When Does an IT Business Need a Local Legal Entity in a New Market? Part 1

Not every new market requires a new company

International expansion often starts with one question:

“Where should we incorporate?”

But that question may be premature.

The fact that a company has customers in another country does not automatically mean it needs a separate local legal entity.

A business may sell SaaS, provide IT services, sign contracts with foreign customers and receive payments from abroad while remaining incorporated in its home country.

The picture changes when the business starts building a physical or economic presence in the new market.

Local employees, an office, an agent, a sales team, government contracts or regulated activities can create an entirely different legal situation.

So the better question is not:

“Do we need a company?”

It is:

“What level of presence do we actually need?”

1. Direct sales: when you can enter without a local company

The simplest model is to sell products or services through an existing company.

Imagine a Ukrainian IT company launching a SaaS product and starting to sell it to customers in Kazakhstan.

The customers are in Kazakhstan.

But:

• the company is incorporated in Ukraine;
• the team works from Ukraine and other countries;
• contracts are signed with the Ukrainian company;
• payments go to the Ukrainian company;
• there is no local office.

In such a model, a separate Kazakh legal entity may not be necessary.

That does not mean local law can be ignored.

The company still needs to assess:

• tax implications;
• VAT and other indirect taxes;
• digital services rules;
• data protection;
• consumer protection;
• licensing;
• advertising;
• Permanent Establishment.

In other words:

No local legal entity does not mean no local compliance.

2. When does a business need a local presence?

The need for a local structure usually arises not from the existence of sales itself, but from the nature of the company's activities.

For example, the company:

• hires local employees;
• opens an office;
• builds a local sales team;
• signs contracts through local representatives;
• participates in government procurement;
• operates in a regulated sector;
• maintains local infrastructure;
• wants to contract with customers through a local entity;
• plans to attract local investors;
• intends to build a long-term operational presence.

At that point, simply selling from the Ukrainian company may no longer be the most efficient model.

3. Subsidiary: a separate local company

One of the most common structures is a subsidiary.

For example:

Ukrainian Parent

↓

Local Subsidiary

↓

Local employees / customers / partners

A subsidiary is a separate legal entity.

It can make sense if the business plans to:

• operate in the market on a long-term basis;
• hire a local team;
• enter into a significant number of local contracts;
• attract local financing;
• work with major corporate or government customers.

But a subsidiary also creates additional costs:

• incorporation;
• accounting;
• tax reporting;
• corporate administration;
• local compliance;
• banking;
• potentially audits or special licences.

That is why incorporating “just in case” rarely makes sense.

4. Branch: a local presence without a separate legal entity

Another option is a branch.

Unlike a subsidiary, a branch is generally not a separate legal entity from its parent company.

This can be useful when a business wants a formal local presence without creating a separate corporate entity.

But the legal consequences of a branch vary significantly from country to country.

Different jurisdictions may impose different requirements concerning:

• registration;
• taxation;
• permitted activities;
• local representatives;
• parent company liability;
• reporting.

A branch should therefore not be treated as a universally “simpler version” of a subsidiary.

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Contact us: business@avitar.legal