The main principles of international business law: from sales to the taxation of international business

Are you developing your business internationally — exporting products, providing advice to a foreign client, creating a subsidiary in another country — and are you wondering about the legal framework that governs your operations? You are right to do that. International business law is a subject that is both fascinating and challenging in its complexity.

At the crossroads of commercial law, private international law, tax law and company law, this discipline covers all international trade operations : the sale of goods across borders, the negotiation and execution of international contracts, the determination of the applicable law in the event of a dispute, the settlement of disputes through arbitration, and the taxation of cross-border transactions.

The purpose of this guide is to offer you a panoramic and accessible vision the main principles that structure international business law. It is aimed at managers, executives and decision-makers who want to understand the legal challenges of their international transactions — without, however, substituting for the case-by-case analysis that each situation requires.

What is international business law?

A subject at the crossroads of several disciplines

International business law — sometimes referred to as “international business law” or “international trade law” — can be defined as the set of rules that apply to international trade operators and transactions. This definition, which is deliberately broad, covers a plural reality.

This subject involves several branches of law: commercial law and contract law, of course, but also private international law (which determines the applicable law and the competent jurisdiction), company law (for establishment abroad), international payment law, international payment law, customs law and international taxation.

What characterizes international business law is the diversity of its sources. Unlike purely national subjects, the practitioner must navigate between the national laws of the various countries concerned, international conventions (Vienna Convention, Hague Conventions, OECD model), European regulations (Rome I, Brussels I bis), the uses of international trade (the famous Lex Mercatoria), the rules enacted by private organizations (ICC, UNCITRAL, UNIDROIT) and the general principles of transnational law.

The internationality criterion: when does a contract become “international”?

A contract is qualified as international when it presents elements of connection with several legal orders. This may result from the fact that the parties are established in different countries, that the object of the contract must cross a border, that the provision of services is performed in a country other than that of the provider, or that the payment transits through several national banking systems.

Concrete example : A French cosmetics company enters into an exclusive distribution contract with a Brazilian partner for the marketing of its products in South America. This contract is international in the sense that it connects two parties established in separate countries, involves the export of goods and raises questions of applicable law, competent jurisdiction and cross-border taxation.

The qualification of internationality is not a simple theoretical exercise: it determines the applicable legal regime to the transaction, the potentially competent jurisdictions and the fiscal and customs obligations of the parties.

The international sale of goods: the Vienna Convention (CISG)

A fundamental instrument for global trade

La United Nations Convention on Contracts for the International Sale of Goods (CISG), signed in Vienna on 11 April 1980 and entered into force on 1 January 1988, is the founding text of international sales law. It was ratified by 97 states which account for more than three quarters of global trade, including France, Germany, the United States, China and most major economies.

The CISG aims to provide a legal regime modern, uniform and balanced for contracts for the international sale of goods. It establishes substantive rules that are directly applicable — that is, it does not simply designate an applicable national law, but it itself provides the substantive rules that govern the sales contract.

The scope of application of the CISG

The Convention applies to contracts for the sale of goods concluded between parties whose places of business are in different Contracting States (article 1). It also applies when the rules of private international law designate the law of a Contracting State as applicable to the contract.

Several sales categories are excluded of its scope of application: sales to consumers (purchases for personal, family or domestic use), auctions, sales by judicial seizure, sales of securities, ships, ships, aircraft and electricity. The CISG therefore only concerns sales between professionals (B to B).

An essential point deserves to be emphasized: the Convention has a suppletive character. Article 6 provides that the parties may expressly exclude its application or derogate from any of its provisions. This contractual freedom is a pillar of international trade.

Concrete example : A French company sells industrial equipment to a Japanese company. Since both countries have ratified the CISG, the Convention automatically applies to the contract, unless the parties have expressly stipulated an exclusion clause — for example: “The parties agree to exclude the application of the CISG. This contract is governed by French law.”

The obligations of the seller and the buyer

The third part of the Convention — the most substantial — defines the respective obligations of the parties.

