The Pitfalls of US Companies Expanding into Europe
The Pitfalls of US Companies Expanding into Europe
European expansion offers businesses of all sizes a wealth of opportunities, from access to pools of highly skilled talent to lucrative new markets. However, overlooking the importance of a well-thought-out strategy before undertaking an international expansion can quickly become problematic. By taking the necessary precautions your business can benefit from a European expansion while circumventing any possible pitfalls.
What are the advantages of expanding into Europe?
Expanding into Europe opens the door to faster business growth, new markets, highly skilled talent as well as the prestige of having an international organisation.
● Access to Highly Skilled Talent
With high standards of education across the continent, Europe offers access to some of the most highly skilled workers in the world. Boasting some of the world’s most highly recognized universities, such as Oxford and the Swiss Federal Institute of Technology, Europe provides your company access to an extensive talent pool of skilled individuals that are ready to get the job done.
Many European citizens have a rich and culturally diverse background, and by being part of the European Union many citizens are internationally minded who can understand consumers and cultures in all of the territories across Europe. Besides this, Europe has pioneered several industries such as engineering and pharmaceuticals suggesting a productive and forward-thinking attitude.
● Steeper business growth
By progressing into the EU you can effectively diversify your revenue streams by gaining access to new audiences. Having multiple sources of revenue also safeguards your interests in the event that one of your current markets experiences a dramatic shift. Even if your domestic activity is slow, having access to a wider group of consumers ensures a stable revenue stream. Widening your business prospects allows you to increase your business growth in a safe and sustainable manner.
Many European states boast a stable economy which, through beneficial tax systems, has fostered the growth of several industries. The transparent political landscape has led to decreased corruption and cultivated progressive infrastructure.
● Access to new markets
Expansion into the Europe extends your business’ global footprint, helping you deliver your product or services to a large new group of customers. European markets benefit from open borders extending your reach throughout the entire continent. This, in turn, allows you to rapidly develop new customer bases.
● Free Flow of goods through the EU
Thanks to the European customs union and the principle of non-discrimination, duties between member states are prohibited. This allows for the free flow of goods throughout the EU which allows imports to circulate freely. This type of free trade promotes innovation as it encourages the circulation of new ideas. It also provides consumers with access to a wide array of products at lower costs. This has been one of the driving forces behind Europe’s economic growth and has proved to be a positive policy for both the economy and public policy.
● Staying ahead of the competition
Competition can be fierce, in order to stay ahead of the curve you need to be able to penetrate a market before your competitors. By expanding into Europe before your competitors, you are not only gaining a larger market share, but you are also developing insights which your competitors might not have access to. These insights can then be utilized to help better secure your domestic markets.
Risks when expanding into the EU
Expanding into Europe isn’t without its risks and taking the plunge without a well-formulated strategy can be troublesome. Before attempting to extend your operations across the Atlantic, there are some important risks that need to be mitigated. These risks can be complex and challenging, but we’ve broken them down for you to better understand.
European Employment Law and Compliance
European Employment rights cover a vast area, from holiday and sick leave to employee safety and training. Staying compliant with local employment laws can prove challenging for those who are not prepared.
Employment contracts differ from country to country however, as a general rule of thumb, employees must be able to understand the contract. European employees are also entitled to statutory employee benefits, this includes sick pay, holiday leave, parental leave while in certain states, such as Belgium, employees can receive travel allowance provided they are earning less than €26,000.
It is important to note that the exact specifics differ from country to country, as a result, it is important to conduct proper research into your chosen country’s employment rights. In general, European employees are entitled to;
● Holiday Leave
● Sick Pay
● Maternity/Paternity Leave
● Employee Training
● Employee Safety
Setting up an Entity
All European countries have different types of business entities available. Each of the different types of business entities have different registration and structural requirements. This includes capital contributions or equity minimums.
Opening offices or subsidiaries in Europe can be quite a complicated challenge. Certain states require a set amount of capital before opening a branch. You might also need to set up an international bank account to process certain types of payments, such as paying employees and reimbursing expenses.
Businesses in Europe also need to comply with several anti-money laundering laws. This includes implementing “Know Your Customer” (KYC) and “Know Your Business” (KYB) protocols. Without these protocols in place, it will be difficult (if not impossible) for your company to establish a foothold in Europe.
Europe and GDPR Compliance
The General Data Protection Regulation (GDPR) is one of the toughest privacy and security law in the world. It lists the requirements for any companies (in and outside of the EU) which intend to collect, store and manage personal data of EU citizens. By requirement, non-european companies that intend to store data on citizens within the EU have to appoint a representative in the EU.
It is imperative for your European expansion to ensure that your company is compliant with GDPR. Data Protection Laws and regulations are particularly strict and the consequences for noncompliance are high. As a result, it is essential that your company adheres to privacy laws. This might include appointing a Data Protection Officer, ensuring that consent is freely given when collecting data, as well as providing individuals with transparent information on how their data will be used.
Taxation laws within the EU vary from country to country. As such, it is your company’s responsibility to comply with the different national rules on company tax. This includes registering your company for taxation purposes as well as preparing a company tax return within each country you expand into. In most European states, annual tax audits are required by statute. Annual financial reports, which often become public information, are also required.
Entities in Europe are subject to both direct and indirect taxation. In the case of the former this includes incomes tax, capital tax and (in some cases) double taxation. Indirect taxation refers to VAT (value-added tax). Besides the financial costs of staying compliant with these forms of taxation, they also present an administrative burden for your company.
Managing International Employees
Hiring and managing international employees requires your HR and administrative departments to navigate the unique logistics that come with supporting employees located overseas. International employees, particularly in Europe, are used to having freedom of movement. This can prove to be problematic if a highly-valued employee wishes to relocate to a country where you do not have an entity. Similarly, you might need to relocate an employee however you are still waiting for a work permit to be issued. Effectively managing your international employees requires a thorough understanding of the various regulations found across Europe, which might strain your HR and administrative teams.
Besides handling possible language and cultural differences, your HR and administrative departments have to adapt to the plethora of European employment laws. This can prove quite challenging, especially for SMEs. With regards to the payroll of your overseas employees, there are a number of options available, such as:
● Running the host country payroll remotely from your head office
● Running payroll through an appropriate entity in the host country
● Outsourcing payroll to a third party
A PEO Solution
While European expansion can prove to be a monumental first step for your business, the day-to-day administrative tasks, setting up a European entity and staying up to date with local legislation can easily drain you of time and resources. By outsourcing your HR needs to a team of experts, Professional Employment Organisations (PEO) improve productivity and profitability by allowing your business to focus on their core mission, rather than trying to navigate the legislation of international policies and regulations.
At Bradford Jacobs, through dedication and professionalism, we empower our clients to reap the full advantages of European Expansion while expertly navigating any possible pitfalls. Our years of expertise in strategic international business expansions guarantee that our solution is cost-efficient while mitigating risk.
If you are considering expanding your business into Europe, contact us now and find out how we can help your expansion to succeed.