Type Of Legal Entity, Tax Rates, Even City Can Impact Your Office Space Choice
By this stage you have chosen your country and the type of legal entity to house your activities. You are about to recruit and need office space. What considerations should you bear in mind in a foreign location?
Suitability Of Premises For Legal Entity Type
A number of countries, e.g. China, have restrictions on which premises can be used not just by the type of activity but also by the type of legal entity being set up. Before embarking on an extensive search and visit, therefore, it is wise to check for any such restrictions and obtain a list of offices that are approved for the type of legal entity.
Suitability Of Premises For Activity
The majority of countries will restrict the type of activity that can be carried on at a location. For example, are you setting up a regional headquarters there, a marketing and sales office, an office from where you will meet and service customers, one where you will demo products or a distribution facility?
Choice Of City
Once you have chosen the country, you will not necessarily set up in the capital which is likely to be the most expensive. For example, it may not be necessary to set up operations in Tokyo – you may well be able to operate from locations such as Osaka or Nagoya.
Tax Issues
You will have considered tax rates as part of your decision to choose between say Singapore and Hong Kong but it is important that having chosen a country, you review the local tax rates which may vary in different regions. Switzerland is a good example of this in Europe. In Asia, different states in India have differing rates of state taxes such as sales tax, professional tax and real estate taxes. You may also wish to check what taxes apply – for example in Canada, GST (Goods and Services Tax) will apply but some states also charge PST (Provincial Sales Tax) and some combine GST and PST into HST (Harmonized Sales Tax) and apply that rate.
Negotiating The Lease
The Document
This requires especial care because practice varies widely across countries. In some countries you may be given a simple two page document which you innocently sign, not realizing that there is a 100 page document backing that which is lodged as required at a Chamber of Commerce which also binds you. Many countries also have standard lease wording – this may be mandatory to use or negotiable.
Costs Of Improvements
If the premises need improvement, check local custom as to who pays for these. In most countries, the landlord will be expected to pay for improvements to the base building e.g. ceilings, HVAC, common areas etc. whereas you (the tenant) will be expected to pay for your specific requirements such as internal space configuration to create a kitchen for staff.
Foreign Businesses Often Lose Out On Incentives Simply Because They Were Never Aware Of Them
One can lose a lot of money by not checking into local practice on incentives – for example, how many rent free periods will the landlord give you, is there a furniture or improvement allowance you can negotiate with the landlord?
Broker Commission
If you have found the premises through a realtor, check local custom on how the broker is compensated. Is this the landlord’s responsibility, the tenants or joint? How flexible is local practice on the amount and split? When will the amount become payable?
Lawyers Costs
Legal fees – in general the landlord pays his/hers and you will pay yours as the tenant. If you are told it is your responsibility to pay both (!) do check into local custom as this is generally not normal.
Obligation To Restore The Premises When Ending Lease
In most countries, landlords insert clauses regarding the tenant’s obligation to restore the premises to the original state. However, many clauses we have reviewed are effectively a requirement to improve the premises for the landlord so this section of the lease will need careful review and negotiation. However, market awareness is essential – for example, in Argentina it is not the norm to require restoration to original state.
Security Deposits And Guarantees
The amount of security deposit varies widely so it is very important to review this. Some landlords will seek to charge a foreign based enterprise or a startup business more than a local one on the grounds that it is harder to recover damages in the event there is a problem. In some countries, such as Brazil or Columbia the landlord may well request a bank guarantee as security.
Right To Sublet
In an economic downturn, you may end up with unwanted space – or you may want to take additional space right now – to fit in with your expansion plans. To have flexibility over the years, most tenants want a right to sublet which, however, will need careful negotiation. For example, instead of allowing you to sublet, the landlord may wish to have first refusal to take the space himself/herself so that he can let it again himself on his/her terms. He/she may wish to restrict the type or number of subtenants. This is an area where the skill of negotiation will get you the best terms!
To allow for future expansion, many tenants will want to check what available space may become free or what additional accommodation the landlord may build. If there is such space, it is often possible to negotiate a right of first refusal on pre-agreed terms.
Landlord Late In Giving Occupation
Make sure you get the best terms here as late occupation may affect your business. Some locations have stiff penalties typical of that location such as 1 month’s rent lost for each day of late occupation. As long as you are aware of such norms and incorporate them, it gives the landlord a significant incentive to get the premises ready on time!
Termination Of Lease
Other than standard termination by lapse of time, the lease should contain other provisions for termination such as the building being damaged and being uninhabitable. It is normal in such cases for no rent to be payable during the period of disuse or for the lease to terminate with no further rental payments being due. However, many tenants forget to check that all other charges such as service charges also become non-payable.
Language Of Lease
In some countries, the lease must be in local language – e.g. in Brazil. It is the lease terms in local language that will prevail in the event of any dispute so it is essential to fully understand them.
These are general guidelines – certain countries like France are very specialized – for more information on your specific country or situation, please connect with us.