Introduction
When referring to international businesses, we consider a business operating across multiple national borders and jurisdictions. Different aspects like differences in culture, language and legal systems greatly influence the success or failure of international business.
Therefore, it becomes crucial to have proper written agreements covering the scope and working of the international business while aligning with the domestic and foreign company requirements in the global or international market.
The process requires time and research regarding the markets you wish to enter and the potential legal issues. This article explores the top 10 legal matters and contracts before starting or pursuing your international business. Let’s start!
Legal issues in international businesses
If you plan on expanding your business internationally, you must consider some potential legal issues that might arise. Some of the top legal issues to take note of are:
Correct company structure – Ensure that you choose the correct company structure for yourself, depending on the extent of liability that you are willing to undertake. Registering as a company or a limited liability entity would limit the extent of your liability against the business. Otherwise, you could be personally liable for anything related to your business. It is further dependent on your jurisdiction as well. For instance, certain countries require your business to be registered as a company, even if individuals own it. Therefore, be very clear about your company structure.
Employment laws -It is vital to have employment contracts that correctly outline the team’s roles and responsibilities. This should be made in accordance with the jurisdiction that the employee is operating in. Usually, anyone working on a salary is considered an employee. Therefore, ensure that the following are correctly provided to them:
- Minimum employment rights, such as sick pay and holiday pay
- Right to join trade unions
- National minimum wage
- Employer pension contributions
Company share options – Providing this option to employees allows them to own shares in the company they are working in. This option could be provided to the employees as part of the remuneration package or as an additional motivation for performance and growth. Commonly, providing such options provides tax benefits to both the employer and the employee. Therefore, check the relevant laws applicable in your jurisdiction and consider providing these options to your employees.
Acquiring an overseas business – If you are considering buying an already established business overseas, you would require a separate team to deal with legal issues, accounting, taxes, human resources, and IT professionals. All of these must be employed at the local level to follow the relevant rules and regulations of the specific jurisdiction.
Tax obligations – Proper tax structuring advice may help you minimise your corporate tax obligations and clarify your responsibilities under the global transfer pricing rules. Additionally, the existence of double taxation avoidance agreements (DTAA) between the source country and the residence country also affects the taxes applicable to you. Therefore, ensure that you complete proper research on the local laws of the specific jurisdiction.
Real estate – If you plan to buy or rent a new space in the jurisdiction, you must be aware of the tenant obligations and some potential pitfalls for buying and selling property in that specific jurisdiction. The laws differ for every country. However, some common issues that you must seek clarity on are:
- Rights over fixtures and fittings.
- What happens after your lease runs out?
- Is it possible for the lender to call in the loan early in case of a mortgage?
- Does the landlord have a right to increase rent?
- Payment for utilities, maintenance, and security, along with any other additional expenses incurred while you operate the property.
- Leaving obligations, if any.
Incorporation and company structure
Deciding on a company structure is the first step towards establishing an international business. Do you want to be a company? A partnership? A sole trader? What is the right company structure to go forward with?
These are the first questions that you must concern yourself with. The country that you aim for also plays an important role here, considering that some countries require businesses to be registered as companies, even if an individual owns the business.
You also need to consider the amount of liability that you wish to be associated with. For example, to be registered as a company or a limited liability entity, you would become personally liable for everything the business does or faces, especially the losses incurred.
If you are selling your products to individuals, you would be required to be aware of your business’s legal status in the country you are entering.
The operational requirements of a business, like employee rights, data protection, or taxes, can become major problems if the business fails to comply with the country’s requirements. Hence, you must have an ideal company structure in place.
The organisational structures for international business can also be in the form of branches, especially for countries where the legal owners of the business are not permanent residents or citizens. Usually, tax benefits through double-tax treaties are provided to such entities to encourage more investment in the country.
Most international businesses worldwide are limited liability companies, and a few are partnerships or branches. This is because the financial liabilities and legal status are the same for beneficial shareholders, ensuring that the voting and investment power in the company remains constant.
