The 2022 Easiest & Most Complex Countries to do Business
(The Hague, 23.09.2022) Like every year, TMF Group published in July 2022 the updated 2022 Global Business Complexity Index – Paths to grow: navigating the complexities of doing business across borders.
TMF analyzed a total sample of 77 jurisdictions corresponding to 92% of the world GDP and 95% of net FDI inflow. This analysis is conducted with a transparent methodology, focusing on 292 different indicators which all relate to the overall business complexity. The report provides deep dives into domestic and international challenges which may impact the ease of business globally. This year the focus is on three themes, each of which take an active part in shaping contemporary business complexity. These are:
Emerging from Covid-19
Simplification: Drivers and barriers
The rise of Environmental, Social and Governance (ESG) Policies
Emerging from Covid-19
Measures introduced to assist local businesses with overcoming Covid-19 in previous years have oftentimes been reversed, causing short term complexity for businesses. However, a more positive by-product is that 2022 sees a larger role of effect on the global vs local forces that act on businesses, particularly in regard to digitalization Due to many countries worldwide feeling pressured to adjust their approach to digitalization, this field has seen rapid acceleration across the board. This also impacts the way businesses in different jurisdictions around the globe can operate.
Flexible working as aftermath of the pandemic
A core long-term shift in working patterns birthed by the pandemic is that of flexible working. Many governments at the height of the pandemic forced a shut down of offices, causing many employees to have to work from home and spurring many individuals to venture into the field of entrepreneurship and forming businesses. With the re-opening of offices globally, a trend that many evaluated jurisdictions have adopted is remote working (31% of jurisdictions). Having shown that a remote workforce can indeed be effective, businesses have recognized the potential for cost savings and hence identified the advantage to offer their employees flexible working arrangements so that they can not only effectively retain their existing workforce, but also bring in new talent.
The shift to internationalized regulations
In most jurisdictions, the pandemic had prompted relaxation regarding the requirement of company directors to be a local resident. In 2020, this loosening of regulation was the case in 69% of the jurisdictions. In 2021, this number rose to 74%, meaning less jurisdictions required a local resident as company director. In 2022, however, the trend has regressed back to its 2020 numbers. This means nearly one third of studied jurisdictions do require a local resident to be a company director.
Simplification: drivers and barriers
Simplicity of conducting business forms an overarching factor of importance in a complexity ranking. Hence, by examining historic data as well as 2022 data, several common characteristics (= drivers of simplicity) were identified. These drivers are:
Political, social and economic stability
Digital literacy
Open and defined laws and legislation
International alignment
In tandem, these drivers assist a jurisdiction in being more business friendly and it is generally found that jurisdictions lacking these drivers are more complex to do business in.
The Stability Triangle: Political, Social, Economic
Over the past two or three years, globally impactful events such as the geopolitical tension between China and the US, the Russian invasion of Ukraine as well as the Covid-19 pandemic have impacted the global political, social, and economic environment of the world, resulting in a rise in uncertainty.
The level of certainty regarding political stability has drastically dropped, with TMF citing that compared to the 60% of South American experts predicting a stable political environment in the next 5 years in 2020, a mere 30% remain of the same view in 2022. Several jurisdictions within South America face or have been facing major changes in electoral landscape. For instance, Peru with its July 2021 election of President Pedro Castillo, the 2022 Colombian election or the Chilean aim to rewrite its constitution (which was later voted against), changed the business landscape and increased uncertainty in the field of business. However, lack of economic stability caused uncertainty at much larger levels than the political. Global inflationary pressures following both the Covid-19 pandemic and important geopolitical events is not just looming ahead but becoming more and more eminent as time goes on. Social stability forms the third aspect of stability in the analysis of simplified business procedures. Overall, TMF observed a predicted drop in social stability, mainly driven by the South American and EMEA regions. Some jurisdictions in the EMEA predicting less stability than before, are: Greece, Czech Republic, Ukraine, Turkey, Italy, Poland and Hungary.
Digital literacy
The study’s assessment of digital literacy shows an overall increase across the jurisdictions. Said countries turn to technology specially to make their jurisdictions more inviting and less complex to foreign businesses or investors. In several cases, the Covid-19 pandemic also drastically pushed digitalization and technological advances assisting the ease of business. In the span of two years, for example, the jurisdictions in which authorities are automatically notified of an incorporation has risen by 10%, easing administrative procedures immensely. Compared to the 38% of analyzed jurisdictions requiring electronic tax invoicing in 2020, this number rose to 51% in 2022.
