How to structure the international supply chain

Mainstream

Structuring an international supply chain is not a choice of carrier and warehouse. It is the construction of a legal and tax architecture that protects margins and the business itself.

The main question is not how to deliver the goods. The main question is how to deliver goods without losing money, assets and reputation.

Effective structuring begins with three checks:

1. Where there is maximum legal risk in the chain.
2. Where in the chain “settles” margin and how to protect it from tax and customs claims.
3. How to maintain control over assets and contracts in a conflict with a counterparty

If these three issues are not resolved at the start, a business can generate revenue but lose both goods and money in the event of a dispute, customs arrest, or bankruptcy of a key link in the chain.

When it comes to revising the supply chain

An audit of the structure is necessary if:

• You are entering the EU market for the first time through your own legal entity or distributor;
• The product crosses several borders to the final buyer;
• You work through an agent, commission agent or trader, and ownership is not obvious.
• The storage facility is located in another EU country;
• You apply a deferral of VAT and customs duties;
• Your product is subject to EU sanctions or export restrictions (DUAL USE).
• You plan to separate the functions of the principal, logistics hub and trading house into different jurisdictions;
• there is a risk of recognizing your structure as artificial (for example, in Estonia or Cyprus) and additional tax assessment;
• There are links in the chain that do not produce anything, but accumulate profit or IP.

The mistake most companies make

Many companies start with the question:

Where is it cheaper to clear the goods?

That's the wrong first question.

The right question is:

What structure of the chain will ensure the stability of the business during tax inspection, seizure of goods, blocking of payment or bankruptcy of the counterparty?

Sometimes the best solution is to export directly from the parent company. Sometimes, it is a business house in the Netherlands. Sometimes it is the use of a distributor, rather than its own representative office. Sometimes, the division of contracts for supply, distribution and storage. Sometimes, it is a transition to an agency model with the preservation of ownership until the end customer is sold.

The international supply chain requires structural and legal design rather than logistical design.

Step 1. Verify the contractual matrix

The first thing to audit is not the transport contracts, but the system of contracts under which the goods move and sell.

Key elements for verification:

• parties in each link (manufacturer, trader, agent, distributor, end buyer);
• place of transfer of ownership (title);
• place of risk transition (risk);
• Incoterms terms in each contract;
• the applicable law and jurisdiction for disputes under each contract;
• currency of payment and currency clauses;
• pricing structure (transfer pricing – TP);
• availability of royalties (license fees) in the chain;
• conditions of termination and consequences for the goods in transit;
• The right of retention and the right to stop the goods in transit.

If the contractual matrix is fragmented, a single link break due to a dispute or bankruptcy can paralyze the entire chain. But even with a weak structure, the transition of ownership and risk can often be restructured without revising the entire model.

Step 2. Check the customs and VAT architecture

For EU chains, customs and VAT are not service functions, but structural elements that determine cash flows.

The following should be analysed:

• Who is the importer of the record (importer of record)
• whether there is a permanent establishment in the country of importation;
• Whether the VAT deferral mechanism (import VAT deferral) is applied;
• Customs warehouse or regime 42 (customs procedure 42) is used
• where the release of goods into free circulation takes place;
• Whether the company is registered as a VAT payer in several EU countries (VAT registration);
• Are triangulation transactions (ABC transactions) properly executed?
• The system is based on the VIES (VAT Information Exchange System).

An error in the VAT structure can lead to the blocking of VAT refunds, double taxation and the arrest of invoices.

Step 3. Determine jurisdiction for each link

The jurisdiction of each element of the chain affects:

• corporate tax;
• Access to the Parent-Subsidiary Directive, Interest and Royalties Directive
• asset protection;
• the possibility of applying double taxation agreements (DTT);
• currency control;
• Substantial requirements (substance requirements)
• responsibility of the directors.

If a company in a low-tax jurisdiction without a real substance is used in the chain, it may be ignored by the EU tax authorities, which will lead to additional tax assessment to the parent structure.

Step 4. Check compliance and sanctions risks

The cross-border supply chain must be consistent along the entire length.