Contract: Incorporation agreement
An incorporation agreement, or pre-incorporation agreement, is used by international businesses while they take steps to incorporate themselves in specific jurisdictions. The agreement helps prevent misunderstandings concerning the roles and responsibilities of the parties involved in the incorporating entity.
Some of the common aspects to be included in this agreement are the company’s name, purpose and structure, names of directors, share distribution, salaries of directors, etc.
Usually, the document is formed before the filing of the Articles of Association of the company.
Once an incorporation agreement has been entered into and clarity has been achieved towards the start of the business, it can provide tax advantages for shareholders, it becomes easier to transfer ownership of shares of incorporation, and it becomes easier to raise capital for the business.
Some common clauses that are expected to be included within an incorporation agreement are:
- Name of the business
- Structure of your business
- Incorporation details
- Corporate address
- Directors details
- Capital contribution
- Authorized persons
- Reimbursement of expenses
- Confidentiality details
- Jurisdiction of courts
- Termination
Labour and employment laws
Since international businesses have overseas operations, it especially becomes vital to have a basic understanding of international labour and employment laws. International labour law protects employees, governments and trade unions operating within the workplace. While each country might have its rules and regulations, the main aim is to protect business-related operations.
Most laws are created through the rules mentioned in the International Labour Organization, the World Trade Organization, and the European Union. These organizations are also helpful in assisting businesses and helping them remain compliant with the labour law specifics in countries.
Therefore, it becomes important to become aware of these standards to ensure you provide adequate working conditions, health and safety at work, and have a proper mechanism for communication and participation for the employees.
Contract: employment agreement
An employment agreement is a legal statement of record that helps become the link between the business and the employees, especially those located overseas locations. The agreement includes all the key terms and conditions between the employee and the business. Further, important negotiation points, such as salary, vacation rights, benefits, sick leaves, termination, confidentiality requirements, notice period, and other important conditions related to employment, are made clear for both parties beforehand.
However, you must note that you cannot have a single employment agreement for all your employees in multiple jurisdictions, especially considering that labour and employment laws differ from country to country. Further, in disputes, the local tribunals and courts in that jurisdiction shall adjudge the matter, considering their standards and procedures. Therefore, having a different employment agreement per local laws becomes necessary. For instance, it is advisable to have a separate contract for each province in Canada, considering the distinct character of the laws involved.
The employment agreement terms depend on the country where the employee works. For example, an employee working from Australia would require an Australian employment contract. However, some of the common terms to be included in the agreement are:
- Statutory minimum employment rights (including details about leaves, benefits, and holiday pays)
- Employee’s right to join any trade union.
- National minimum wage
- Employer pension contributions
Rights to intellectual property (IPR)
International businesses often find it difficult to protect their intellectual property (IP) while conducting business overseas. This is mainly due to the lack of information related to IP. Common knowledge is that IP registered in one country is not protected in another, considering the territorial nature of IP rights. Therefore, it becomes important to register any patents, trademarks, design rights, or copyrights in every country in that you want to sell your products.
Some simple ways you can use to protect your IP are:
- Working with a specialised in-county attorney who is well aware of the target country’s guidelines
- Register your IP in the target country
Therefore, you have the option of either applying in each country and following the respective procedures for the registration of your IP. Or do you have the international route for the registration of your IP? The World Intellectual Property Organization (WIPO) administers the Madrid, Hague, and PCT Systems, which conduct the international registration of trademarks, designs, and patents.
Therefore, you can start by conducting a Freedom to Operate (FTO) search to ensure that you are not infringing anybody’s patents, designs, or trademarks. Thereafter, you can go to the respective websites of Madrid, Hague and PCT systems and register your IP on the platforms.