The vendor has three main obligations: deliver the goods in accordance with the terms of the contract, transfer ownership goods and, where appropriate, hand over the documents related to it (article 30). The concept of conformity of goods is central: the seller must deliver goods whose quantity, quality and type correspond to what is provided for in the contract (article 35). The purchaser must examine the goods in a as short a time as possible and report any lack of conformity within a reasonable time, otherwise you will lose the right to rely on it (article 39).

THEshopper, for its part, has two fundamental obligations: Pay the price and Take delivery goods (article 53).

Penalties for non-compliance

In the event of a contractual breach, the CISG provides for an arsenal of sanctions balanced between the interests of the seller and those of the buyer. Both parties can claim Execution in kind, to damages (sections 45 and 61), to the resolution of the contract in the case of an essential violation (sections 49 and 64), or to the price reduction (section 50).

The concept of essential violation (article 25) is a key concept: it allows for the unilateral resolution of the contract when the breach causes such harm that it substantially deprives the other party of what it was entitled to expect from the contract.

The Convention also provides for an original mechanism forexemption due to impediment (article 79), which relieves some of its liability when the non-performance results from an event beyond its control, unforeseeable and insurmountable — a concept similar to, but not identical to, force majeure in French law.

Concrete example : An Italian manufacturer delivers machine tools to a Canadian buyer. The machines have a lack of conformity making their use impossible for the intended industrial use. The buyer, after reporting the defect within a reasonable time, may request the delivery of replacement goods (essential violation), repair, price reduction or damages — depending on the seriousness of the breach.

Incoterms: the distribution of risks and costs in international sales

What is an Incoterm?

Les Incoterms (contraction ofInternational Commercial Terms) are international trade rules published by the International Chamber of Commerce (CCI). Revised every ten years to reflect changes in business practices, they are currently in their version Incoterms 2020, in force since January 1, 2020.

Incoterms fulfill three essential functions in an international sales contract: they determine the reciprocal obligations of the seller and the buyer in terms of transport and customs formalities, they set the Risk transfer point (i.e. the moment from which the buyer bears the risks of loss or deterioration of the goods) and they distribute the transport costs between the parties.

An often overlooked point: Incoterms do not define the time of transfer of ownership, which falls under the law applicable to the contract. They only concern the transfer of risks associated with transport.

The 11 Incoterms 2020

The Incoterms 2020 consist of 11 rules divided into two categories:

Les 7 Multimodal Incoterms (usable for any mode of transport): EXW (at the factory — minimum obligations of the seller), FCA (Franco-carrier), CPT (postage paid up to), CIP (postage paid, insurance included, up to), DAP (returned to the place of destination), DPU (returned to the place of destination, unloaded) and DDP (returned duties paid — maximum obligations of the seller).

Les 4 Maritime Incoterms (reserved for transport by sea or inland waterway): FAS (free along the ship), FOB (free on board), CFR (cost and freight) and CIF (cost, insurance and freight).

Concrete example : A French SME exports wine to a New York importer using Incoterm CIF New York. The French seller organizes and pays for maritime transport from the port of Bordeaux to New York, takes out transport insurance covering at least the price of the goods plus 10%, and completes export formalities. However, the transfer of risks takes place at the moment when the goods are loaded on board the ship in Bordeaux. If the ship is wrecked in the middle of the Atlantic, it is the insurance taken out by the seller that will compensate the purchaser — but the risk was transferred as soon as boarding.

The strategic choice of Incoterm

The choice of Incoterm is not trivial: it has direct repercussions on the sale price, on the logistical obligations of each party, on customs formalities, on the customs value of imported goods, on insurance and even on the terms of payment (in particular in the context of a documentary credit).

A French seller wishing to maintain control of its supply chain will prefer a Group C or D Incoterm. Conversely, a buyer who has an efficient logistics network may prefer a Group E or F Incoterm to negotiate its own transport conditions.

