This document outlines major legal issues to consider when managing international subsidiaries. It discusses establishing a foreign subsidiary, including deciding on the entity form and ownership structure. It also covers management and governance issues, such as control, compliance, and crisis response plans. Additionally, it provides an overview of important employment laws in both Europe and Asia, as well as US laws that may apply extraterritorially to international operations. The document is intended to help multinational companies navigate complex legal requirements across different jurisdictions.

1. Track 704
Major Legal Issues in Managing
International Subsidiaries
ACC International Legal Affairs Committee
18 October 2016

2. Outline
• Before You Establish a Foreign Subsidiary
• Form of Entity and Ownership Percentage
• Management Issues and Control
• Governance
• Business Management
• Back Office Support
• EU Employment
• Employment Laws in Asia
• Support for Manufacturing Facilities
• Terms and Conditions for the Sale and Movement of Goods
• US Laws and Regulations with Extraterritorial Impact
• Crisis Created by Adverse Publicity, Natural Disasters and Civil &
Criminal Actions
• Exit Strategy
• Addendum: Model Plan and Checklist

3. Before You Establish a Foreign Subsidiary
• Have a decision-making and approval process and follow it.
• Is this a new jurisdiction or just a new subsidiary?
• Do you really need a new subsidiary?
– Weigh alternatives such as billing from another country, using
billing/office services of an existing local company.
– Consider the time is takes to set up a new subsidiary, do not start too
early or too late...
– Consider not only the setup costs but also operations, maintenance
and exit expenses.

4. Before You Establish a Foreign Subsidiary
• Some things to consider:
– Business purpose.
– Type of entity.
– Ownership structure/governance/management.
– Permits and licenses to do business.
– Visas and work permits.
– Taxes.
– Capitalization and currency issues.
– Law, regulations and intellectual property protection.
– Anti-corruption controls; compliance.
– Culture.
– Risk management.
– Exit Strategies.
– What else can go wrong?

5. Form of Entity and Ownership Percentage
• Things to consider:
- Entity’s business.
- Wholly-owned subsidiary or branch?
- JV or other form of multi-owner entity?
- Identity of shareholders (avoid personal share-holding).
- Understand local ownership requirements.
- Financing requirements; ease of fund repatriation.
- Regulatory requirements.
- Control: from headquarters or local/regional?

6. Management Issues and Control
• Wholly-owned/Branch.
– Parent company’s requirements, policies, procedures, accounting
practices, etc.
– Ensure compliance with parent company standards
• Tone at the top
– At a minimum, establish standards.
• Global standards or local?
• Joint Venture (partnership or other form of multi-owner entity).
– Each party typically has a different view of how the venture should
operate.
– Anything from “hands off” by owners to one owner taking a
predominate position.

7. Management Issues and Control
• Establish the rules up front. Considerations:
– Know your partner.
– Financial contribution.
– Local laws and regulations.
– Risks

8. Management Issues and Control
• Avoid disproportionate responsibility.
– Example: own 33% of a venture and have contractual responsibility
to appoint and employ the entity’s general manager.
• Can you really have a “hands off” relationship?
– Danger of parent/owner involvement without control.
– Who’s responsible in time of crisis?
• Some US laws such as sanctions and export controls have extra-
territorial application.
• Management: ex-pats, local residents or combination?

9. Governance
• Creating New Entities.
– Form of entity.
– Selection of officers and directors.
– Liability of directors, officers, managers and legal representatives.
– Authority of individuals, especially signatory rights and cash control.
– Local residency requirements for directors.
– Background checks.
– Compliance and anti-corruption training.

10. Governance
• Managing Existing Entities.
– Annual meetings, filings, local representatives, coordination of legal,
tax and finance issues.
– Selection of legal counsel:
• In-house or law firm?
• Privilege issues?
• Is there no attorney privilege in the jurisdiction?
– Compliance with corporate policies.
– Reporting procedures; e.g. legal proceedings (threatened or existing).
– Differences in level of formalities:
• Required (actual vs telephone meetings, written consent,
approval of financial statements).

11. Governance
• Coordination with headquarters:
– Establish clear reporting lines.
– Establish communications expectations, especially if local
management.
• Frequency of communications.
• What must be communicated.
• Crisis communications and management.
– Remote control/supervision of ban accounts, checks and petty cash.
– Data privacy rules.
• What information can be transferred across borders.
• Set up appropriate procedures to facilitate data transfers.

