Can I Unofficially Expand Into a New Country?

An international business attorney weighs in on the do’s and don’ts of testing a market

“Sometimes companies just move at lightning speed and they either knowingly decide that they're taking a risk, or they naively don't realize a potential risk is there,” says Terese M. Connolly, an international labor and employment partner with Barnes & Thornburg. Managing risk is the bulk of Connolly’s job as someone who advises companies with workforces in multiple countries. And there’s plenty of it.

“I get a lot of questions from U.S.-based companies looking to expand outside the U.S. They tell me, ‘We just want to test out expanding in this other country. We're not going to set up an entity there yet, just send one person to test the market,’” she says.

So what is the verdict? Is this OK or not? How risky is it? As with nearly anything in international employment law, “it depends,” Connolly says.

"The biggest red flag I see is, ‘I'm just going to send Jimmy over there, and he's just going to see if we can sell the product,’ versus, ‘Jimmy's going to test the market and do some real market research and isn't going to generate revenue.’”

To determine the best approach, Connolly must seek answers to a number of questions: "What is this person going to be doing? Are they going to be generating revenue? Are they negotiating and concluding contracts? Depending on the answers, the company might be dealing with a permanent establishment issue, and then we need to bring in a tax attorney to figure out whether there is a tax treaty between the two jurisdictions, et cetera."

It's a lot to parse. "Other questions I ask are, 'What is the purpose of the assignment? How long will the person be there? How will the individual be paid?' There are a lot of angles to assess; these could involve employment, tax, corporate and immigration laws. Assembling the right legal team is essential,” she says.

In short, if your intentions are to test the waters by exploring the market, scouting locations, talking with potential customers/partners, and generating general interest, you might be OK from a tax perspective. If you’re looking at money/goods changing hands, you probably aren’t without taking other steps. Regardless, there are still employment and immigration issues to mete out. These issues can arise even with short business trips.

“There are a variety of ways to structure an expatriate assignment like Jimmy’s, and it is essential to get it right. We have to address under what circumstances that's doable, and get the right team together in order to be compliant with applicable laws,” Connolly says.

The law is confusing at the best of times. Add multiple jurisdictions, governments, and languages, and it’s downright daunting. But international business attorneys like Connolly are up to the challenge. While she has a high-level knowledge of worldwide employment laws, Connolly says she’s constantly in touch with local counselors to, “sign off on any advice and advise on the more in depth legal issues.” 

The key with any new business venture—no matter how excited you are to jump at something—is to press pause and seek legal advice. What you don’t want to do is make too many assumptions, or think you can do everything on your own. Getting it right on the front end can save a lot of money.

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