Net Compulsory Tax invoices, TMF Study 2022, Page 13
Transparent Regulation in place
The general understanding with transparent regulation is that open and clear legislation without room for interpretation assures a simpler environment for businesses, as the governments further seek to help businesses adhere directly to the regulation put in place. Online guidance to assist businesses to follow regulations exist in 90% of the evaluated jurisdictions, with only 5% reporting a lack of both on- or offline guidance.
A counter example of transparency and openness regarding laws is the case of the Chinese tax law of 2021, where the government decided a drastic turnaround on a 2019 tax law which was aimed at expatriates in the jurisdiction. This was announced at such a late stage, that many had changed their business procedures or processes to meet the new requirements initially set forth by the law. This, naturally, does not invoke certainty in businesses and therefore has negative effects.
Streamlining of international procedures and standards
Lastly, global adoption of international standards like the Common Reporting Standard (CRS), Foreign Account Tax Compliance Act (FATCA) or various OECD Guidelines and initiative pillars has reflected a united and global move towards further transparency. This, in turn, is key for businesses seeking cross border alignment as it allows them to conduct their businesses similarly across several jurisdictions. 86% of global jurisdictions in 2022 have adopted CRS, the 2014 introduced standard. With this, an exchange of information between financial institutions between jurisdictions is forced which lifts aspects of transparency. The adoption of the FATCA Model 1 has also severely increased since 2020.
The rise of Environmental, Social and Governance (ESG) Policies
In 2022, ESG Policies have undergone further growth of importance in a business context. Most jurisdictions as of now express this in form of interest, not legal enforcement as of now. Outside of the EU especially, ESG regulation is much less frequent. Within the EU, this has been passed down to EU member states. Guidance on the matter is offered towards corporations, but there is a clear absence of international alignment when it comes to the application of ESG Policy. While Europe overall has seen growth in adoption and push (with countries like France leading the way globally), the Americas lack implementation of ESG regulatory frameworks, with the local jurisdictions there treating the regulatory uptake at a much slower pace.
ESG Policies: Impact on complexity
With a concept in its infancy stage on a grand scale, such as being the case for ESG Policy, it is too early to deem accurate impact on businesses due to it. Yet, it is to say that ESG reporting requirements will naturally increase complexity. Things like a company’s carbon footprint or employee demographics will need to be monitored by companies. If, however, this were to find global alignment like the model present for EU jurisdictions, the impact on business complexity is expected to be minimal according to TMF. There have been certain changes in culture and approach towards the topic of ESG Policy, captured well in this account of a TMF Netherlands expert:
“What you see more is the sentiment. Big concerns about big banks saying, 'We don't provide loans anymore for companies that are investing in oil or gas.' They want to start a new wave and invest in a new energy that is more sustainable for the future. That's a very important change compared with last year. The more significant companies are also investing in that, and they have policies in place. They're forced by the law, but they are also really taking concrete actions to make sure we are compliant with those laws and regulations. I find it really positive. What you are really seeing is a change in culture. I think that's a good step forward.”
The study in the flesh
This in-depth analysis, with the three global themes as overarching pillars, branching into a total of 292 indicators allows TMF to rank the 77 jurisdictions they considered for the study in terms of the existing business complexity. Further relevant for TMF are debates such as, technology and simplification, modernization vs tradition and internationalization versus localism. Of course, compared to the annual global themes, these take a backburner for the index, do however help in shaping the overall direction of it.
With this established, it is time to take a deeper look into how our own MCI CLT jurisdictions fare in the TMF Index and how they have managed to adapt to changes in global business complexity needs since 2020.
We will therefore be taking an extensive look at:
The United Arab Emirates
The Netherlands
Germany
Hong Kong
China
China (Mainland) – Among The Most Complex Jurisdictions, Rank 14 (2020: Rank 6, 2021: Rank 12)
Seeing a rather slow ease of complexion for businesses over the year, our comments of 2019 on China’s complexity still holds true today: China’s business landscape is rather primed for long term benefits for international businesses investing in China in the future, with the initial phases of such long-term benefits starting to showcase for businesses in China. Naturally, the ongoing global political situation has taken a toll on this year’s complexity ranking, as well as rankings in the past.
Although insofar being seen rather as a labor superpower, China is aiming to develop as a consumer economy at a fast pace. Currently, there is a professional class of roughly 400 million – able to be supplied to multinationals. The government in China has since been keen to incentivize such companies to enter the Chinese market. This shift can be observed through aspects such as the China International Import Expo held annually in Shanghai.
