Creating a legal entity is a complicated and time-consuming endeavor, especially during global expansion. As companies expand into new markets, they begin taking the necessary steps to establish a legal entity in their desired countries of operation. Before starting this process, it’s important to understand the most difficult countries to incorporate in, so you can be prepared if your business intends on establishing operations there.
In this article, we’ve compiled a list of the most difficult countries to incorporate in based on our team’s experience and expertise, in conjunction with data from the World Bank regarding difficult countries to operate in. It’s important to note that this article will only include countries that are common or popular destinations for global expansion.
This article will detail all the requirements for the top 4 most difficult countries to incorporate:
Latin America is bursting with opportunity, with the Federate Republic of Brazil boasting the largest economy in the region. With so much landmass covering the continent, in conjunction with the massive population of 212 million, it’s an excellent destination for growing businesses to explore. Brazil falls within the top 10 consumer markets in the world, outshining several popular European markets, such as Germany, United Kingdom, France and Italy. In Brazil, GDP per capita reached USD 15,258 PPP (Purchasing Power Parity) in 2019, according to the latest data by the World Bank. As of July 2020, the average monthly salary in Brazil was BRL 8,535 Furthermore, Brazil’s Private Consumption Expenditure was reported at USD 186.323 billion in June 2020.
Setting up a legal entity in Brazil requires in-depth knowledge of the local environment, including the direct and indirect costs of doing business there. These costs may include items such as distribution, government regulations and procedures, employee benefit requirements, environmental laws, payroll requirements and tax structuring. Logistics can be a major pain point as Brazil races to build an infrastructure to support their country’s rapid economic expansion.
Despite the economic upturn Brazil has experienced in recent years, it’s complex laws and regulations governing the business environment make it extremely difficult for international businesses to incorporate in Brazil. Foreign companies looking to do business in Brazil can establish themselves through a branch, representative office, or a subsidiary. Corporations have many of the same functions and requirements as the U.S. and Brazilian “Limitadas” function much like Limited Liability Companies (LLC) in the U.S.
Here is the list of requirements your business will need to prepare for setting up a legal entity in Brazil.
- Appoint a Representative
- Check Company Name
- Establish an Office
- Apply for Governmental Approval
- File Company Documents with the Department of Trade
- Publish Financial Statements
- Register for Federal Tax
- Register for Social Security
- Approve Office Address
- Apply to Municipal Business License/Permit
- Register for Municipal Tax
- Register for State Tax
- Apply for digital certification for e-invoice
- Register Employees in Social Integration Program
- Open Retirement/Unemployment Fund
- Notify the Ministry of Labor
- Registration with the Patronal Union and Employees Union
- Open Company Bank Account
When a branch is formed, it must be approved by the federal government. Additionally, any changes to the branch’s articles of incorporation will also need to be approved. After a company receives approval, they will have twelve months to develop its activities, or the authorization will automatically expire. Therefore, setting clear business activities is critical, as the government can cancel their authorization if the company acts outside of its established purpose.
Representative Office Requirements:
A representative office has many similarities to a branch in Brazil. This formation allows businesses to operate within a limited range of activities. Representative offices are generally used to conduct market research, develop relationships, and formalize agreements between customers and partners. In this instance, the representative office is not seen as a separate legal entity. Instead, it operates as an extension of the parent company. Due to this structure, the parent company will be liable for any debts or obligations placed upon the representative office.
When it comes to setting up a legal entity, it’s common for businesses to choose between a Limited Liability Company and a Corporation. These subsidiaries are Brazilian companies established under Brazilian law, which can increase productivity and efficiency when operating in Brazil. With complete control over employees and operations, the business is in a good position to succeed. The LLC must be managed by at least one member resident in Brazil, appointed by the quotaholders (legal entity or an individual) in the Articles of Association or in a separate corporate document. Decisions are made as set out in the Articles of Association.
