entrepreneur should guarantee that compliance policies are in place and are strictly monitored.
  •    For your business to avoid any mishap during the transition from one country to another, training for relevant stakeholders should be in place. This is one way of ensuring that everyone within your business doesn’t make affirmative and inadvertent disclosures, which could harm your business in the long run. This training should include topics of deemed export.
  1.   Permanent Establishment Issues: When you decide to operate your business in the United States, chances are, you might be paying for an establishment to host your business. In the legal context, this is referred to as your business’ “permanent establishment” in that country. But if you are planning to have limited activities in a certain country, in the United States for example, you might be exempted from obtaining permanent establishment. But this is determined on a case-to-case basis. In situations like these, it’s best to obtain a professional tax advice before engaging business into a new country to know the range of activities considered for a permanent establishment.
  •    If the United States is just one of the countries you’re eyeing for your business expansion, you might need permanent establishment in this country and in other countries as well. Doing this will require your active participation with tax, finance and legal and sales leaders which will ensure that these locations are thoroughly selected for your business’ strategic importance. Careful planning before expansion allows you to address strategic and tax goals, so make sure that you have this on your list.

While running your own business has its rewards, it also has its share of risks, some of which are legal that can end up driving your business into the ground, especially if you’ve decided to expand your business operations in a foreign country whose laws work differently. To avoid having to face insurmountable legal disputes and spending more time running your business based abroad, you should make yourself aware of the legal risks listed above that you and other foreign investors have to consider when expanding into an overseas market.

Posted by Michael Lawson

Michael Lawson is a specialist bankruptcy attorney who, along with the other experts at the three offices of BLC Law Center, has helped many clients in the past move past their bankruptcy, FDCPA claims, or foreclosure. The BLC Law Center aims to provide legal support for Southern California Residents. Additionally, Michael currently writes for Blclawcenter.com. In his spare time, he likes to enjoy some downtime traveling with his family.

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