It is necessary to check:

• classification of goods according to the HS code (correctness of the HS code);
• Is the product subject to the EU’s DUAL USE Regulation?
• Whether sanctioned persons, shippers, consignees or banks are involved in the chain;
• end-user and end-use recipients of the goods;
• Are there signs of evasion of sanctions through third countries?
• Compliance with anti-money laundering legislation (AML) and KYC requirements;
• Whether there is a risk of enforcement of foreign sanctions (e.g., secondary sanctions)

Violation of compliance at one EU customs post can stop the whole consignment, lead to the seizure of goods and criminal prosecution of responsible persons.

Step 5. Select an operating model: distributor, agent or own office

The choice of a go-to-market model determines who controls the price, the customer, and the stock.

Model 1: Own representative office or subsidiary company

Maximum control, but also maximum tax and legal liability. Requires VAT registration, corporate reporting and personnel management. The goods are imported into the balance sheet of the subsidiary company.

Model 2: Independent Distributor

The distributor buys the goods from the manufacturer and resells them on their own behalf. Control over the final price and the customer is reduced. The tax presence in the country of the distributor does not usually arise from the manufacturer. The key risk is the status of a distributor upon termination of the contract and the compensation of the clientella (goodwill indemnity) in a number of EU countries.

Model 3: Agent or commissioner

The agent acts on behalf of or at the expense of the principal. The ownership of the goods is retained by the principal until the sale to the final customer. This gives control of the goods and receivables, but creates a tax presence of the principal in the agent's country. The agent receives a commission and can also claim clientella compensation.

The choice between models is not just a commercial issue, but a legal decision that determines the protection of assets for years to come.

Step 6. Protecting assets and the right to stop goods

This is a key block for a risk-oriented framework.

At each link in the chain it should be clear:

• Who owns the goods in the warehouse, in transit and in responsible storage;
• What right applies to property rights (often different from contract law)
• how property rights are protected in case of bankruptcy of the counterparty (whether the retention of title clause is valid in this EU country);
• How to stop the goods in transit and give instructions to the carrier;
• Do you have a contractual right to withdraw the goods from a third party warehouse?
• Whether the counterparty’s obligations are secured by a bank guarantee, letter of credit or insurance.

A structure without asset protection is financing someone else’s business at your expense.

Step 7. Transfer pricing (TP) and documentation

If the chain includes interdependent companies, each transaction between them must comply with the arm’s length principle.

Preparation should be made for:

• Functional analysis (who does what, what risks, what assets are used)
• TP policies for goods, services, royalties and financing;
• Local File and Master File if required by EU law
• intercompany agreements that are consistent with the TP policy;
• Benchmarking study to justify the price level.

Extra tax due to TP can make the entire chain unprofitable.

Step 8. Prepare a dispute resolution mechanism for the entire chain

In an international chain, disputes can arise between any links. It is important that the dispute resolution system is coordinated.

It is necessary to determine:

• the uniform or coordinated applicable law for related contracts;
• A single arbitration centre for all contracts in the chain (e.g. ICC, VIAC, DIS) to prevent parallel processes in different courts;
• a mechanism for consolidating arbitrations;
• language of the proceedings;
• (a) the place of arbitration in a neutral jurisdiction convenient for the enforcement of the awards;
• the possibility of quick interim measures in the country of location of the goods or warehouse.

If a supplier sues a trader in London and a trader with a buyer in Paris, it creates existential risks to the business rather than legal risks.

Step 9. Implementing a strategy to exit each link

The structure should involve divorce.

Each substantial contract shall include:

• the procedure for termination;
• the fate of the goods in transit and in the warehouse at the termination;
• the fate of prepayment and security payments;
• renunciation of the right to retain goods by the counterparty;
• the time and procedure for returning confidential information and customer base;
• applicable post-termination restrictions (restrictions after termination of the contract);
• Buy-back or sell-off mechanism of goods residues;
• Customerella compensation (for agents and distributors in the EU)

Structuring not only the deal, but also the breakup of relations. It is at the exit that the business loses the most money.

Step 10. Conduct regular supply chain audits

The structure is not static. It requires regular review when:

• Changes in the sanctions lists;
• introduction of new substance requirements in the country of incorporation of the company;
• Changes in customs rules and classification of goods;
• tax reform in the EU or in a particular country;
• Brexit and other geopolitical developments
• the appearance of a new link in the chain;
• entering a new market;
• scheduled tax audit.