Determining the law applicable to the international contract: the Rome I Regulation

The fundamental principle: the autonomy of the will

When a contract is international in nature, a crucial question arises: What national law regulates this contract ? The formation of the contract, its interpretation, its execution, the consequences of non-performance — all these questions depend on the applicable law.

Within the European Union, the answer is provided by the Regulation (EC) No 593/2008 of 17 June 2008, commonly known as Rome I regulation, which applies to all contracts concluded on or after 17 December 2009 and involving an external element in civil and commercial matters.

The cardinal principle of the Rome I Regulation is that ofautonomy of the will of the parties, enshrined in its article 3: the contract is governed by the law chosen by the parties. This choice may be express (clause of applicable law inserted in the contract) or tacit, resulting certainly from the provisions of the contract or the circumstances of the case.

The parties enjoy a almost total freedom in the choice of applicable law. They may refer to the law of a Member State or that of a third State, even if that law has no objective link with the contract. They can also “break up” the contract by subjecting different parts of the contract to different laws, and modify the applicable law after the conclusion of the contract.

Concrete example : A French company and a Singaporean company conclude a contract for the distribution of technological products. They agree to subject their contract to English law, which is known for its predictability in commercial matters, although none of the parties are British. This choice is perfectly valid under the Rome I Regulation.

Linkages in the absence of choice

When the parties have not chosen the applicable law — a situation that is more frequent than one might think in practice — article 4 of the Rome I Regulation provides for objective connections which vary according to the nature of the contract.

For a contract for the sale of goods, the applicable law is that of the country in which the seller has his usual residence. For a contract for the provision of services, it is the law of the country of the provider's usual residence. For a franchise agreement, it is the law of the franchisee's country of usual residence. For a distribution contract, it is the law of the distributor's country of usual residence.

If the contract does not fall into any of these categories, or if it falls under several, the applicable law is that of the country of usual residence of the party providing the characteristic service of the contract. Finally, if the contract has clearly closer links with another country, the judge can apply the law of that country as an exception clause.

The limits to the autonomy of the will: police laws and public order

However, freedom of choice is not absolute. The Rome I Regulation provides for two essential corrective mechanisms.

Les Police laws (article 9) are mandatory provisions whose compliance is considered crucial by a country for the protection of its public interests. They apply regardless of the law chosen by the parties. The forum judge can apply his own police laws, and he can also give effect to the police laws of the country in which the obligations arising from the contract are to be performed.

THEinternational public policy exception (article 21) allows the judge to rule out the application of a provision of the designated foreign law if such application is “clearly incompatible with the public policy of the forum”.

Concrete example : An international employment contract subject to the law of a third country that does not provide any minimum protection for the employee may see some of its stipulations set aside in favor of French police laws that protect the employee, if the employee usually performs his work in France.

International arbitration: the preferred method of settling commercial disputes

Why arbitration has come to the fore in international trade

International commercial arbitration has become the Common law resolution mode international trade disputes. When a dispute arises between two companies of different nationalities, recourse to state courts — which are those of a single country — raises considerable difficulties: which jurisdiction is competent? Will the decision be recognized and enforced in the other country? Does the judge master the uses of international trade?

Arbitration offers an elegant response to these challenges. It features several decisive advantages for international trade operators.

La neutrality : the parties are not obliged to plead before the courts of one of them. They choose the arbitrators together, who are generally neither of the nationality of the parties nor of the nationality of the law applicable to the contract.

La confidentiality : unlike public court procedures, arbitration takes place behind closed doors, which can be decisive for companies that want to protect their trade secrets.

THEexpertise : arbitrators are chosen because of their expertise in the field concerned (trade, finance, construction, intellectual property, etc.), which guarantees a thorough understanding of the economic issues of the dispute.

THEinternational execution : thanks to the New York Convention of 10 June 1958 for the recognition and enforcement of foreign arbitral awards, ratified by more than 170 states, an arbitral award is enforceable virtually all over the world — which is not the case with state judgments.