Contract: Intellectual property licensing agreement
Once the international business has obtained protection for its IP, the business can license its IP by entering into an IP licensing agreement. This helps business manufacture and sell their products in foreign jurisdictions without expending their resources to manufacture, market, or distribute their goods. While the revenues would be shared between the licensed authority and the business, it becomes a safe investment to enter a new market since the licensed entity is much more aware of the local territories and the best marketing strategies for that particular country.
Therefore, through licensing, another company can use the IP in exchange for a percentage of revenue or fee. The agreement can be exclusive or non-exclusive or be for a fixed term, depending on the negotiations between the parties. Some common negotiation terms to keep in mind during the negotiation phase are:
- Costs (Royalties, lump sum, or recurring fee)
- Term (Indefinite period, or a fixed period)
- Territory (regional, national, or international)
- Type (exclusive or non-exclusive)
- Rights (distribution, reproduction, and adaptation rights)
- Assignment of rights
- Infringement and consequences
- Indemnification
- Dispute resolution and governing laws
Ultimately, it is the duty of the licensor to properly enforce the license agreement and ensure that the licensee is using the IP per the agreed terms.
Compliance with taxes
A multinational corporation is often subject to tax rules in numerous countries, and tax compliance can be complex and difficult. Following are some broad rules that a foreign company should follow to maintain tax compliance:
Register with tax authorities
The first step for an international firm is to register with the tax authorities in each country where it operates. Obtaining a tax identification number (TIN) or comparable identifier in each nation is part of this process.
Determine tax responsibilities
A multinational company must identify its tax liabilities in each jurisdiction, which may include income tax, VAT, withholding tax, and other taxes. This will be determined by the sort of firm, the nature of its operations, and the tax rules in each nation.
Maintain accurate records
An international company must maintain accurate and full records of all financial activities, including income, costs, and taxes paid. This will help guarantee that the company complies with tax laws and regulations.
Filing tax returns
An foreign firm must file tax returns in each country where such filing is required. Tax returns normally include information about the income, costs, and taxes paid by the firm during the reporting period.
Pay taxes on time
To avoid fines and interest costs, an international corporation must pay its taxes on time. Tax payment dates differ by nation and tax kind, so it’s critical to remain current on the regulations in each jurisdiction.
Get professional help
As international tax laws are so complicated, it’s a good idea for an international business to obtain professional assistance from tax professionals who are knowledgeable with the rules and regulations in each country where the firm operates. LegaMart would be the best resort to opt for assistance.
A foreign corporation is not required to enter into any particular contracts in order to comply with tax rules. Yet, a foreign firm may be subject to a plethora of tax-related legal and regulatory duties in various jurisdictions. A multinational firm, for example, may be needed to enter into a tax treaty with a foreign jurisdiction in order to establish processes for evaluating tax liabilities in that country. Additionally, a worldwide corporation may be required to enter into contracts with tax specialists or counsellors to ensure compliance with the tax rules and regulations of each country in which it operates.
Cybersecurity and data privacy
In today’s digital world, cybersecurity and data privacy are key concerns for multinational enterprises. To solve these concerns, multinational enterprises may need to enter into the following contracts:
Contract: Cybersecurity insurance contract
To limit the financial consequences of data breaches or cyber assaults, an international firm may need cybersecurity insurance. These contracts often cover the expenses of data breaches, such as notification, investigation, and legal fees.
Cyber security insurance protects organisations and individuals from damages caused by cyber-attacks and data breaches. When acquiring cyber security insurance coverage, it is critical to read the contract to understand what is thoroughly and is not covered. These are some important things to remember:
Coverage
Examine the contract to ensure that it covers the specific risks and types of losses that apply to your company. Coverage may include data breaches, network outages, cyber extortion, and other sorts of cyber assaults.
Exclusions
Examine the policy for any exclusions or limits that may affect your coverage. Certain plans, for example, may restrict coverage for losses caused by specific types of cyber attacks or limit coverage for losses caused by third-party vendors.
Limitations and deductibles
Be aware of the policy’s coverage limits and deductibles. This will affect both the cost of the insurance and the degree of protection you receive.