The Chinese import-export structure had suffered much scrutiny due to the trade war with the United States under President Trump. Such trading restrictions could possibly force multinationals to seek out alternative markets within China.
Although the corporate income tax is set to 25% across the country, provinces or cities may slightly modify these – which in turn attracts foreign investment. This results in the Chinese legislation being more ‘layered’ than other jurisdictions. Although most have general conditions with regard to employer and employee obligations, the labor contract law of China details such terms extensively.
A development of uncertainty for China was elaborated on at an earlier stage of the article, citing sudden changes in tax legislation. This, naturally, is negative when the goal is more certainty and less complexion in the jurisdiction for businesses carrying out their activities.
“On 31 December 2021, the government actually made a U-turn
relating to regulation that had been announced two years ago.
If you see this kind of unexpected change, you will make
businesses quite nervous, what will be next?”
– TMF China expert
Germany – Higher Levels of Complexity, Rank 20 (2020: Rank 40, 2021: Rank 27)
Germany managed to facilitate a shift from within the top 10 most complex jurisdictions in 2019, to a mid-range rank of 40 in 2020. These developments were promising; however the jurisdiction did not manage to follow through, slipping back down to Rank 27 in 2021, and even Rank 20 in 2022. To us at MCI, this confirms the fact that while a good structure and regulatory procedures is the key to enabling long term success in a jurisdiction, it can be seriously off putting to foreign investors. Furthermore, this indicates that especially on the front of the three global themes of TMF’s deep dive study, Germany simply did not adapt or perform as well as other countries.
Germany still complies with all European and global regulations as well as keeping up its strict KYC procedures. Nonetheless, the jurisdiction is developing a dangerous sidewards trend in terms of ease of navigation. Maneuvering the Covid-19 pandemic as well as their direct involvement in geopolitical debates have had negative consequences for the jurisdiction’s business landscape in 2022, seen by the further slip in rankings.
To us at MCI, it will be very interesting to continue to observe the developments of the German jurisdiction. The major debate for investors and companies choosing to conduct their business is in what regard the clear and often strict structure of legislation may not simply be too overbearing to assure long term ease in business complexion.
Netherlands – A Sudden Slip Downwards, Rank 56 (2020: Rank 72, 2021: Rank 70)
Rather surprising, the Netherlands has slipped in the rankings from Rank 72 in 2021, to Rank 56 in this year. After initially building on ‘early successes’ with a 2019 rank 68, The Netherlands came in at rank 72 in 2020 and 70 in 2021, with one of the least complexity rankings. Many processes have been digitized for years, which improves data exchange between the taxpayer and the governmental institutions tremendously. Efficiency and security are a priority in The Netherlands, and it truly is possible to ‘set up a business in 1-2 days’.
The Netherlands has always been seen as a highly internationalized jurisdiction with a very elaborate trust industry. In fact, the historic flexibility in the Dutch legislation have established it as a top destination for international business. The economic substance requirements for shell companies are comparatively low and the procedure is further aided with a very transparent and straightforward notary process. Recent international compliance legislation was onboarded efficiently, further boosting the country’s reputation. AML and KYC were integrated with ease into the operational procedures of The Netherlands.
Bearing in mind the rich international trade history of the country, The Netherlands is still to this day a top destination both within Europe and the world for multinational companies to open businesses. Information sharing and access between the government agencies and companies happens on swift basis, supported by the readily available setup of information in both English and Dutch. A large strength of The Netherlands as opposed to other jurisdictions on top of this is its great infrastructure and especially following the political developments in the EU recently (Brexit), The Netherlands crystalized itself as a prime hotspot for multinational corporations.
Then, why the sudden drop in ratings? Firstly, it is to say that a drop into Rank 56/77 is nothing that denotes a terrible business landscape within the jurisdiction. However, compared to the 2019-2021 situation, complexity was overall taken aback.
In comparison to recent years, it is to say that the banking challenges in The Netherlands have become much more severe. The KYC procedure seems very non-transparent and at times it seems that local banks are almost frightened by the word ‘international’ or any aspect thereof to do with the company. Furthermore, the early-on implemented Covid-19 measures have overall caused uncertainty and increased complexity due to arguably lack of transparency in their implementation. For many business owners, these often came at either not enough notice, with not enough guidance (both on- or offline) or general lack of understanding for them. Nonetheless, aspects such as readiness to allow remote working and general workplace flexibility support the Netherland’s strong grounding as a generally less complex jurisdiction for business. Furthermore, in a time of rapid technological developments, the improved FinTech sector delivers alternatives to combat this.
