A practical guide for cross-border businesses
The Default Assumption, and Why It Is Wrong
When businesses begin selling into a new country, the instinctive response is often: 'We need to set up a company there.” This is understandable, but it is often not a legal requirement. There is no general obligation under international law that compels a foreign business to incorporate a local entity simply to sell goods or services in another country. Cross-border commerce is entirely lawful without one.
That said, there are specific, practical scenarios where establishing a local entity becomes either legally required or commercially necessary. Understanding the difference between those scenarios and the genuine alternatives is what matters.
When a Local Entity May Be Required or Practically Necessary
1. Banking and Payment Processing
This is the most common real-world driver. Many banking institutions and payment platforms will only open accounts for, or pay out to, locally incorporated entities. Examples include:
- Shop Pay USD payouts (from Shopify) might require a US entity with a US bank account
- Local bank accounts in many markets are simply not available to foreign companies
- Currency settlement and FX arrangements often tie directly to local entity status
In these cases, the entity requirement is not legal, it is platform or banking policy. But the practical impact is the same: without a local entity, you cannot get paid in that currency through that channel.
2. Employing Staff
Hiring employees in a foreign country triggers local payroll, employment law, and social contribution obligations. A local entity provides the legal framework for this. However, it is not the only option:
- Alternative: Employer of Record (EOR)
- A third-party EOR employs staff on your behalf, handling payroll, tax, and compliance, without you needing your own entity. Widely used for small headcounts or early-stage market entry.
- Independent contractors - suitable for limited, defined-scope engagements but carry misclassification risk in many jurisdictions
A local entity for employment purposes makes most sense once headcount grows and long-term commitment to the market is established.
3. Importation of Goods
Some countries require a locally registered importer of record to clear goods through customs. This is relatively uncommon and, where it does apply, there are alternatives:
- An indirect customs representative (or customs agent) can fulfil the importer of record role on behalf of a foreign business in many jurisdictions, including much of the EU
- Certain markets do impose stricter local entity requirements for importation — this should be verified country by country
4. Platform and Supplier Onboarding
Some local platforms, marketplaces, or suppliers will only onboard entities incorporated in their jurisdiction. This may apply to:
- Marketplace platforms with local entity onboarding requirements (policies vary by platform and country — always confirm current requirements)
- Local fulfilment warehouses, logistics providers, or distributors with domestic-entity-only policies
- Suppliers operating under internal policies restricting them to contracting with locally registered companies
This is a commercial rather than legal constraint, but it can be a hard blocker depending on the business model.
5. Regulated Industries and Licensing
Certain sectors, financial services, healthcare, insurance, legal, and others, require specific local licences or regulatory approvals that, in turn, require a local entity. The requirement is the licence, not the sales activity per se. A foreign company cannot simply obtain a local licence without some form of registered presence.
6. Joint Ventures and Local Partnerships
Entering a formal joint venture or certain partnership structures with a local business may contractually require a local entity to be a co-signatory or shareholder. This is deal-specific rather than universal.
7. Restricted or Blacklisted Foreign Entities
In some jurisdictions, typically those with complex political or trade environments, foreign entities from certain countries may face restrictions, sanctions, or blacklisting that make doing business without a local vehicle impractical or impossible. This is an edge case for most Western businesses but relevant in specific markets.
The Permanent Establishment Question
Separately from whether an entity is required, businesses must be alert to the concept of Permanent Establishment (PE). A PE arises when a company's activities in a foreign country are sufficiently substantial that the host country claims the right to tax the profits generated there, even in the absence of a formal local entity.
Common PE triggers include:
- A fixed place of business (office, warehouse, workshop) used on a regular basis
- A dependent agent, typically a local sales representative, with authority to negotiate or sign contracts on the company's behalf
- Employees spending significant time (commonly 183+ days in a 12-month period) working in a country
The critical point: a PE can create corporate tax obligations, filing requirements, and compliance exposure regardless of whether you have a local entity. It is a tax concept, not a company law concept. Businesses operating cross-border without a local entity are not automatically protected from PE risk, in some cases they may have higher exposure.
If You Have an Entity, It Does Not Have to Be the Merchant of Record
This is one of the most misunderstood points in cross-border structuring. Businesses often assume that if they have set up a local entity, for banking, employment, or platform access, then all sales in that country must flow through that entity. This is not the case.
The decision about which entity acts as the Principal party to the transaction, otherwise known as the Merchant of Record (“MoR”), the legal entity that transacts with the end customer, issues invoices, and bears the commercial and tax obligations, is a separate structural choice.
For example, a UK company can sell to US customers in its own name, using its US entity purely for administrative purposes such as banking, payroll, or local supplier relationships.
Factors that might lead a business to make the local entity the MoR:
- Local tax incentives or a more favourable effective tax rate in the foreign jurisdiction
- Customer or regulatory preference for invoicing from a locally incorporated entity
- Operational simplicity where the majority of the business activity genuinely occurs locally
Factors that might support keeping the home entity as MoR:
- Simpler corporate structure and consolidated financials
- The home country tax position is more favourable
- The local entity exists purely to satisfy a platform or banking requirement
Where two entities within the same group are both active, one as MoR and one providing local services, intercompany arrangements become important. Transfer pricing rules require that any transactions between related entities (e.g., a service fee from the UK parent to the US subsidiary) are priced on arm's length terms, as if between unrelated parties. Supporting intercompany agreements and documentation should be put in place.
Key takeaway: The question of whether to set up a local entity, and the question of which entity should be your Merchant of Record, are two separate decisions. Either can be answered independently of the other. Get clear on what you actually need the entity to do before incorporating.
Practical Decision Framework
Before incorporating in a new market, work through these questions:
- Do you need a local bank account or to receive payouts in local currency through a local platform?
- Are you hiring employees directly, and if so, would an EOR be sufficient at this stage?
- Does your product require importation, and is a local importer of record required in this jurisdiction?
- Are your target platforms, warehouses, or suppliers requiring local entity status to onboard you?
- Are you operating in a regulated sector requiring a local licence?
- Have you assessed your Permanent Establishment exposure based on your actual activities and presence?
- If you do set up an entity, which entity will be your Merchant of Record, and what intercompany arrangements will you need?