The opportunity to grow internationally has become mainstream. Businesses from all over the world have recognized that the ability to expand their profits either through wider market penetration or through outsourcing parts of their operations to lower-cost jurisdictions is no longer a strategy limited to the largest companies. If they don’t take advantage, their competitors will!
The latest statistics from the US Bureau of Economic Analysis show that in 2022, $6.58 trillion was invested by the US in overseas jurisdictions, while the US received $5.25 trillion in investment from overseas. Clearly, that indicates a huge amount of cross-border activity, and so US private equity (PE) and venture capital (VC) investors have become more focused on exploiting the opportunity—not only for their own direct investments into overseas assets but also to encourage their portfolio companies to explore international markets to advance their growth.
However, international expansion can also be challenging for the unwary; a local understanding of the overseas market opportunity should be a key prerequisite for a portfolio company board and its investor representative. Current knowledge cannot be underestimated, since market dynamics (including legislation, regulation, and local culture) can change from year to year, and outdated informal guidance has resulted in many wasted dollars being invested.
The mere size of the overseas market opportunity (i.e., about 95.7 percent of the world population lives outside the US) illustrates why many US businesses are interested in exploring chances to develop their customer base, employee headcount, or research-and-development-based intellectual property in other countries.
Certain countries offer lower-cost destinations for manufacturing or customer service hubs. Other jurisdictions have highly educated and talented individuals whose remuneration expectations are lower than market averages in the US. Correspondingly, many such workers are proud to work for US businesses and less prone to being poached; many international employment laws allow reasonable post-termination restrictions to protect trade secrets and confidential information, as well as a number of other noncompetes.
Consumers can equally be an opportunity for US businesses to expand; US products are often highly sought after, and technology (in particular) may be attractive to early adopters overseas when domestic customers may be slower to accept new innovation.
However, from a legal perspective, it is key to consider significant issues that may arise in growing overseas to ensure that laws and regulation do not derail the reasons for growth. Some initial considerations include:
Structure and tax: Whether to set up as a subsidiary business or operate under a different structure can impact regulatory and tax filings, contract engagement, and timelines to launch. Some jurisdictions have rules around local ownership or local resident board representation in such entities. Most will require a local address for service of formal documents and court papers. Minimum share capital and incorporation procedures (perhaps including the need for a local bank account) can impact timing materially.
Intellectual property (IP): IP is considered the most valuable asset for many US businesses. Protecting IP overseas through local registration and confidentiality will be key. The viability of litigation to protect the same, and of ensuring that employees or third-party contractors assign any new IP to the business, should be considered carefully.
Employment: Generally, the greatest difference between engaging US employees and overseas individuals is the terms of employment. Most overseas jurisdictions do not operate employment-at-will, necessitating a notice period, and many countries guarantee employees legal rights that often require set procedures to ensure fair and transparent treatment. Great care should be taken when recruiting, hiring, and terminating employees outside of the US.
Regulation and compliance: There are numerous areas of consideration when doing business in an international jurisdiction that will be industry specific. Many are aware of differences in privacy and consumer rights, but anti-corruption laws, labeling requirements, and safety regulations may also require adjustments to products or services offered in a US domestic market.
Finally, beyond legal obligations, businesses growing outside of the US should consider many of the other factors which could impact their success: culture adjustments are regularly overlooked, and lack of consideration can result in upset employees, disinterested consumers, or angry regulators. None of these help to establish a positive local presence, and most can be avoided with some simple local advice and respect for local market practices. Adjustments to operating procedures may also be needed in order to trade locally, whether by opening a local bank account, adjusting bookkeeping or tax filings in different currencies, or adopting local accounting standards. And of course, it’s important to recognize that a sensitive HR policy is needed for the people who will be implementing your local strategy, understanding that approaches to time zones, typical benefits, and time off can be very different overseas.
The above provides some general commentary that applies to any international growth. We now consider some of the more regional issues applicable to an international growth strategy, exploring examples from four different parts of the world.
United States
Expansion of Non-US Companies to the US
The US is a fairly business friendly market with low barriers to entry; however, certain types of businesses may be highly regulated by federal and state entities.