The arbitration clause: a contractual imperative

For arbitration to apply, the parties must have Consent to this method of payment by the insertion of a arbitration clause in their contract. In principle, this clause refers to the seat of the arbitration, the number of arbitrators, the language of the proceedings and the arbitration institution possibly chosen.

The ICC (International Chamber of Commerce) in Paris is one of the most renowned arbitration institutions in the world. Other major centers include the LCIA (London Court of International Arbitration), the SIAC (Singapore International Arbitration Centre) and the CRCICA (Cairo).

Example of an arbitration clause (ICC model clause): “Any disputes arising out of or in connection with this contract will be definitively settled according to the Arbitration Rules of the International Chamber of Commerce by one or more arbitrators appointed in accordance with these Rules.”

Concrete example : A French construction company wins a contract to build a hotel complex in Côte d'Ivoire. A dispute arises with the Ivorian project owner over the respect of deadlines and the quality of the work. Thanks to the arbitration clause provided for in the contract, the dispute is submitted to an ICC arbitration tribunal sitting in Paris, composed of three arbitrators of different nationalities, ruling in accordance with Ivorian law chosen by the parties.

Sources of international trade law: lex mercatoria and uses

Lex Mercatoria: a law without borders

La Lex Mercatoria — literally, the “law of merchants” — refers to the set of rules of law based on custom and uses of international trade. It is a normative corpus that has developed independently, on the fringes of national laws, to meet the specific needs of international trade actors.

Lex mercatoria occurs in several ways: professional uses recognized in a given sector (for example, the uses of maritime trade or raw materials), general principles of international trade law (good faith, pacta sunt servanda, prohibition of abuse of rights), private codifications such as UNIDROIT principles relating to international commercial contracts, and standard contracts developed by CCI or other professional organizations.

The Vienna Convention itself recognizes the force of uses: Article 9 provides that the parties are bound by the uses to which they have consented and by the habits that have been established between them.

The UNIDROIT Principles: a model law

Les UNIDROIT principles relating to international commercial contracts, published for the first time in 1994 and regularly updated, constitute a doctrinal codification of international trade rules. They are not binding as such, but they are frequently used as interpretative reference by arbitral tribunals and national judges, and the parties may choose them as the law applicable to their contract.

These principles cover the entire life cycle of the contract: formation, validity, interpretation, content, execution, non-performance and its remedies. They are a valuable tool for practitioners who negotiate international contracts, especially when the parties wish to avoid the particularities of a given national law.

CCI standard contracts: a practical tool

The International Chamber of Commerce has also developed a series of standard contracts (or model contracts) intended to facilitate the practice of international trade. These models, developed by international experts, cover many situations: international sales, commercial agency, franchise, distribution, brand license, joint venture, subcontracting, subcontracting, technology transfer or even confidentiality agreements.

These standard contracts are not mandatory standards: they constitute reference models that the parties can adapt to their specific needs. They offer a double advantage for SMEs and ETIs who do not necessarily have a specialized legal department: they offer a solid and balanced drafting base, and they incorporate the best practices of international trade.

Concrete example : A French SME wants to appoint a commercial agent in West Africa. Rather than drafting a contract ex nihilo, it can rely on the ICC's model international agency contract, which provides for the essential clauses (territory, exclusivity, commission, non-competition obligation, duration, termination) in accordance with the customs of international trade.

International business taxation: fundamental principles

The risk of double taxation

When a company operates in several countries — whether selling goods, providing services, collecting royalties or holding shares in foreign companies — it is exposed to the risk of international double taxation. This risk arises when two states simultaneously consider that they are entitled to tax the same income.

Double taxation can occur in two main hypotheses: either two states consider that a taxpayer is tax resident in their respective territory (residence conflict), or a taxpayer is a resident of a State but earns income including the stream is located in another state (source/residence duality).