“The Dutch business approach is open-minded and internationally oriented.
We speak your language and will translate any documents or instructions
to make processes easier for you.”
Ron Arendsen, TMF Group, The Netherlands
United Arab Emirates – Lower Middle Field of Complexity, Rank 61 (2020: Rank 53, 2021: Rank 60)
Over the past years, the United Arab Emirates has seen a steady decrease in complexity, rising ever so slowly in the rankings from 53 (2020) to 61 (2022). This is a positive development keeping MCI’s business jurisdictions in mind. The legislation introduced in the last years has – overall – aided the streamlining of procedures for businesses and therefore made it easier to navigate.
While the adoption of global standards such as FATCA, CRS, ESR, BEPS and others, as well as the introduction of a VAT and now (for 2023/2024) a corporate tax model may seem overbearing to businesses at first, they are handled rather straight forward and kept simple in the UAE’s business landscape.
A definite strong point for the jurisdiction is the excellent handling of the Covid-19 pandemic in context of businesses and the support and assistance given to them. In the UAE, many authoritative bodies are experimenting with – or have already introduced – full online handling of business matters such as incorporation documents within Free Zones or UBO registers.
The competitive edge of the Free Zone landscape – counting all over the federation nearly 50 different Free Zones – did lead especially during the last 2 years to particular attractive discount models for license fees and rent if licensees commit themselves on longer tenures (2 to 5 years license periods etc.).
A further very positive and stimulating move was and is the introduction of “100% Foreign Ownership” in UAE mainland entities. Being traditionally a much more protective “Sponsor Country”, requiring 51% ownership on shares by UAE citizens, this has been given up for most of the business activities to stimulate a severe increase in mainland incorporations along with strong increase in Foreign Direct Investments (FDI). Just strategically high seen activities remain under the requirement of a “Sponsor”.
Hong Kong – Firmly Among Ten Least Complex Jurisdictions, Rank 74 (2020: Rank 66, 2021: Rank 76)
Hong Kong yet again manages to position itself comfortably within the top 10 in terms of being a “least complex” jurisdiction. Moving slightly down from 2021’s Rank 76, to 74 in 2022, no real change in complexity is clearly discernable. What the rise in recent years (Compared to Rank 56 in 2019 and 66 in 2020) means, is that Hong Kong manages to deal with contemporary issues – be it the global pandemic or ongoing technological developments very well in a context of ease of business.
In the special case of Hong Kong and the recent political developments to do with Mainland China – which until this day did not allow ‘normality’ to return to the light of day – risks of this changing are still definitely prevalent. It should therefore be considered twice for foreign investment at this time, even as it is a top ranked country according to the criteria applied and despite the somewhat easing of the banking sector in Hong Kong itself. Risks are, of course, always involved in business. However, it may be best to give the situation in Hong Kong even more time to unfold before making any long-term commitments or moves towards the jurisdiction.
The Rankings and the Position of MCI CLT
“Our” jurisdictions continue to show that MCI CLT is positioned well globally and continues to spread its business as an Intelligent Service Provider in the interest of its clients. In light of global challenges as well as developments of technology, standardization of international alignment, our jurisdictions overall manage to provide a stable business environment with overall promising outlooks for what lays ahead.
“There are some very interesting changes as compared to recent years.
The moves from the bottom (2019) to the upper middle of the table
of the UAE (2020 – 2022) is one that displays:
although legislation and structure may harm complexity and business operation
in the short term, they always provide long-term benefits to companies.
This is very interesting also in regard to China, observing their upcoming developments.
Overall, it was good to see all jurisdictions make strides towards offering
a less complex playing field for our existing- or future clients.
Complex jurisdictions to navigate are not exclusively negative for MCI CLT to operate in.
For us, it is actually more important to be present in such jurisdictions
to be able to provide our advice and services to our many trusted- and long-term clients.
Enabling them to go through their corporate structuring, management
and operation has always been our top priority
– no matter the jurisdiction or the underlying complexities.
Nonetheless, with our “less-complex” locations in the UAE, the Netherlands
and Hong Kong (keeping the current political development in mind)
we ensure that we are able to provide tailor made services
which apply direct to our client’s needs.
If these needs are to change, we are able to provide flexibility
and make use of our procedures and networks to our client’s ultimate benefit.”
Phillip Kraeter, Chief Strategy Officer MCI CLT, The Hague and Dubai