Companies expanding to the US will often reincorporate by forming a US holding company and having the non-US company become a subsidiary of the US holding company (known as a “Delaware flip”). This structure allows non-US companies to be more attractive to US investors but can create uncertainty for non-US investors. As a US company, the entity may be subject to certain restrictions prohibiting investment of investors from certain sanctioned countries and in certain industries. US investors may also request that the IP be held by the holding company.
The data privacy landscape is evolving in the US. Certain US states have passed laws that make privacy laws more restrictive, similar to European and Canadian privacy protections.
Additionally, the US is known for being protective of intellectual property rights, primarily through formal contractual protections and/or licensing as well as filing (and enforcing) registrable IP rights. Companies operating in the US may also be subject to various types of taxes including sales taxes, employee-related taxes, and income taxes.
While employment in the US is generally “at will” (i.e., employers may dismiss an employee for any reason that is not illegal and without warning), state laws govern the relationships between employees and employers. These laws may require employers to provide employees with certain rights and make employers liable for the actions of employees against others.
Expansion of US Companies Overseas
US businesses are global leaders when expanding their domestic operations overseas. Investors often have experience in growing revenues outside the US, and many serial entrepreneurs will have had positive experience with significant international customer acquisition.
However, as noted above, IP is key, and most investors will insist that IP is retained onshore and transferred to the US parent company if created in another jurisdiction.
Subsidiaries are usually 100 percent owned by the US parent company, and so subsidiary boards often are of less concern to investors who delegate responsibility for local corporate governance to their portfolio officers. There is an overriding presumption that the overseas business will follow the global strategy set by the main parent company board.
There is no set timing to international expansion, but most investors will expect a successful (preferably revenue-generating) domestic business to have demonstrated local growth before distracting management with challenging overseas markets. As a result, overseas expansion is usually considered around a corporation’s C or D round of funding (although there are many who make the move earlier and later). Good corporate governance will ensure the right team is available to support the launch, and consideration often needs to be given as to whether to transfer existing team members to the overseas market or hire locally (or a combination of both).
Europe
Corporate/Commercial Issues
Formal legal processes: One of the differences that companies face when expanding to Europe is the formalities present in some countries, like the role of notaries and the requirement to file certain documents with a commercial registry in order to make them enforceable. Likewise, a Power of Attorney is mandatory to prove capacity, as it is not valid to sign a document under a premise of apparent authority.
Liability of directors: In the years since the 2008 financial crisis, the European Commission has introduced a series of recommendations intended to harmonize and improve corporate governance regimes across Europe, based on the “comply or explain” principle. These days, board members in Europe are subject to increased scrutiny by regulators. It is important for directors of portfolio companies to document that they have been fulfilling their roles in compliance not only with European Union (EU) regulations, but also with the local regulations of the countries where the portfolio company operates.
Sanction regimes: Sanctions may be applied differently in the EU than in the US in ways that could potentially be used to structure a business model to enter into new markets without violating any sanction regimes. For example, a European parent holding company and European subsidiaries may be able to do business in Cuba while US subsidiaries cannot.
Foreign direct investment regulation: The EU’s Foreign Direct Investment (FDI) Regulation, in effect since October 2020, establishes common criteria to identify risks relating to the acquisition or control by foreign investors of strategic assets. The primary responsibility for vetting FDI remains with the Member States, which continue to apply national law while respecting the provisions of the FDI Regulation. The FDI Regulation also does not oblige Member States to adopt an FDI screening mechanism or seek to achieve the full harmonization of existing FDI screening mechanisms across the EU. Instead, it provides for information sharing and cooperation between Member States and the Commission. This involves the mandatory notification to the Commission and other Member States of any FDI scrutinized at the national level, including the provision of certain specified information. The FDI Regulation also requires that existing (and any new) regimes comply with a minimum set of requirements, while also encouraging those Member States that currently do not have an FDI regime to adopt relevant rules.
Antitrust: Analysis can be conducted by national authorities, EU authorities, or both. Likewise, the new Foreign Subsidies Regulation in the EU requires prior approval if the buyer is the recipient of significant non-EU subsidies.