Concrete example : A French company opens a sales office in Germany. The profits generated by this office are potentially taxable in Germany (country of source, where the activity is carried out) and in France (country of residence of the company). Without a corrective mechanism, these same benefits would be taxed twice.

International tax treaties: the OECD model

To prevent double taxation, states conclude bilateral tax treaties. The global network now has more than 3,000 such agreements, the vast majority of which are based on the model developed by theOECD (Organization for Economic Cooperation and Development), first published in 1963 and updated regularly.

These tax treaties serve three essential functions: they distribute the right to tax between the State of residence and the State of source for each category of income (business profits, dividends, interests, royalties, capital gains, etc.), they provide for mechanisms for the elimination of double taxation (tax exemption or tax credit method) and they organize a administrative cooperation between states to combat tax evasion and tax evasion.

The general principle is as follows: profits of a business of a State are taxable only in that State, unless the company carries on business in the other State through a permanent establishment which is located there. In this case, the profits attributable to the permanent establishment are taxable in the State in which it is located.

The concept of permanent establishment

THEpermanent establishment is a central concept in international taxation. It is defined by the OECD model as a fixed business facility through which an enterprise carries out all or part of its business. Classic examples include a management office, branch, office, office, office, office, factory, factory, workshop, mine, or construction site (the latter being a permanent establishment if it lasts longer than twelve months).

The permanent establishment may also result from the intervention of a dependent agent : if a foreign company employs a person in a country who has the authority to negotiate and conclude contracts on its behalf, this presence may characterize a permanent establishment, even in the absence of a physical establishment.

The recognition of a permanent establishment has direct fiscal consequences : the company becomes subject to corporate tax in the country concerned for the profits attributable to this establishment. There, it must meet specific reporting and accounting obligations.

Concrete example : A French software startup sends a salesperson permanently residing in Milan to approach Italian customers and conclude license agreements on behalf of the French company. This commercial is a dependent agent that can characterize a permanent establishment in Italy, making the French company taxable on the profits generated by this commercial activity in Italy.

Transfer pricing: a major challenge for international groups

Les transfer pricing refer to the prices at which companies in the same international group charge for goods, services or intellectual property rights exchanged between them. The problem is as follows: by manipulating these prices, a group could theoretically artificially transfer its profits to countries with advantageous taxation.

To prevent these practices, tax rules require compliance with Principle of full competition (Arm's Length Principle): transactions between affiliated companies must be carried out under the same conditions as those that would have been agreed between independent companies in comparable circumstances.

Businesses must constitute a documenting justifying their transfer pricing policy, including a main file (Master file), a local file (Local file) and, for large groups, a country-by-country statement (Country-by-Country Reporting). In France, article 57 of the CGI imposes strict obligations in this area, and non-compliant transfer pricing adjustments are one of the most frequent reasons for correction in international tax audits.

The BEPS project and OECD Pillars 1 and 2

International trade has been profoundly affected in recent years by the BEPS project (Base Erosion and Profit Shifting) of the OECD and the G20, which aims to combat the erosion of the tax base and the transfer of profits by multinational companies.

This project resulted in the adoption of a Multilateral Convention signed in 2017 and entered into force in 2019, which allows states to simultaneously modify their bilateral tax treaties to incorporate anti-abuse measures developed under the BEPS project.

More recently, the work of the OECD has led to the establishment of two “pillars”: the Pillar 1, which aims to reallocate part of the profits of the largest multinational companies to the countries where their customers and users are located, and the Pillar 2, which establishes a 15% global minimum tax rate for groups whose consolidated turnover exceeds 750 million euros. The latter is already being transposed in many countries, including France.

VAT in international trade: an essential reminder

La value added tax is a specific challenge in international commercial transactions, whether it is the sale of goods or the provision of services. The rules on the territoriality of VAT, derived from European directive 2006/112/EC and transposed into French law in articles 259 and following of the CGI, determine In which country is VAT due and By whom it must be acquitted.