12. Business Management
• Local laws and customs.
– Language requirements and practical needs
• Terms and conditions for purchase and sale of goods and services:
practices vary greatly by jurisdiction.
– Parent’s/owner’s terms or the subsidiary’s terms?
– Credit arrangements?
– What happens when customers don’t pay?
– What happens when the subsidiary doesn’t pay?
– Do non-negotiated terms and conditions apply to a transaction?
– enforceability of specific terms such as limitation of liability.
• Germany: limitation of liability without exclusion for personal
injury and death not enforceable.
• Turkey: if document is not signed by both parties it has no effect.

13. Business Management
• For the entity:
– Physical location requirements
– Licenses required
– Taxes in addition to corporate entity requirements
• For the business
– Additional licenses (manufacturing, import, or industry related)
– Understanding statutory and customary terms that apply to
contractors, distributors and advisors
– Restrictions on expatriating cash

14. Business Management
• Statutory liability issues for manufacturers and distributors vary, and
particularly with respect to consumer products.
• Collections procedures in the country.
– Evaluate credit checks and payment terms differently in the
jurisdiction.
– Simple processes such as use of Dun & Bradstreet.
• Credit/business reports may not always be readily available.

15. Back Office Support
• Handling the day-to-day needs.
– Including human resources, accounting, financial control, legal,
purchasing, sales & marketing.
– Are there requirements for in-country licensing of certain
professions?
– Is it practical to provide back-office support from afar?
• Remote access to the parent company’s systems and third parties.
– ERP.
– Financial institutions.
– Expense of redundant system if access not provided.

16. EU Employment
• EU labor law defines rights and obligations of workers and employers.
• EU labor law covers two main areas:
– working conditions:
• working hours, part-time & fixed-term work, posting of workers.
• informing & consulting workers about collective redundancies,
transfers of companies, etc.
• EU policies in recent decades have sought to achieve high employment &
strong social protection, improve living & working conditions, and
protect social cohesion.
Source: European Commission

17. EU Employment
• The EU complements policy initiatives taken by individual EU countries
by setting minimum standards.
• In accordance with the Treaty (Article 153), the EU adopts laws and
directives that set minimum requirements for:
– working & employment conditions,
– informing & consulting workers.
• Individual EU countries can provide higher levels of protection.
Source: European Commission

18. EU Employment
• The EU adopts directives which its member countries incorporate in
national law and implement.
– National authorities (labor inspectors and courts) enforce the rules.
• The European Court of Justice & labor law
– Whenever a dispute before a national court raises a question of how
to interpret an EU directive, the court can refer the issue to the Court
of Justice of the EU.
– The European Court then gives the national court the answers it
needs to resolve the dispute.
• The Commission confirms that EU directives are incorporated into
national law and ensures through systematic monitoring that the rules
are correctly implemented.
• When the Commission considers that an EU country has not
incorporated a directive into national law correctly, it may decide to start
infringement proceedings.
Source: European Commission

19. Employment Laws in Asia
• As many sets of laws and regulations as there are countries.
• What is required in one country isn’t in another.
• Examples of recent changes:
– China: PRC Employment Contract Law, strict enforcement of labor
dispatch regulation, and impact of two-child law on female
employees.
– Japan: amendments to the Worker Dispatching Act, Act to Advance
Women’s Success in their Working Life.
– Korea: draft guidelines for greater labor flexibility.
– Malaysia: increased minimum wage.
– Singapore: enhanced employment rights, changes in court
enforcement of post-termination injunctions.

20. Support for Manufacturing Facilities
• Reliance on third parties to obtain or renew licenses, approvals,
certifications to operate.
• Selecting suppliers for the entity.
• Who’s responsible for due diligence of third parties?
• Are third parties retained by parent/owners or by the legal entity?
• Are goods produced only from materials sourced locally?
• Transportation and storage.

21. US Laws and Regulations with Extraterritorial Impact
• Foreign Corrupt Practices Act (15 U.S.C. §§ 78dd-1, et seq.)
• Export Administration Regulations (15 CFR Chapter VII, Sub-chapter C)
• International Traffic in Arms Regulations (22 U.S.C. 2778; 22 CFR 120-130)
• SEC reporting requirements (17 CFR 210, et al)
• Depending upon your products:
– DEA regulations
– FDA regulations
– EPA regulations
– CITES
– Conflict Minerals
• And many others.