Managing EU Employees
Hiring and firing in the EU: One of the biggest conceptual differences for companies expanding overseas is the unique US employment at-will doctrine—which does not exist in European employment law. Naturally, understanding this difference (among many others) is especially important when dealing with the European Union and its Member States. In some countries, termination without a legally valid reason may be null and void, and it may result in large severance and damage awards for unfair dismissal.
In Europe, there are also laws that relate to a wide variety of employee benefits, including caps on hours worked and allowances for vacation, holidays, sick leave, parental leave, and more. Yet another difference between European and US employment law is the requirement of written employment contracts in a great range of labor relationships. If the written contract requirement is not complied with, the employment is presumed to be for an indefinite period and on a full-time basis.
M&A transactions: A prior consultation with labor unions or work councils might be mandatory in some countries before completing an M&A deal. In principle, the workforce cannot be dismissed because of an M&A transaction. On the contrary, the workforce is transferred to the new owner, along with the workers’ contracts and accrued rights. If there is redundancy in jobs as a result of the M&A transaction, it will be necessary to negotiate a collective mass layoff with the work councils and under the supervision of the relevant labor authority.
Immigration issues: An EU national will generally not need a work permit to work anywhere in the EU. For non-EU residents, a work and residence permit will be required. In any employment relationship, the laws of both the country in which the employee resides and the country where the employee works apply. There are twenty entrepreneur and visa programs currently active in Europe, including Ireland and the UK. In any case, any worker who is not a resident of the country in which the work will be carried out must apply for and obtain an identification number for administrative and tax purposes in that country.
International or transnational telework: There is not a legally established definition of transnational telework, and there is a lack of a specific legal framework at national and international level. This makes transnational teleworking a situation that entails a few risks for companies and workers in terms of taxation, migration, labor, and social security.
Regarding social security, the general principle of lex loci laboris applies, i.e., the law of the place where services are provided applies, which in practice would imply social security contributions are required in the country from which the teleworker is working.
Care must be taken with alternatives to cover international teleworking situations that raise doubts about their legality. Of particular relevance is the transfer of workers within the EU, where differences in national employment laws and collective bargaining agreements among member states can give rise to legal complexities. These complexities often involve matters such as employment contracts, terms and conditions of employment, and collective rights, including the right to strike. Additionally, while the EU champions the free movement of workers, it’s important to note that some member states may enforce transitional arrangements or temporary restrictions on labor market access for workers from newer EU member states, as permitted by specific EU treaties.
C-level regulation: In many cases, European CEO contracts do not have the nature of an employment relationship but are considered to be corporate contracts. In these cases, such contracts are based on parties’ will. Critical clauses to consider in these types of contracts include post-contractual compete restrictions; confidentiality clauses; termination clauses; and garden leave.
Employee Stock Ownership Plans (ESOPs): European employees own less of the companies they work for than US employees. For late-stage startups, employees typically own around 10 percent, versus 20 percent in the US. Stock options are also executive biased: two-thirds of stock options are allocated to executives, and one-third to employees below the executive level. In the US, it is the reverse.
Essentially, in the EU, ESOPs can be “share option plans” or “phantom share plans.” The former give employees access to become partners in the company, while the latter only give employees the option to receive the increase in the value of the company generated during their service with the company. Phantom share plans operate as a bonus in an employment relationship.
In much of Europe, employees will be paying a high strike price, and they will be taxed heavily upon exercise as well as sale. Leavers often get nothing. There is wide variation in national policy, regulations, and tax frameworks across Europe, with the UK most supportive of employee ownership.
ESG Spotlight
EU regulation: In February 2022, the European Commission released a proposal for the Corporate Sustainability Due Diligence Directive, which aims to enhance corporate governance and promote sustainable and responsible business practices. The directive mandates specific due diligence measures and responsibilities to address negative human rights and environmental impacts.
The EU’s Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation (TR) impose transparency and disclosure obligations on financial sector participants, including European PE and VC fund managers subject to the European Venture Capital Fund Regulation (EuVECA), regarding Environmental, Social, and Governance (ESG) factors.
