Country Exit – Managed Wind-Down with a twist!

Let us indulge in the obvious (and a key definition) – a country exit will result in the complete exit of legal entity presence in a jurisdiction (otherwise it would not be a country exit!) – the absence of a surviving entity in-country provides us with the key differentiator to “traditional” legal entity rationalisation and other solvent restructuring initiatives.

Without a surviving entity, there is no home to continue the existing business and no employing entity for the staff. The lack of a surviving entity in country is the predominant reason why country exits throw up far greater complexities than “simple” in-country mergers/ integrations/ business transfers.

Let’s explore the key considerations for country exit, in more detail:

1. Domestic merger/ integration – not available
Often the simplest, fastest and most tax-efficient form of elimination is not available in a country exit scenario – after all, if you are exiting a country, you are removing all entity presence so a surviving entity to merge and integrate into is not available. In the absence of a merger option, the corporate will need to turn to (i) a full cross-border business/ asset transfer or (ii) a complete business wind-down in-country, both of which will be followed by liquidation. The tax implications on exit and costs of each route will need careful consideration before deciding on which is preferred.

2. Can be greater savings
Let’s consider the profile of entity in an exit country – first and foremost, the exit country is likely to be a non-core jurisdiction. Legal entities in these jurisdictions have usually been setup to service a specific customer requirement and/ or to try and service a specific market. Functional support and local compliance is often outsourced to in-country finance/ tax/ HR service providers – this inevitably results in a greater legal entity operating cost. These jurisdictions/ entities often have minimal Head Office focus, thus operate with a higher risk profile than larger entities in core jurisdictions. Even small entity country exits can generate tangible savings.

3. The complete wind-down…
No legal presence means no way of lifting and shifting contracts, assets, people from A to B – an exit solution is required for each and every asset, customer, individual
For example:

1. Fixed asset disposals often require valuations, marketing and third party in-country support to sell/ abandon – tax authorities in certain jurisdictions also demand evidence that assets have been sold or abandoned which can be onerous.
2. Customer contracts may be serviceable post-country exit (more on this below) but it is more likely that the majority of contracts will need an exit plan – larger contract wind-downs/ run-offs may require post-exit transitionary service agreements to be put in place to ensure smooth transition of services post-exit.
3. Whereas a TUPE (or equivalent) lift and shift of employees from A to B is possible in a traditional LER scenario, this is not possible for a country-exit – redundancy processes and costs will prove a focal point for any country exit decision making.

Traditional LER is generally industry/ sector agnostic – it gives little focus to the services being provided but far more on the ability to move them from A to B.

Under a country-exit scenario it may be possible to retain some in-country business where a customer is engaged at a global level and the services being provided do not require in-country presence to deliver. Remote services (call centres/ on-call technical advisory/ cloud-based data storage/ etc.) can often continue to be provided post-country exit although careful cross-border tax and FX consideration (especially where contracts are “in-country” or delivery is via local subcontractors/ suppliers) is required – tax and FX impacts are likely to be far less onerous in the EU/ Eurozone.

5. Local employee retention – possible?
Local jurisdiction employing entities (“staffing firms”) can be useful allies in supporting a country exit by providing a local employing entity – this moves the employer —> employee relationship to a third-party subcontractor relationship and could provide a solution to the “arms and legs” challenge that crystallises through country exit. Cost impacts can be considerable but this type of outsourcing approach can help to sustain key customer contracts where, for example, having “boots on the ground” in country is contractually stipulated.

6. Customer entanglement – small but big!
A non-core country may be a named country for service delivery in a global customer contract – non-core does not always mean unimportant. A non-core jurisdiction may be the reason why country presence exists in the first place and careful consideration should be given to customer impact both inside and outside of an exit country to ensure a small country exit does not crystallise a bigger problem elsewhere in the group.

7. Inbound/ outbound employee entanglement
Consider which contracts your in-country staff are supporting. Just because they are located in a country that is a small, perhaps a far-flung part of a global group, it does not mean they are not providing mission critical outbound services to customers elsewhere in the group. Similarly, the inbound employee entanglement may provide further opportunities to reduce headcount/ save cost where overseas employees are supporting exit-country business – corporates undertaking country exit work should carefully consider stranded costs to ensure exit savings/ benefits are not left on the table.

8. Communication sensitivities – develop a comms plan!
Again – often not a focal point for traditional LER – a shift of business from A to B in a typical merger/ business transfer scenario of course requires careful, well timed and clear communication/ consultation (in the case of employees). However, the sensitivities around the impacts and even the public relations messaging of country exits should be carefully considered. Not only are local employees likely to lose employment, but customers may be left without a supplier and what about the wider messaging this could give to the industry or market within which the company operates?

9. Divestment may be a simpler option
Not without its own complexities and possibly more of an option for larger country exits, but sale of the in-country entity could provide a faster, simpler exit route – one company’s unwanted “baggage” could be another company’s “treasure”.

10. Post-exit obligations can run and run…
In-country responsibility may not extinguish upon legal entity country exit. Most jurisdictions require corporates to maintain data, books and records long after an exit has concluded for legal/ tax purposes. Considerations for archiving within local laws is likely to be a crucial statutory requirement and prepayments for storage of records can be material.

Additionally, registered office addresses and local directors may also be required during the exit process – this may require local accountants/ legal advisors support with the inevitable cost implications.