22. Crisis Created by Adverse Publicity
• Who controls the process? HQ or local?
• Yellow journalism.
– The truth isn’t there and the facts are distorted or missing.
• Do you respond and if so, how?
─ PR firm?
─ Press conference?
─ News release?
• Official action such as prosecutorial investigation instigated by false or
misleading reporting.
─ Meet and explain?
─ Avoid danger; use local law firm to handle inquiry?

23. Crisis Created by Natural Disasters
• Who controls the process? HQ or local?
• Recovery plan.
– Get facilities and offices stabilized and operational.
• Personal protection and security plan.
– Identify employees’ locations, safety and health status.
• Obtain insurance against natural disasters, human threats (e.g., Kidnap
and Ransom insurance) and report immediately when crisis happens.)
• Emergency financial plan.
– Obtain cash/credit as needed to stabilize the business and support
employees’ needs.

24. Crisis Created by Civil and Criminal Actions
• Who controls the process? HQ or local?
• Civil Actions:
– Shareholder lawsuits.
– Allegations of environmental damage.
– Claims of supply chain malfeasance; i.e. child labor, indentured
servitude, etc.
• Government criminal investigations:
– US: FCPA
– UK: UK Bribery Act
– Germany: German Criminal Code (Strafgesetzbuch) Sections 331-338
(bribery in public office), 299-302 (bribery in commercial business
transactions) and 108b-198e (electoral bribery), China:
– China: Anti-Unfair Competition Law and China Criminal Code

25. Exit Strategy
• Terminating contracts.
- Beware of potential statutory damages.
• Providing required notices to and obtaining permissions from
government agencies.
• Providing required public notices.
• Terminating employees.
- Beware of potential statutory damages.
• Settlement of debts and disputes.
• Disposition of facilities.
• Liquidation of local entity / sale of shares / merger.

26. Addendum
Model Plan and Checklist

27. Model Plan
• From time to time, Company ABC considers hiring an employee in a new
jurisdiction, developing a sales and marketing function in a new
jurisdiction, or considering other business activities in a country in which
Company ABC does not own an entity.
• Legal, Finance and HR and the business will work together to analyze the
various issues and develop a check list for forming the new entity.
• The following summarizes the issues to be considered, to make sure the
issues, costs and risks are reviewed before making a final decision.

28. Model Plan
• Identify business justification for new entity:
– Common justifications include needing to hire a new sales employee
or develop a distribution center or new project in the country.
– Justification should include whether sales/invoicing will be done by
the entity or whether the activity will be solely marketing.
– The business may also consider the projected rate of return for the
new entity.
– When estimating start-up costs, expenses to consider include, legal
fees, tax consulting fees, registration/government fees, ongoing
payroll administration, annual reporting/taxes, lease/registered
agent fees, bank fees, financing costs and insurance premiums.

29. Model Plan
• Selection of type of entity:
– Tax and Legal will consider the various entity types available in the
jurisdiction (such as corporation, LLC, representative or branch
office).
– In addition to the tax consequences, legal issues such as liability of
directors, governance requirements, logistics and fees will be
considered.
– Corporate Finance should be notified of plan to create a new entity
so that global reporting systems will be updated.
• Consultants:
– Legal will identify of outside counsel in the local jurisdiction.
– International Tax, the business and HR will determine if other
consultants are necessary (Tax, HR, etc.)

30. Model Plan
• Ownership structure:
– Tax and Legal will determine the proper ownership structure for the
entity.
– Considerations include withholding taxes on dividend payments, tax
treaty availability, capital gains taxes on disposal of the entity and
withholding taxes imposed on the capital gains, impact and
availability of the disregarded entity rules (including on merger and
reorganization provisions), APB 23 assertion utilization and
availability of foreign tax credit relief at the parent company level.

31. Model Plan
• Governance:
– Company ABC has a standard list of directors for new entities.
– In some jurisdictions, a specified number of directors must be
resident in the jurisdiction and this list may need to be adjusted.
– Regional management must also decide what level of authorization a
local employee should have.
• Trademarks:
– Review with business leaders which products and trademarks are
expected to be used in the region.
Check with Legal for trademark registrations in the jurisdiction.