M&A transactions: Private equity and venture capital firms need to assess sustainability risks in their investments—such as M&A transactions and equity investments—in order to implement ESG disclosures. Additionally, if the target company exceeds an average number of five hundred employees on its balance sheet during the financial year, these investors must consider the principal adverse impact (PAI) of their investments on ESG factors relevant to the target company. The company is required to make a statement on its website regarding its due diligence policies for adverse impacts, considering factors such as company size, nature of activities, and types of financial products offered. If the limit is not exceeded, investors’ consideration of the PAI of their investments on ESG factors is voluntary.
ESG factors have become critical drivers in PE and VC deals, as they can impact a target company’s long-term value and reputation. Assessing ESG factors and evaluating the alignment of the target company with them is essential to mitigate potential risks.
EU Taxation
Permanent establishments: The rules governing permanent establishments of companies in a Member State have become increasingly relevant to expanding companies, particularly with the rise of highly skilled teleworkers, including management personnel, potentially creating new permanent establishments. There has been a surge in the concept of “virtual permanent establishment,” especially related to e-commerce businesses.
Legal uncertainty: There is growing uncertainty regarding the taxation of outbound interest, royalty, and dividend income under the EU Parent-Subsidiary and Interest and Royalty Directives, influenced by interpretations from the EU Court of Justice. This uncertainty will affect decisions on corporate structure, such as EU holding and finance companies. This scenario is particularly pertinent in leveraged buyouts (LBOs) and debt push-down processes, where the deductibility of interests has undergone various modifications, requiring careful consideration in strategic planning.
Anti-abuse rules: Anti-abuse tax rules are being tightened at the EU level, resembling the domestic tax base erosion and profit shifting (BEPS) rules of the Organisation for Economic Co-operation and Development (OECD). This includes measures targeting the use of finance hybrids and controlled foreign company (CFC) rules.
Taxation of cross-border talent movement: Such taxation has become very relevant, with special tax regimes for “inpatriates” in countries such as Italy, Portugal, the Netherlands, Spain, and the UK, as well as salary incentives like ESOPs.
Transfer pricing: Valuation of cross-border income flows between related parties, especially in relation to intellectual property (IP) licensing activities, is of utmost importance.
Exits: When planning an exit strategy, most double taxation treaties offer protection from source taxation, but not all of them provide such provisions.
Other Relevant Obligations
AML: The EU implemented its first anti-money laundering directive in 1990 to prevent money laundering and require customer due diligence for obliged entities. Today, Directive (EU) 2015/849 is a key part of the EU’s anti-money laundering and terrorist financing legislation, requiring enhanced vigilance for high-risk third countries.
The new Anti-Money Laundering Authority (AMLA) will monitor risks within and outside the EU, directly supervising credit and financial institutions based on their risk level.
GDPR and privacy: In 2023, the European Commission adopted an adequacy decision for the EU-US Data Privacy Framework, which ensures data protection in data transfers to US companies, enabling the program to facilitate such transfers. The framework includes binding safeguards, a Data Protection Review Court, dispute resolution mechanisms, and an arbitration panel.
Compliance with the General Data Protection Regulation (GDPR) and EU-US Data Privacy Framework is crucial to avoid substantial fines (up to 4 percent of the company’s annual global turnover or up to €20M, whichever is greater), as demonstrated by the record fine imposed on Instagram by the Irish Data Protection Authority in 2022.
IP rights: Intellectual property rights—including patents, trademarks, trade secrets, copyrights, data, software, and technologies—are highly protected within the EU, with some local differences to consider. As an example, regarding Trademark Registration Procedures, while EU member states generally follow the EU Trademark Directive for trademark registration, there can be differences in procedural aspects such as examination criteria, registration timelines, and administrative requirements. For instance, some countries may have stricter criteria for trademark distinctiveness or may require additional documentation during the application process.
Consumer protection: The European Commission is in the process of conducting a “Fitness Check” of EU consumer law on digital fairness to ensure a high level of consumer protection in the digital environment and analyze the need for additional legislation or action.
