Entering South America – 7 Essential Tips to make your life easier
Our top tips are based on our experience assisting hundreds of companies enter the Latin American Region and are directly relevant to many of the legal and operating issues which you are likely to encounter. Understanding the different issues will be the difference between a successful entry or one that is filled with stress and problems.
Tailor your Company’s constitutional documents
A company’s articles of association set out the formalities relating to the composition of the board of directors and the means by which directors and shareholders make decisions. Take time to understand the different corporate vehicles, their limitations and benefits. It will go a long way to ensuring that your constitutional documents are not unnecessarily restricting your business and ensuring the company has good corporate governance.
Decide how you will fund the new entity
Once a company is legally established and bank accounts are opened, most companies start thinking about bringing money in order to fund the purchase of equipment, office space and employees. One of the areas that we work with clients quite closely is in using inter-company loans as a tool to fund the new operation.
Inter company loan agreements are a standard tool across the world with small variations depending on the legal and accounting system used in the respected country. In general, the issue with inter-company loans and taxes is that while the company may consider it a loan, government agencies may view it as an equity investment. If it is an investment, it must be treated differently by the recipient, and creates a complicated tax situation. Inter company loans must be conducted at arm’s length with a clear loan agreement to demonstrate that it is a loan within the company, not a movement or investment of capital, and the borrower has an obligation to repay it at set terms.
We have provided a link that highlights some of the points one must take into consideration before executing an inter company loan agreement for a Chilean subsidiary.
Produce standardised written terms with customers and suppliers
Most companies will have written terms they use in their home country but a new legal jurisdiction will require some tailoring to ensure it fits local laws. In addition, these standardised terms should be translated to Spanish to ensure it meets local standards. Should a supplier fail to deliver or a customer fail to pay, having a legally enforceable agreement in place will be invaluable to the business to ensure that its rights can be enforced. Your suppliers and customers may try to impose their own standard terms. Having a set of terms and conditions, or a set of standard clauses which will be used in all your contracts (even if these are partly bespoke) will mean that you are more comfortable in finalising contracts quickly and without protracted negotiations.
Protect your Intellectual Property (IP)
Contrary to popular belief, there is no such thing as an “international” or “worldwide” patent, or “international trademark” that covers the whole planet in one application. National applications need to be made in each individual country in Latin America and in some countries, for instance Brazil, the process can take a minimum of three (3) years until final registration. In general however, the process takes approximately two (2) years (presuming that no objections are raised by the authorities or the public) from application until final registration.
It is common to see companies come to Latin America and market their product and/or service (through various trade shows), set up, trade and then realise they have no protection, or even worse are in infringement of a third party’s IP rights.
From a business perspective, we have found that our clients’ whom have their IP “in order” send a good message to the marketplace as they are strategically and effectively able to transact with their buyers, especially in the case where the buyer is a large multinational like BHP, whom in some cases require that you are the owner of the IP rights prior to entering into a purchase contract.
Formalise your employment and consultancy arrangements
Employment Law in most of Latin America is often very pro-worker which is why it important to understand the intricacies of each jurisdiction.
We often see companies try to use the same contracts they would use in their home country. This often does not work because there are key differences in labour law which creates discrepancies.
For example, in Chile it is impossible to put post-termination restrictive covenants in work contracts because they cannot be enforced as they are found to be unconstitutional. Another good example regarding Chile is that it is impossible to have an employee on probation period as is common in many western countries. Little things like this can put an employment contract at risk if not done properly.
There are often ways to work around these issues to protect the employers and meet their objectives but it requires some up front knowledge of local laws to do so.
Make sure you have strong controls and procedures in place
Often when companies set up in Latin America they start with a small team of trusted employees. In man cases they may be managed from their companies’ home country. It is important to ensure that there are proper controls in place.
A good example is the use of power of attorneys (“POAs”) in Latin America. Without POAs, it is very difficult to operate. Setting up POA´s is fundamental if you want to operate in a business environment. Both the private and the public sectors will require such documents when transacting with a corporation.
The wider the powers contained in the PoA, the more practical it is. Nevertheless, this has the drawback of being more dangerous. If the GM, principal or attorney is granted too much power, he/she can be a risk to the business, so the key is trust. Companies need to find the right balance between ‘wide’ and ‘specific’ powers. In some cases, foreign companies give very limited powers in PoAs so the General Manager cannot do anything without the parent company’s approval. This obviously has negative practical impacts on running the business in the Region. Nevertheless, POAs are easy to revoke, so they are safe in that respect.
For more information, see a previous blog post here.
Keep up with housekeeping
In Latin America countries, there are often some key accounting and taxation differences. It is important to understand what is required or it can lead to fines in many cases.
For example, in Chile, taxes needed to be declared each month. Expenses that are often deductible in Western Countries are not accepted in Chile. One such expense would be deductions for company cars. Rejected expenses by the tax office can carry a 35% fine.
Harris Gomez Group has assisted hundred of companies with their entry into Latin America. With a team of Common Law and Latin American Lawyers, we understand both jurisdictions and we help create a seamless bridge between the two regions.