32. Model Plan
• Bank Account:
– Some jurisdictions require a local bank account before an entity can
be registered.
– In other cases, the bank account can be opened when it is
convenient.
– Treasury coordinates bank accounts for our subsidiaries.
• Leases:
– Some jurisdictions require that office space be leased before an
entity can be formed.
– In some cases, a service organization can provide the lease. In other
cases actual space must be identified.
– Other jurisdictions do not have a physical presence requirement, and
we can delay decisions about leasing space until after the entity is
formed and employees are engaged.

33. Model Plan
• Employees:
– Payroll: HR resources for the region will work with Tax and Legal to
determine if a payroll service will be required, and if not, how payroll
will be handled including number of payroll payments per year .
– HR will select payroll service provide and Legal will provide input on
service provider agreement.
• Legal:
– Legal and HR will work with outside counsel to determine whether
an employment agreement is appropriate (or required) and
understand the local employment laws applicable to the new
employee (probation periods, termination issues, visas (if
applicable), benefits and holidays).
– HR will work with the business on the various employment
agreement issues (such as job title, duties, probation period,
expenses, and compensation), considering the differences when an
employee will be hired locally or will move from an existing location.

34. Model Plan
• Employees:
– Pension Plan: HR will determine whether to offer a supplementary
pension plan and its subsequent structure following a review of local
market practices
– Insurances: HR will determine whether to offer insurances
(disability, life) in accordance with local market practices.
– Company car: HR to decide on the allocation of a company car and
liaise with a local lease company to make the necessary
arrangements.

35. Model Plan
• Initial capitalization issues:
– International Tax and Legal will determine the minimum initial
capitalization required and the appropriate source and currency for
funding.
– International Tax and Treasury will determine the proper mix of
capital or debt funding, based on local country requirements and
thin capitalization rules.
– If debt will be used, International Tax and Treasury will determine
the best source for intercompany lending based on Company ABC’s
cash positions and on withholding rates for interest payments.

36. Model Plan
• Other treasury issues:
– Treasury and Legal will determine what currency exchange controls
exist and whether the new entity will participate in cash pooling
arrangements.
– International Tax will determine if payments can be made and
deducted for regional headquarter services.
– Corporate Finance will determine the appropriate source (cost
center) for funding pre-formation expenses.
– Treasury will determine whether to add the subsidiary to global
insurance policy and whether to investigate local insurance.

37. Model Plan
• Timing issues:
– Legal typically will engage outside counsel in the jurisdiction. This
may take several weeks.
– The amount of time required to form an entity, and to begin
operations varies from jurisdiction to jurisdiction.
– At the beginning of the process, legal will obtain input from outside
counsel to assist the business in developing a timeline.
– Jurisdictions vary whether the new entity must be established before
an employee is hired, or whether an employee is necessary for the
formation.

38. Model Plan
• Post Formation Issues:
– Treasury will determine functional currency and consolidation needs.
– Reporting: An individual or third party service provider will be
identified to be responsible for accounting for the new entity as well
as meeting annual reporting requirements.
– Intercompany services agreement:
• if appropriate, intercompany agreements for services, or HQ
services will be put in place.
– Internal notifications:
• Provide location information to GTC, Tax, and any additional
employee who participated in the formation process once entity
or representative office is registered.
• Provide entity information to Corporate Finance, Regional
Finance, HR.

39. Checklist
Issue Timing Responsible Function (also identify individual)
Identify Business Need
Identify project team
Pre-Formation notifications: International Tax, Regional
Finance, Legal, Corporate Finance,
Selection of Outside Counsel Legal
Entity Choice Legal
International Tax
Entity Formation (including determination of governance,
capital requirements, ownership structure)
Legal, International Tax, HR
Trademark review Global Marketing, Legal
Budget
Hiring; including employment agreement if applicable HR
Legal
Payroll HR, Legal
Lease
Benefits (to the extent applicable: car; insurance; pension) HR
Bank Account Treasury
Insurance
Determination of exchange controls
Loan agreement (if applicable)
Internal Company ABC notifications
Intercompany Agreements
Entity Accounting
Entity annual filings (tax, corporate)
Summary Check list