India
Key Considerations
FDI approval routes: The pivotal aspects for consideration when it comes to expanding your business into the Indian subcontinent are the sector-specific regulations and entry routes for receiving investments into India. Foreign investments in India can be made through one of two means: the automatic route or the government approval route. While most investments fall under the automatic approval route, some may entail prior approval of the Government of India. For example, any investment in the defense sector will require prior approval of the relevant ministry along with concurrence by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
Further, pursuant to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and the Consolidated FDI Policy dated October 15, 2020, detailing Press Note No. 3 of 2020 (PN3), if an entity of a country that shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, such investment will also require prior approval of the Government of India. FDI proposals in sensitive sectors and proposals falling under PN3 will be subject to further security checks and require security clearance from the Ministry of Home Affairs as well. The timeline for obtaining FDI approvals spans from about three to nine months, since it passes through several layers of scrutiny by the relevant authorities governing the sector of proposed investment.
Competition law guidelines: In addition to the structuring of a deal, investors must be aware of the compliance framework prevailing in India. Investments that are over certain limits prescribed in respect of turnover, existing asset value, or the newly introduced criterion of deal value are subject to the regulatory scrutiny of the competition watchdog of the country, the Competition Commission of India (CCI).
Choice of entity: It is important to determine the nature of the entity to be established in India for the purpose of carrying out business objectives. Subject always to the guidelines prescribed by the Reserve Bank of India, foreign companies can operate through a subsidiary, branch office, liaison office, project office, or representative office. While a branch office is not allowed to carry out manufacturing or processing activities in India (either directly or indirectly), project offices are set up to execute only specific projects in India. Liaison or representative offices are only meant to promote the parent company’s business interests, such as promoting its parent entity’s products. The establishment and management of a subsidiary are governed by the Companies Act, 2013, and the extant Foreign Exchange Management Act (FEMA) guidelines. Therefore, the choice of the nature of entity in India would depend upon the commercial exigencies in consonance with the objectives envisaged by the business plan.
Industrial policies: The Indian government has established foreign trade zones such as Special Economic Zones and Software Technology Parks (STPs) to incentivize foreign investments, improve the ease of doing business, and reduce the tax burdens on businesses operating in these zones. In addition to these, Export Processing Zones (EPZs) offer incentives to foreign investors involved in export-oriented businesses. Further, the Government of India also offers several production-linked incentives that are aimed at incentivizing foreign manufacturers to set up production units and manufacture in India under the “Make In India” scheme.
Nature of funding: Indian companies can issue equity shares; fully, compulsorily, and mandatorily convertible debentures; and fully, compulsorily, and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA regulations. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA rules/regulations. Companies may also receive funds through issuance of other preference shares/debentures (non-convertible, optionally convertible, or partially convertible) other than from foreign sources. Further, Indian companies are permitted to issue warrants or partly paid shares to a person resident outside India subject to the terms and conditions stipulated by the Reserve Bank of India.
Borrowing from foreign companies or individuals is governed by the Master Direction—External Commercial Borrowings, Trade Credits and Structured Obligations. Within the contours of these regulations, the Reserve Bank of India lays down detailed guidelines in respect of external commercial borrowings (ECB), including the term of such ECB, minimum average maturity period, permitted end uses, and reporting requirements of the borrower.
Repatriation of funds: Profits from an Indian entity can be repatriated abroad by various means, such as dividends, buyback of shares, reduction of share capital, use towards fees for technical services, consultancy services/business support services, or royalty. Funds resulting from winding up or dissolution of entities can also be repatriated. Some of these require prior approval of the Reserve Bank of India and in some cases with the approval of specific tribunals (e.g., National Company Law Tribunal).
Statutory dues, licenses, and registrations: Other than the aforementioned approvals from the Reserve Bank of India and the CCI, investors in India should also be acquainted with the nuances of the statutory payment such as taxes, levies, and stamp duties. They also need to ensure compliance with the provisions under the Companies Act, 2013, such as obtaining local certifications and payment of employment benefits. Further, if the company will establish of a new entity or manufacturing facility, the relevant registrations, and the various licenses, both at central and state levels, are to be obtained under the applicable Indian laws.