The economic growth and stability of the Chinese market is undeniable. With over 1.44 billion people, China has an average population density of about 150 inhabitants per square mile. The areas of higher consumption are concentrated in major cities such as Beijing, Shanghai, Shenzhen and other Chinese urban areas with high per capita income and high purchasing power. According to the latest data, the employment rate of the 2018 Chinese college graduates remained stable at 91.5%, with the private sector being the biggest recruiter for graduates. The agricultural sector employs about 24.7% of the labor force while the industrial sectors employ 28.2% of the population. So, with a skilled workforce and stable economy, many businesses can benefit from incorporating in China.
Despite the attractive elements of setting up a legal entity in China, the laws and regulations a business must comply with to do so are extensive and highly complicated. Any company looking to do business in China will need to have sufficient resources available to navigate the related challenges of incorporating there. With that said, there are three ways a company can set up a legal entity in China: A Wholly Foreign-Owned Entity, Joint Ventures, or a Representative Office.
Wholly Foreign-Owned Entity (WFOE)
One of the most common and popular methods of incorporation is the WFOE. According to Chinese law, WFOE is a limited liability company that is completely owned by a foreign company or person. With full ownership of the entity, the business maintains greater control over operations, profit targets, and overall revenue. This is a favorable option because it is a separate entity, which limits your liability to the contributed share capital.
Businesses that choose this route can expect more autonomy and will receive the same treatment and advantages of a domestic company. Having a legal presence also helps with things like intellectual property, which local courts require. Joint Ventures are typically more vulnerable when it comes to IP protections. It can also streamline revenue and ensure smooth operations while doing business in China.
A joint venture is simply another type of limited liability company. This option requires businesses to identify and register a company with a Chinese partner. It’s important to note that this Chinese partner must have controlling shares within the company, which would be at least a 51% ownership stake. This means that the Chinese partner will have control over the day-to-day operations of the company in China.
Some companies prefer this method of incorporation simply because they can leverage an existing firm to quickly access Chinese markets. They can use their partner’s know-how, distribution networks, and sales channels to generate immediate revenue potential. Additionally, this option means the business wouldn’t need to worry about the incorporation challenges associated with Chinese legal entities. As mentioned in the WFOE section, this means your business will have less control and more challenges regarding IP protection. For many investors, this can be considered too great a risk to pursue.
Although this is the fastest method of incorporation in China, it also imposes the most limitations on a business. Representative Offices can only participate in activities that do not generate revenue for the company, such as offering customer support or conducting market research. Even if that is a primary objective for a company, some people still choose to set up a WFOE if they plan to grow and expand within the Chinese market.
Steps to Establish Your Preferred Legal Entity:
- Consult with experts that understand the complexities and requirements of Chinese regulation.
- Prepare the proper documentation.
- Apply for the Approval Certificate, which is managed by the Ministry of Commerce (MOFCOM) and State Administration of Industry and Commerce (SAIC).
- Apply for a business license.
- Register with the Public Security Bureau (PSB).
- Open a bank account.
- Register at the Tax Bureau.
With the second-largest economy in Latin America, it’s impossible to ignore expansion opportunities in Mexico. With a young, growing population, 66% of people in Mexico are between 15 and 64, according to World Bank figures. The GDP per capita PPP is about $20,410. People in Mexico earn an average salary of $15,314 per year, which is much less than the OECD average of $43,241 and the lowest in the Organization for Economic Cooperation and Development (OECD). In Mexico, the average household net-adjusted disposable income per capita (approximately 267,986 pesos) is considerably lower than the OECD average of $33,604 a year. In terms of employment, about 61% of people aged 15 to 64 in Mexico have a paid job, lower than the OECD employment average of 68%.
Although Mexico can be a great destination for expanding businesses, it can be difficult to properly establish a legal entity there. The ever-changing regulations and legal complexities can make incorporation a challenge. There are three main types of legal structures to be aware of: Stock Corporation, Limited Liability Corporation, and a Simplified Shares Company.
