Navigating the Global Legal Maze: Guide to Incorporating a Foreign Subsidiary

Incorporating a foreign subsidiary is a common step for a company looking to expand its business globally. Such a leap, however, is rarely straightforward - it requires in-depth local legal knowledge and meticulous planning.

In this guide, I will walk you through the essential steps and guidelines for setting up your a new legal entity, irrespective of the country you will incoporate in. No matter your familiarity with the target country and its laws, these guidelines will serve as an essential resource for successfully setting up new subsidiaries across borders.

1. Know Where You’re Going

Understand the local legal environment before you start. When it comes to corporate law, every jurisdiction is unique, so it’s vital to understand the local legal framework and terms, as even common terms like “articles of association” could have different names and meanings in different countries. It’s not just about semantics – the legal requirements, processes and the types of arrangement you will need to include in the incorporation documents could vary significantly between jurisdictions.

Consider corporate tax aspects. While this guide is focused on corporate law, tax considerations play a large role in determining the preferred structure of your new subsidiary. It's imporatant to consult a tax advisor to understand the optimal legal structure for the planned business activities and its financing.

Look beyond corporate law – employment law, privacy and others. Check local regulation in other domains which might also affect your activities, such as employment law (if hiring local employees), privacy and the data protection (if processing personal data) or other industry-specific regulations.

2. Engage a Local Lawyer

When journeying into a new legal landscape, have a local expert guide you. A local lawyer won't just translate the legal jargon; they'll provide invaluable insights into the local legal requirements and processes, draft incorporation documents in accordance with local regulations (and in the local language, if required), facilitate filings with the local government authorities and help you troubleshoot legal issues as they come.

Get Insights into the expected costs. Incorporating in a foreign jurisdiction can be costly, and without understanding the legal costs involved, you might be setting yourself up for an unpleasant surprise. Use legal guides such as Legal500 to familiarize yourself with the local legal market, consult on the applicable rates, and ask your lawyer to estimate the expected timeline and costs in advance. You might want to try and hedge the cost in advance by negotiating a fixed fee arrangement or discounted rate for the entire process.

3. Define Your Business Objectives and Corporate Structure

Your subsidiary’s business activities will impact the preferred legal structure. What will your subsidiary do? Will it be a development hub, a sales office, or an offshore manufacturing unit? It's important to involve the relevant stakeholders in your company to discuss and understand the planned business activities and ownership, control and funding structure before you start. As the parent company’s directors or officers will need to approve and execute many of the incorporation document, they should be aware of and involved in the legal process.

4. Research the Local Legal Requirements

To incorporate or not to incorporate? Deciding between a branch and a company. Does your plan favor a local subsidiary or a branch office? A branch would be a local extension of the parent company, while a subsidiary would be a separate legal entity owned and controlled by the parent, having its own legal liability. While a branch might be easier to set up and will have limited governance and compliance requirements (no board of directors and limited or no annual filings) it could be limited in its activities and expose the parent to liability for the branch’s activities. In certain countries, an alternative to a branch might be a representative office, which allows very limited local activities (such as market research) with minimal legal overhead. For a joint venture, you might prefer to set it up as a registered partnership instead of a company. Each of these structures might be treated very differently for tax purposes, especially when distributing profits to the parent.

One size (does not) fit all: Choosing the preferred incorporation type. If you’ve decided to register a company, you might need to choose which type to use. Many European jurisdictions provide two or more different forms of incorporated entities – usually a simpler one intended for a limited number of shareholders with a relatively flexible governance and equity structures and complex one intended for companies with larger number of shareholders (France, for example, offers a choice between an SARL, SAS and SA); the US also provides a somehow similar choice between the simpler Limited Liability Company and a Corporation. The selected type will most likely affect how it is treated for tax purposes, so your tax advisor’s input should be part of the decision.

Check for restrictions on who could be the shareholder(s). Every company must specify its shareholder(s) upon registration. While most jurisdictions have long done away with requiring a minimum number of shareholders, some, like India, still require most companies to have at least two. Others might impose limitations on foreign ownership in certain sectors of the economy. Therefore, you might be required to seek a nominee to act as shareholder on your behalf. This nominee could be a lawyer, advisor or local employee from your organization. If you have decided to appoint a nominee, make the necessary arrangements to protect the primary shareholders’ interests and control in the company by having the nominee execute a trust agreement and amending the incorporation documents to limit the their decision-making powers.

Name your company. Make sure the proposed company names are valid under local regulations and available for registration. Some jurisdictions will allow a name to be reserved before filing for incorporation.

Directing the Directors

How many directors should you have? Where must they be located? always check for the legally required minimal number of directors (some countries require at least two) and their country of residence. Even without a legal minimum it would make sense, as a matter of practice, to have at least two so that you will always have a director available to sign documents. Place of residency might also be important - it is not uncommon for a country to require at least one director to be a local resident of the country of incorporation (like Australia or Singapore) or in an EU country (like in Ireland). In addition, most countries would have basic requirements regarding age and lack of criminal history of directors.

Need an external director? Protect your control in the compay. If the company does not have an officer who can fulfill a residency requirement, an external advisor or employee can be appointed as a director (your local lawyer might assist in finding a suitable candidate). In such a case you should make the necessary arrangement to protect your controlling interest in the company, including having the appointee execute a nominee agreement with the parent and amending the company’s articles to limit their powers to pass resolution in the board.

Tax considerations for foreign directors. If the directors reside outside the country of incorporation, their place of residence might impact where the company would be considered a tax resident and where it will be taxed. Some countries consider a company to be tax resident where it is managed and controlled, which is often determined based on the place of residenct of its directors or the place where board and shareholders’ meetings are held.

Mandatory disclosure of personal or sensitive information. As the legal world is slowly but steadily getting more transparent, personal details for directors, shareholders and beneficiaries may now need to be disclosed as part of the registration and ongoing compliance processes. Furthermore, some of these details might be made publicly available online by law. To avoid unwelcome surprises, you should let the relevant stakeholders and directors know the extent that their own personal details would need to be disclosed.

Finance and Banking

Understand the capital requirements including minimum required capital for the company and mandatory debt-to-equity ratio, and check for rules limiting the company's ability to repatriate capital and profits to its parent .

Dedicated bank account may be required either for incorporation or ongoing operations. Be aware that opening the local account for a new company might involve an extended process with the bank, in order for it to comply with the Know Your Customer requirements.

5. Planning Ahead: the Incorporation Process

Anticipate the roadblocks - understand the process and timelines. Different jurisdictions could have very different incorporation procedures, with timelines that ranging from a single day to months. You should ask your local lawyer to provide a comprehensive roadmap that include all required steps end to end and their expected timelines, taking into account the response time of the relevant government agencies.

Documents are the key. The roadmap should also detail all the documents to be prepared and submitted as part of the incorporation process (whether prepared by the local counsel or provided by you or the would-be directors) complete with execution instructions. Keep in mind that government fees and legalization of documents might be a significant addition to the bill, and could also add time to the incorporation process.

6. A Journey, Not a Destination: Planning for Ongoing Compliance

Registering your new subsidairy is just the beginning. Once a legal entity is registered, it would need to follow the local compliance and reporting requirements. In my next article I will discuss how you can keep track of these requirements to ensure your new subsidiary remains in compliance and avoid penalties.