Hiring of employees and labor law compliance: Foreign companies intending to venture into India must also consider the plethora of labor laws in India. In the absence of a subsidiary, project office, liaison office, or branch office, it is not legally permissible for a foreign entity to directly hire Indian resident employees for running their business operations in India. In such a case, the Indian resident employees can only be hired through an appropriate agency (Professional Employer Organization (PEO) or Employer of Record (EOR)). When hiring through a PEO, service providers will be beneficial to a foreign entity that already has an establishment in India. An Employer of Record (EOR) may be preferred where a foreign entity does not have any existing establishment. On the other hand, if the foreign company has already established its Indian entity or intends to establish a subsidiary, such entity must ensure compliance with the extant labor and employment laws in India. Several factors such as the number of employees, mode of employment, salary structure, etc., affect the extent of applicability of labor laws and the necessary steps for compliance.
Taxation: India has entered into various double taxation avoidance agreements (DTAA) with foreign countries that provide benefits to non-residents who may be subject to tax both in India and their home jurisdiction. Investors must consider the tax implications under the DTAA between India and their home jurisdiction and under the Income Tax Act, 1961, to minimize tax leakage and efficiently reap the benefits of the DTAA.
Further, a company is said to be a resident in India—and therefore, taxable—in any previous financial year if such company has its place of effective management in India. A company may be construed to have its place of effective management in India when its key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made in India. In such a case, the global income of such company becomes taxable in India at the rates applicable to a foreign company in India.
Other Factors
Choice of law: Choice of governing law and dispute resolution mechanism is of vital importance for cross-border investments and M&A. Whether the forum for dispute settlement is India or the foreign country is a question that is to be determined and agreed by the parties based on the nature of contract(s) entered into and on a comparison of costs involved therein. In India, arbitration is increasingly preferred over traditional dispute resolution through courts due to delays and time consumption in resolving disputes through the court system. Even arbitrations conducted under the aegis of an international arbitration institution such as the London Court of International Arbitration, International Chamber of Commerce, or Singapore International Arbitration Centre are enforceable by the Indian courts, and the final award is appealable only on very limited grounds.
Fiduciary duties: Investors should also be cognizant of the fiduciary duties that are associated with holding a directorship position or the role of a promoter of an Indian entity. In the case of private companies that have an IPO as an exit mechanism, promoters have a lock-in period of eighteen to thirty-six months. Foreign individuals who intend to be appointed as directors on the board of an Indian entity should obtain a director identification number, Digital Signature Certificate, and a permanent account number prior to such appointment. Further, Indian entities require at least one director to be a resident in India.
Social responsibility: Companies are also required to honor their social responsibility by being accountable to themselves, their stakeholders, and the general public. India takes a self-regulating approach in which companies integrate social and environmental concerns in their business operations and interactions with their stakeholders instead of focusing entirely on profit-making objectives, as well as use a part of their profits towards corporate social responsibility activities.
Sustainability reporting: Since fiscal year 2022–23, the Securities Exchange Board of India—the primary regulatory body governing listed companies in India—has made it mandatory for each of the top one thousand listed companies to submit a business responsibility and sustainability report. This is intended to help investors make informed decisions while investing in such entities and understand which companies are making a positive social and environmental impact.
Chile
Taxes and structuring: Chile has undergone several tax reforms in the past fifteen years and is currently discussing the need for a new tax reform. The Chilean tax system is applied on a national level and generally does not have special regimes for different industries. As an exception, Chile has approved a Mining Royalty that applies in addition to the corporate tax. A tax invariability regime called DL600 was recently repealed, leaving all foreign investors subject to the general tax regime and its potential changes.
Chile has entered into more than thirty-five tax treaties and is guided by the OECD guidelines in most tax matters. Most recently, a tax treaty between the US and Chile entered into force in December 2023. The Chilean tax administration, the Servicio de Impuestos Internos, is a very modern and highly digitalized entity and is pushing to make all interactions with taxpayers take place through digital means. Chile has specialized and independent first instance Tax and Customs Courts. The Appellate Courts and Supreme Court, however, are not specialized.
The corporate tax under the general tax regime is currently 27 percent, and it can be used as a credit against the tax on dividends (at 35 percent), making the effective tax rate for dividends either 35 percent (under a tax treaty scenario where the corporate tax is fully creditable) or 44.45 percent when the corporate tax is only creditable at 65 percent.
