Foreign expansion is an important landmark in the life cycle of a corporation. Sometimes, expansion is the result of growth and a first step towards penetrating a foreign market. In other instances, a company might already have a decent amount of business in another country, and they might think that having a local office might make things more convenient. But the truth is that not all foreign expansions work out smoothly. It might be the overhead costs that are not justified by local revenue, complex local taxation, and financial layout, local market turning hostile, or consumer-base moving to a local alternative or one of the several other reasons that might force you to close down your foreign business and retract your operations back home. And retraction can get complicated.
Retraction: Common Challenges And Steps
If a foreign branch has put down roots in the host country, the process of retraction can get quite complex. It’s relatively easier for countries with sharing borders (from a logistics point of view) and tax treaties. But for countries that share very little with your local compliance and corporate culture, retraction can become a lengthy process. The branch you are planning to close down would have become a part of the local corporate landscape, and you pulling the plug on the business will impact several jobs and affect connected businesses.
The retraction steps in most countries revolve around three key elements:
- Your financial obligation to the host country
- Your financial obligation to the local employees and vendors
- Cutting all “legal” ties your business has with the local government bodies
There are some steps you might need to take in most countries you are retracting from, and then there are country-specific steps.
The general steps might include:
- Compensating all employees and arranging repatriation of foreign workers. You will need to give due notice of offer parallel compensation.
- Paying all local suppliers. It can be a bit complicated because you might expedite your payments, but the entities you are expecting payments from might not alter their due process for you.
- Follow local taxation protocols to pay off any financial debt you have to the country. The local tax department will have protocols in place to facilitate the retraction.
- Terminate any leases you might have for offices, warehouses, or employee accommodation. It might incur a penalty. You would also need to get rid of the physical assets your company might have. Transport can be costly, so selling them in the local market is a more pragmatic option.
- Close down any bank accounts you and your employees have and transfer out funds (if you are allowed to do so). You might also need to transfer social security credit (unless it’s due right away like provident fund) your employees have accumulated.
- Fulfill local government’s deregistration/retraction documentation requirements and pay any associated fees.
You can also liquidate your capital investments in the country, but you will need to pay the relevant amount in taxes to the state before you can transfer funds out.
The rules differ from country to country. In UAE, you have to give a 30-day notice during which any entity you have a financial obligation to, especially creditors and banks, can contest your retraction. In Canada, you need to prove you have no financial liabilities in the country and no property to dispose of; then, your business number is annulled. China follows most of the steps above, and you have to pay certain fees associated with retraction.
Retraction is not an easy situation to deal with, especially if there are a lot of complex local regulations you have to wade through, some of which only get triggered when you are retracting. But it’s a scenario every business should prepare for, ideally at the time of expanding. Consultant firms that offer global expansion services also offer retraction services, and they might help the process easier (if not faster) for you.