Risk management requirements
Certain policies may mandate the insured to establish specified security controls or conduct regular security assessments to manage cyber security risks.
Understanding the rules for informing insurance in the case of a cyber-attack or data breach is essential. Failing to inform the insurer in a timely way may affect your coverage.
Claims procedure
Understand what is necessary to submit a claim and how soon the insurer will react by reviewing the claims process. It is critical to understand the claims procedure so that you can respond swiftly and efficiently in the case of a cyber-attack.
Overall, while acquiring a cyber security insurance policy, it is critical to thoroughly check the contract to verify that you have the necessary coverage for your organisation and understand the policy’s terms and conditions.
Payment control and finance
Payment control and financial compliance are critical parts of the operations of a multinational firm. Here are some of the contracts that an international company may need to sign to handle payment management and financial compliance:
Contract: Payment processing agreements
To manage its financial operations, an international company may need to enter into payment processing agreements with third-party payment processors. These agreements often outline each party’s duties, such as data security, fraud prevention, and chargeback management.
In international commerce, a payment processing agreement is a commercial agreement between two or more parties, often a seller and a buyer, that governs the terms and conditions of processing payments for products or services across international boundaries. A payment processing agreement is required to guarantee that all parties understand the payment conditions and duties and reduce any potential risks or conflicts.
Here are some critical factors for an international payment processing agreement:
Payment methods: The agreement should state which payment methods are acceptable, such as wire transfer, credit card, PayPal, and so on. It should also indicate the currency to be utilised for payment as well as any applicable conversion rates.
Payment conditions: The payment terms, including the amount of the payment, the due date, and any penalties or interest for late payments, should be clearly outlined in the agreement.
Duties of the parties: The agreement should explicitly outline the buyer’s and seller’s responsibilities regarding payment processing. For example, the seller may be in charge of invoicing the customer, but the buyer may initiate payment.
Dispute resolution: The contract should include language outlining the actions to be taken in case of a payment-related disagreement, such as mediation or arbitration.
Compliance: The agreement should assure compliance with relevant international payment rules and regulations, such as anti-money laundering and know-your-customer standards.
Confidentiality: The agreement should include safeguards to protect the confidentiality of payment information and any other sensitive transaction information.
When writing a payment processing agreement for an international company, it is critical to work with legal and financial specialists to guarantee compliance with relevant laws and regulations and reduce potential risks or conflicts.
Contract: Anti-money laundering (AML) agreements
To ensure compliance with international AML requirements, a multinational firm may need to engage in AML agreements with banks or other financial institutions. These agreements generally outline each party’s responsibility for monitoring and reporting suspicious transactions and compliance with AML rules.
Anti-money laundering (AML) agreements for international business are contractual arrangements in place to prohibit the use of the international financial system for unlawful purposes such as money laundering and terrorism funding. These agreements are intended to assure compliance with international rules and to limit financial crime risks.
Here are some crucial factors to consider when drafting an AML agreement for foreign business:
Compliance: The agreement shall assure compliance with all relevant money laundering and terrorist financing laws and regulations, including those in the nation or countries where the business is done.
Risk assessment: The agreement should include methods for detecting and analysing possible money laundering and terrorist funding risks linked with company activities.
Due diligence: The agreement should oblige the parties to undertake due diligence on their customers, business partners, and other relevant parties, including identification and fund source verification.
Reporting: According to existing rules and regulations, the agreement should oblige the parties to report suspicious activity to the appropriate authorities.
Record-keeping: The parties shall be required under the agreement to preserve records of transactions and other relevant information in compliance with applicable laws and regulations.
Training: To guarantee compliance with AML requirements, the agreement should oblige the parties to offer adequate training to their employees and agents.
Confidentiality: The agreement should include protections for the confidentiality of AML compliance information, including sharing information with necessary authorities and other parties.