When a business is structured as a Stock Corporation, the company value is split into shares, which are typically protected by creditors. These entities don’t have restrictions or limits on the number of shareholders that can invest in the company. This is a very attractive aspect of stock corporations, as it allows new companies to raise capital quickly. The setup process for this can be complicated and extensive, but it has the largest potential for profit and growth.
Limited Liability Company:
For small and medium sized businesses, this is a very accessible way to enter the Mexican market, as it only requires an initial deposit of $160. This entity also allows taxes to be paid through the individual members of the company, rather than the company as a collective. LLCs provide protection of assets, while limiting responsibility to only their shares within the company.
Simplified Shares Company:
The simplified shares company structure is mirrored in other Latin American jurisdictions like Argentina and Colombia. This is a relatively new option for expanding businesses, only announced in 2016 as part of the reforms to the General Law of Commercial Companies. This opens the Mexican market to foreign investment and simplifies and encourages foreign operations. This is a fast way for businesses looking for an easy route-to-market. However, this type of structure only allows a maximum profit of about $265,000, making it less attractive for large corporations.
Registering a Legal Entity in Mexico
- Use a legal representative and grant them Power of Attorney so they can sign and official documents on your behalf.
- Draft the entity’s company bylaws to establish the purpose of the business to authorities.
- Register the business with local authorities.
- Apply for a corporate tax ID number to identify the entity on important financial documents.
- Open a corporate bank account.
- Deposit an initial investment into the bank account.
Europe is certainly not exempt from this list. Although there are many European countries that pose unique challenges for legal entity setup, France is one of the most complex. France’s population has a high and diversified level of mass consumption, as many French people believe consumption is synonymous with pleasure; therefore travel, restaurants, sports, culture and entertainment products and services are quite important to most French consumers. In France, GDP per capita has been rising since 2009 and reached $40,493.9 in 2019, according to the latest World Bank data. The yearly gross average salary of a French person was about $42,500 in 2019.
Despite several complex regulatory hurdles, France supports and encourages foreign direct investment by using many of its resources to leverage policy incentives, marketing, and other investor support mechanisms. The country has a modern business culture, sophisticated financial markets, strong intellectual property protections, and innovative business leaders, all of which make it an incredibly attractive location for businesses to expand. The three main ways to establish a legal entity in France include: a subsidiary company, a branch office, and a liaison office.
In France, there are various types of subsidiaries, but they are defined as local independent legal entities formed under French law. This means that these companies are governed by their own bylaws. It also allows ownership through a foreign parent company, without holding it liable for the subsidiary’s debts and obligations. This is the most common method of incorporation for foreign investors looking to operate in France on a long-term basis, as it provides more control and flexibility for day-to-day operations.
A foreign branch office is an extension entity of the foreign parent-company. This means the parent company can be held liable for any debts or obligations placed upon the entity. It is a permanent establishment that can conduct commercial activities and deal with third parties without being separate from the parent company. This is a common incorporation method for foreign investors hoping to keep an eye on day-to-day operations, as the branch is not independent from the parent corporation.
This type of entity is limited in its ability to operate in France. The purpose of a Liaison Office is simply to provide a channel for promotion, advertising and seeking business opportunities for the foreign parent company. It is not a separate entity from the parent company and is usually only used by foreign investors for short-term goals.
Steps for Incorporating in France:
- Check Availability of Name
- Open Commercial Bank Account
- Establish an Office
- Appoint an Auditor
- Publication of Incorporation in Official Journal
- Register Company and Register for Tax, Social Security and Insurances
- Stamp Company Books at Commercial Court
In order to achieve successful global growth, businesses need to make lasting partnerships with expansion experts. This gives businesses the chance to find hidden opportunities in the global marketplace, as well as creating additional revenue streams.
Regardless of your growth goals, every business will need to find a partner that is flexible, with enough expertise to provide a customized approach. As one of the leading companies providing incorporation services in 180+ countries, Global Upside can help your company expand to any market.