For the provision of services between professionals (B to B), the general principle is that of taxation at the place of establishment of the lessee (article 259-1° of the CGI). The French service provider invoices without taxes and the foreign customer autopays the VAT in his own country. For the deliveries of goods, it is the place of delivery and transport that determines the applicable VAT, with specific regimes for intra-community deliveries and exports.

International VAT errors — undue invoicing of French VAT, omission of mandatory information, lack of a European Declaration of Services — are among the most frequent and the most expensive in the event of a tax audit.

The importance of legal advice in international business law

International business law is, by nature, a subject of considerable complexity. The relationship between international agreements, European regulations, national laws, national laws, professional practices and tax regulations requires a rigorous analysis of each transaction. The financial stakes are often significant, and the consequences of an error — tax adjustment, invalidity of a clause, sanctioned non-performance, unfavorable arbitration award — can be severe.

So it is strongly recommended to seek the advice of a specialized lawyer in international business law to structure your transactions, draft and negotiate your international contracts, secure your transfer pricing policy, anticipate the risks associated with permanent establishment and defend your interests in the context of cross-border arbitration or litigation. The intervention of a legal professional prior to the transaction makes it possible to avoid pitfalls that are often irreversible.

FAQ: the most frequently asked questions about international business law

What are the main sources of international business law?

International business law is characterized by the plurality of its sources. A distinction is made between state sources (national laws of the countries concerned by the transaction), international conventional sources (Vienna Convention, Hague Conventions, OECD tax treaty model), European sources (Rome I Regulation on applicable law, Brussels I bis Regulation on judicial jurisdiction), institutional sources (ICC rules, UNIDROIT principles, UNCITRAL model laws) and private and customary sources (lex mercatoria, professional uses, standard contracts).

Does the Vienna Convention automatically apply to an international sale?

The CISG applies By right to contracts for the sale of goods concluded between parties established in different Contracting States, without the need to mention it in the contract. However, the parties mayexpressly exclude in accordance with its article 6. If you do not want the CISG to govern your contract, it is essential to stipulate an explicit exclusion clause. Conversely, parties may choose to implement it even when their states have not ratified it.

How to choose the law applicable to an international contract?

The Rome I regulation enshrines the principle of the autonomy of the will: the parties are free to choose the law applicable to their contract. It is recommended to insert a applicable law clause clear and unambiguous in the contract. In the absence of a choice, the Rome I Regulation provides for objective connections that vary according to the nature of the contract (residence of the seller, the service provider, the franchisee, etc.). The choice of applicable law must be consistent with the jurisdiction or arbitration clause.

What are the advantages of arbitration compared to state courts for an international dispute?

Arbitration offers several major advantages: neutrality of the court (the arbitrators are chosen by the parties), the confidentiality of the procedure, theexpertise arbitrators in the field concerned, the rapidity relative of the procedure, and especially theinternational execution of the sentence thanks to the 1958 New York Convention. Arbitration also avoids the difficulties associated with the enforcement of foreign judgments, which are often subject to long and uncertain exequatur procedures.

How can a business avoid international double taxation?

Double taxation is avoided thanks to bilateral tax treaties concluded between States, which distribute the right to tax and provide for elimination mechanisms (tax exemption or credit). Businesses should carefully analyze the applicable agreement, identify the possible existence of a permanent establishment, comply with transfer pricing rules, and assemble the required documentation. In the event of effective double taxation, the amicable procedure provided for in the conventions makes it possible to ask the competent authorities of both States to find a solution.

What is an Incoterm and how do I choose one?

One Incoterm is a commercial term standardized by the CCI that defines the distribution of costs, risks, and logistical obligations between the seller and the buyer in an international sale of goods. The choice of Incoterm should be guided by the nature of the goods, the mode of transport, the degree of logistical control of each party and the constraints related to customs formalities and the financing of the operation. Incoterms 2020 includes 11 rules that are universal in scope.

Article written by Guillaume Leclerc, business lawyer in Paris, 34 Avenue des Champs-Elysées

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