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I'm working with a startup in a country where laws are loose at best. After reviewing the privacy laws that bind us by doing business in this country, there seem to be an endless amount of ways that we could be in violation without any malicious intent because of the vagueness of the language.

My idea to pitch to my partners is to set up the company in a country where laws are more explicit and the legal system is robust which holds all of our assets, processes payments, and where all the ownership lies, then use a local pass-through entity in the country we are targeting that has all of the liabilities of handling the sensitive information, but with which we are not technically affiliated.

Given this situation, is such an arrangement viable from a legal perspective in terms of protecting our assets and ourselves from liabilities and litigation?

EDIT Feb 19, 2018

Great answers and responses. Given me a great deal to think about.

Just a few points of clarification:

  • In the future our business will likely expand to markets other than "A", however, that is likely many years in the future. This consideration could render the question moot I suppose.

  • Since "B" is a purely hypothetical, my first choice was Singapore.

  • The legal system in "A" is fundamentally corrupt, its really just a contest of who has the most resources/connections.

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    Sure, you can setup a business entity that way; but it's far too broad a question to cover here, and you need a law firm to advise you of all the details, not people in a Q&A.
    – BlueDogRanch
    Commented Feb 16, 2018 at 15:15
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    Go pay for a lawyer who specializes in the country's privacy law and ask them for advice.
    – Kevin
    Commented Feb 17, 2018 at 4:24
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    Setting this up requires a lawyer - probably even 2: 1 for each country. I suggest asking that same lawyer(s) if it makes sense. The actual answer will differ significantly based on the kind of business and the actual countries involved. It's also necessary to consider the risk of laws getting changed.
    – Peter
    Commented Feb 18, 2018 at 13:16

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Okay, let's call the "country where laws are loose at best" A, and the "country where laws are more explicit and the legal system is robust" B.

The answer pretty much depends on whether you mostly do business in A or not.

No matter what country B your business is domiciled in, if you do business (have customers) in country A, you won't be protected from litigation in that country. Noone of your adversaries in A would say "Hmmm, they're from B, we can't sue them here in A". If they can't get you in B, they will at least be able to ban you from A.

In most countries, if your business is present physically — offices, physical stores etc. — those need to belong to your entity registered in that country. You cannot have a food supermarket in the EU directly owned by a US company — it needs to be owned by an entity registered in the EU (which in turn can be owned by the US company though). If your business is purely online then you could get away without a local entity — but only until you become noticeable: Google, PayPal etc. all have entities in Europe and those are the targets for any litigation coming from Europe.

It is true though that having your assets registered in B would require your adversaries in A to litigate in B to get hold of your assets (unless they are present in A physically; it is not uncommon for two states in confrontation to arrest each other's property).

Bottom line:

  • if your customers are mostly/entirely in A, then having your business domiciled in B can only be justified if there are assets that can stay outside A without adversely affecting the business (e.g. intellectual property)
  • if your customers can be anywhere then definitely chose B to domicile your business.
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    Having your assets present in separate country from the one in which you are sued does not guarantee the safety of your assets. The recognition and enforcement of foreign judgments is typically something determined by local law as well as international comity and reciprocity. More simply, if the countries like eachother, they're more likely to enforce one another's court judgments. You'd want to consult counsel in both jurisdictions. Also, if your customers are everywhere, B doesn't help you, you can be sued where you target. This is an American-POV, which furthers the point to call a lawyer.
    – A.fm.
    Commented Feb 18, 2018 at 9:22
  • @A.fm. "if the countries like each other" — that is the key. Though the OP does not explicitly say the two countries do not like each other, I assume they are at least not allies as their approach to law differs significantly.
    – Greendrake
    Commented Feb 18, 2018 at 9:31
  • Well, there will generally be enforcement where the foreign court can see that the issuing court had proper jurisdiction over the parties, whether the defendant had notice, whether or not the proceedings were subject to corruption/and where the judgment isn't repugnant to the public policy of the enforcing jurisdiction. Judgments without punitive damages and/or multiple damages are the safest bets for enforcement, too. The legal systems can differ drastically yet still achieve that standard.
    – A.fm.
    Commented Feb 18, 2018 at 9:37
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    The "like eachother" was a simplification of the concepts of international comity and reciprocity. The latter is self explanatory, the former is the general sense that a foreign country will not interfere with the inner workings of another. Thus, an objectively fairly dealt judgment will likely be upheld if it is deemed fair by the standards of the country being asked to enforce it. Sometimes, due to domestic requirements re: notice or other topic, one may need to file formal proceedings in the enforcing country, too.
    – A.fm.
    Commented Feb 18, 2018 at 9:41
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    And if you setup your business in B where you are safe from litigation, potential customers will know that they can't sue you successfully, and as a result will be very resistant to doing business with you. And if your bicycle shop made itself safe from litigation, then the bicycle shop next door might sue you in some countries for unfair competition, or for misleading consumers, if you don't tell your customers very loudly.
    – gnasher729
    Commented Feb 18, 2018 at 12:01

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