Intellectual property: IP is a constitutional right in Chile, for both industrial property rights (trademarks, patents, trade secrets) and copyrights. This type of ownership of rights is protected with the same force as regular property under Chile’s constitution. Those provisions are the source of Chile’s Industrial Property Law (N° 19.039) and Copyright Law (N° 17.336).
Chile is part of various international treaties related to IP, such as the Paris Convention, the Bern Convention, the Trademark Law Treaty, the Patent Law Treaty, and, recently, the Madrid Protocol, which includes the Chilean jurisdiction in the Madrid System (along with 128 other countries) for the centralized prosecution and maintenance of trademarks internationally.
Also, the Chilean Industrial Property Law has been recently modernized to include non-traditional trademarks, such as smells, 3D trademarks, and others, as long as they are distinctive. It also incorporates provisional patents and industrial design deposits for priority purposes, without having to spend resources on a full-scale application process. Often a decision to proceed can be delayed until there is a commercial and financial benefit in the protection offered by the design.
Hiring of employees and labor law compliance: Foreign entities planning to hire employees in Chile need to consider that the country has a strong range of regulations set out on the Constitution, the Labor Code, and different minor legislation regulating the country’s social security system. Additionally, the protection of employees’ rights has been considered a key principle for employment courts, which decide cases with a pro-employee criterion.
Labor regulations set out minimum employment rights regarding employee classification, minimum wage, working time restrictions, protections of salaries, protection against termination of employment, outsourcing, health and safety, fundamental employment rights, and collective employment rights. Chile is not an employment at-will country, so employers are required to invoke legal grounds for terminations even in redundancies.
Foreign entities are allowed to hire employees in Chile, provided they designate a local legal representative and address or set up a subsidiary. Local regulations do not acknowledge PEO (Professional Employer Organizations) or EOR (Employer of Record), restricting the provision of employees to specific time-restricted scenarios. Companies are allowed to outsource the provision of services from third parties, but the law provides a solidary liability for the compliance of employment duties towards the outsourcing entity.
In Chile, trade union organizations are relevant within the company, being allowed to engage into a collective bargaining processes and strike with their employer. Currently, collective bargaining regulations are restricted to the company as a legal entity, but the current administration has announced its intention to create industry-based collective bargaining obligations.
Finally, local regulations consider a strong protection of fundamental employment rights, which are a set of constitutional rights protected in the context of employment such as the rights to life, to work, and not to be discriminated against. Litigation related to such rights can allow employees to claim their reinstatement on serious discrimination claims and can involve additional penalties and restriction on the company’s participation in biddings with public entities for a two-year period. This last sanction also applies to anti-union practices.
Regulatory considerations: Finally, Chile has been a very stable country for the last thirty years. It is now in the process of drafting a new constitution, which likely will end up granting more rights to the Chilean population. Its regulation is sophisticated and provides a number of areas that need to be understood by investors and their portfolio companies who are targeting consumers or who profit from the collection and exploitation of personal data. Chile supports innovation through its regulations and encourages international investment in its forward-looking and established economy.
Renewable energy has become a significant industry since recent governments issued regulations toward promoting foreign investment in this area. Solar and wind projects have been active during recent years, receiving significant amounts of investment from abroad. Now, green hydrogen has triggered interest, since experts consider Chile to have the best conditions for these types of projects.
Conclusion
Opportunities for overseas growth are huge, but navigating the local issues needs to be prioritized. Many businesses consider their international expansion a quick and easy add-on to their US domestic business, but in fact, the unfamiliarity of overseas markets can often mean greater time should be spent on ensuring a proper approach is taken. Doing it right is far more likely to lead to a successful market entry and greater profits, ensuring the return on investment for the investor is maximized and keeping everyone happy!
This discussion is a general, high-level summary and not an exhaustive checklist or legal advice. Obtaining local counsel is vital, and adequate time and resources should be allocated to any international expansion project.
This article is related to a CLE program titled “What Legal Issues Should Investors Ask Their Portfolio Companies to Prioritize When Growing Overseas?” that took place during the ABA Business Law Section’s 2023 Fall Meeting. To learn more about this topic, listen to a recording of the program, free for members.
