What legal and tax aspects to consider when entering a new market

Entering an international market is not only about finding customers and organizing sales. In effect, the company starts operating in a new legal and tax environment with its own requirements for business registration, contracts, hiring employees and paying taxes.

To avoid unexpected costs and legal risks, several areas need to be checked in advance.

First, the legal structure of your presence.

You need to decide in what form the company will operate in the new market: through a local distributor, a commercial agent, a branch or a separate legal entity.

This determines the owners' liability, the registration procedure, reporting requirements and the ability to carry out certain types of activity.

You also need to check industry licenses, permits, product certification requirements and local consumer protection rules.

Second, tax obligations.

Here it is important to consider not only the corporate income tax rate but also value added tax (VAT), withholding taxes, customs duties and social contributions for employees.

Pay special attention to the concept of a permanent establishment. Under the principles of the Organisation for Economic Co-operation and Development (OECD), certain activities of a company in another country can create a taxable presence there and an obligation to pay taxes, even if no separate legal entity has been registered yet.

If the company opens a subsidiary, transfer pricing must also be taken into account. For example, when the head office provides services to a subsidiary or sells it goods, prices between related parties must comply with the arm's length principle.

Third, protection of intellectual property and personal data.

Registering a trademark in one country does not automatically protect it worldwide. The World Intellectual Property Organization (WIPO) offers the Madrid System, which lets you file a single international application to register a trademark in several countries. Each national office, however, decides on its own whether to grant protection.

For digital companies, the rules on processing personal data are especially important. For example, the European Union's General Data Protection Regulation (GDPR) applies not only to companies registered in the EU but also to some companies outside it if they offer goods and services to people in the EU or monitor their behavior.

Fourth, labor and contract law.

Before hiring employees, you need to study local employment rules, minimum wage guarantees, working hours, social contributions and dismissal procedures.

It is also important to adapt commercial contracts: define the governing law, the dispute resolution procedure, the parties' liability, and payment and delivery terms.

So before entering a new market, a company needs to carry out a legal and tax audit: choose the form of presence, calculate the tax burden, check permit requirements and protect its assets.

The key principle: the legal and tax structure should be designed before full-scale operations begin in the new market, not after the first problems appear.

Checklist

Before starting international expansion, go through the following stages.

1. Check the legal requirements

• Choose the optimal form of presence: a distributor, a branch or a subsidiary.
• Check the requirements for registering a legal entity.
• Find out whether licenses, permits and certificates are needed.
• Study the requirements for labeling, packaging and consumer protection.

2. Calculate the tax burden

• Find out the corporate income tax and value added tax (VAT) rates.
• Check whether withholding taxes apply when transferring dividends, interest and royalties.
• Study the double taxation treaties between the countries.
• Check the risk of creating a permanent establishment.
• If you have related companies, prepare transfer pricing rules.

3. Protect your intellectual property

• Check whether the brand name is available in the target market.
• Register the trademark in the necessary jurisdictions.
• Determine who owns the rights to software, technologies and other developments.
• Secure intellectual property rights in contracts with employees and contractors.

4. Prepare your contracts and HR framework

• Adapt contracts with customers, suppliers and partners to local law.
• Define the governing law and the dispute resolution procedure.
• Study the requirements for hiring employees, pay and social contributions.
• Check whether you need to register as an employer and with the tax authorities.

5. Check data and payment requirements

• Determine what personal data the company collects.
• Check the requirements for storing data and transferring it across borders.
• Set up the available methods for accepting international payments.
• Check banking requirements, currency restrictions and financial control procedures.

6. Run a final check

• Draw up a budget for legal, tax and administrative costs.
• Assign people responsible for compliance with local law.
• Get an opinion from a local legal and tax advisor.
• Make sure the company can legally start selling and meet its obligations to customers.

Result: before launch, the company should have a clear legal structure, a calculated tax burden, protected intellectual property and prepared contracts. This will help avoid a significant share of the risks and unexpected costs of international expansion.

Sources:

1. OECD — Cross-border and International Tax. International taxation, permanent establishment, BEPS and the allocation of tax obligations between countries.
2. OECD — Transfer Pricing Guidelines. Transfer pricing principles and rules for determining market prices between related companies.
3. WIPO — Guide to the Madrid System. A practical guide to the international registration and protection of trademarks.
4. European Commission — Registration, Permits and Licences. Company registration, licensing, permits and labor requirements when entering European markets.
5. European Commission — Application of the GDPR. When European personal data law applies to foreign companies.
6. European Data Protection Board — International Data Transfers. Requirements for international transfers of personal data, standard contractual clauses and safeguards.
7. OECD — International VAT/GST Guidelines. Principles for taxing cross-border transactions and international trade.