It is critical for a worldwide company to work with legal and financial specialists to ensure that its contracts and agreements conform with the rules and regulations of each area in which it operates. Furthermore, an international company should implement internal controls and processes to manage payment control, financial compliance, and risk mitigation.
Settlement of disputes
Dispute resolution is an important issue in international business since disagreements can occur from cultural, language, laws, and regulations variations. Following are some examples of contracts that a foreign firm may need to take into to address dispute resolution:
Contract: arbitration agreements
To settle conflicts, a worldwide firm may engage into arbitration agreements with its suppliers, customers, partners, and other third parties. These agreements often require the parties to submit their disagreements to arbitration, which is a secret and confidential procedure that the parties must follow.
An international arbitration agreement is a contract between two or more parties that defines how conflicts between them will be settled through arbitration. Arbitration is a method of resolving disputes in which the parties agree to refer their disagreement to a neutral third party, known as an arbitrator, who will render a binding ruling.
These are some crucial factors to consider when drafting an arbitration agreement for international business:
Choice of law: The agreement should state which law will govern the arbitration procedures. This might be a specific country’s statute or a collection of international arbitration norms.
Arbitrator selection: The agreement should define how the arbitration or arbitrators who will preside over the dispute will be chosen.
Arbitration processes: The arbitration agreement should indicate the procedures that will be followed throughout the arbitration proceedings, such as the location of the arbitration, the language to be used, and the time range for the hearings.
Confidentiality: The agreement should include measures for keeping the arbitration processes and decision secret.
Decision enforcement: The agreement should indicate how the arbitration judgement will be enforced and if it will be appealable.
Costs: The agreement should stipulate how the parties will split the expenses of the arbitration procedures.
The scope of the conflicts that will be arbitrated should be specified in the agreement.
When creating an arbitration agreement for an international company, it is critical to work with legal and financial specialists to guarantee compliance with relevant laws and regulations and to reduce any potential risks or conflicts. Also, it may be beneficial to consider the parties’ linguistic and cultural differences to prevent misunderstandings and promote a smooth resolution process.
A multinational firm should work with legal specialists to ensure that its contracts and agreements handle the particular dispute resolution risks and legal requirements in each jurisdiction in which it operates. Furthermore, a multinational company should have internal policies and procedures to handle conflicts and limit risks.
Is it possible for a common international law to regulate business transactions of different countries?
Currently, no such option is available because every country has its own rules, regulations, government, foreign policies, inflation rates, currency exchange rates, and business models, which result in a complex web of issues specific to that country only. Therefore, every company is required to undertake deep research on the specific jurisdiction that they plan to expand and take note of the legal issues that are specific to that jurisdiction. The same can be done through the help of a local lawyer, who shall assist the company in forming legal contracts for that specific jurisdiction.
LegaMart, with its experienced team of legal professionals, can assist you in your expansion goals by providing a clear picture of the local legal issues and responsibilities. Get in touch with our lawyers today!
Conclusion
That’s a wrap for the top 7 legal matters that any business should consider. It’s important to note that the agreement needs to be customized as per your business, timeline, goods and services, money involved and much more.
Frequently asked questions (FAQs)
How can legal factors affect international businesses?
Legal factors play an essential role in the success or failure of any international business. This is because every country makes specific laws for the protection of their consumers and to ensure that businesses do not exploit their presence in the market by engaging in illegal marketing. Therefore, international businesses must ensure that they follow the legal requirements of the specific jurisdiction since a clear image of the company shall further play an essential role in attracting more consumers in the new market.
How can you protect your business from economic or political instability in the target country?
Analysing all forms of potential risks before entering any new market is a significant part of the due diligence procedure undertaken by the company before it decides to expand in that specific country. Therefore, ensure that you have the knowledge and expertise of local professionals who can provide a clear picture of the pitfalls you might experience. Further, consider studying the market plan of any other company that has previously expanded within the target country and has managed to occupy a significant market share.