The audit should not be responsive, but rather warning.

Common mistakes in supply chain structuring

1. Savings on substance. A company in the EU without an office, staff and on-site decision-making is the main target of tax authorities.
2. Confusion with Incoterms. The gap between the time of risk transfer and the time of ownership transfer leads to a dispute over who pays for the lost product.
3. Ignoring the TP. Domestic prices without documentation are the basis for additional tax on the entire margin.
4. No retention of title. Without a clear reservation registered in the right jurisdiction, the goods fall into the bankruptcy estate of the debtor.
5. A single arbitration clause for all cases. Not tied to a specific link, it can be recognized as not imprisoned.
6. Wrong HS code. An error in the classification of goods can lead to additional charges for 3 years, the arrest of goods and disruption of supplies.
7. Unreported compensation to the distributor. When a distribution agreement is terminated in the EU without taking into account local mandatory regulations, the business receives a claim for hundreds of thousands of euros.

Checklist: 15 Questions Before Launching the Chain

1. Who is the importer of the EU record and where does it pay VAT?
2. At what point and by what law does the ownership of the goods pass?
3. Where is the board of directors of the key chain company physically located?
4. Do you have a functional analysis for all parts?
5. What dispute resolution mechanism binds all contracts?
6. Is there a risk of registering a permanent establishment (PE) in the buyer’s country?
7. Is your product classified as DUAL USE?
8. Is your right to stop the goods in transit protected?
9. What happens to the product in the warehouse in case of bankruptcy of the distributor?
10. What is the procedure for withdrawing goods from the agent upon termination of the contract?
11. Is there compensation for termination of the distribution or agency agreement?
12. Is the final buyer under sanctions?
13. Are the triangular VAT transactions properly executed?
14. Are there royalties in the chain and how are they justified?
15. Which exit scenario is the least expensive for you?

What a strong supply chain structure looks like

A strong structure is usually made up of five layers that work synchronously:

1. Corporate & Tax Layer Choosing the right corporate form, substance and tax regime for each link.

2. Contractual Layer A system of supply, distribution, agency and storage contracts linked by a single logic of law and arbitration.

3. Trade & Customs Layer is a customs architecture that allows the legitimate management of VAT and duties, rather than minimizing them at all costs.

4. Compliance & IP Layer Protection of intangible assets, export control and “know your counterparty” throughout the product journey.

5. Exit & Dispute Layer is a pre-registered plan in case of dispute, arrest or bankruptcy at any of the links.

Without the fifth layer, the first four are a house of cards.

FAQ

Can you use one company in the EU for all countries?

Yes, but it can create a permanent establishment in other countries if your employees or agents are contracting there. We need a detailed analysis.

Which is better: Work through an agent or distributor?

The distributor gives less control, but less tax presence. The agent gives control of the price and the customer, but often establishes a permanent representation. The choice depends on your willingness to pay taxes and your desire to control the final sale.

How to protect the product in case of bankruptcy of a distributor in Germany?

An extended retention of ownership clause (erweiterter Eigentumsvorbehalt) valid under German law and registrable if necessary is required. Without it, the goods will go to the competitive mass.

Can VAT registration in the EU be avoided?

If you are making taxable deliveries, then no. Using a customs warehouse or deferring VAT is a cash flow management tool, not a release.

How do sanctions affect the supply chain?

Even if your counterparty is not on the sanctions lists, your bank may block payment due to compliance policy. Dual-use goods shipped through the EU require an export licence. A sanction clause should be in every contract.

What if the customs arrested the goods because of the wrong code HS?

Immediate work with a customs attorney is required to release the goods under security and challenge the classification. In parallel, code revisions for all future and past shipments.

Related services

• International Trade, Distribution & Cross-Border Transactions
• Corporate Structures, M&A and Corporate Governance
• Tax Law & International Tax Planning
• Sanctions, Export Controls & International Compliance
• Commercial Contracts
• International Arbitration, Commercial Litigation & Cross-Border Disputes

Related material

• How to Choose Between a Agent and a Distributor in the European Union
• Transfer pricing in the international supply chain
• How to protect the ownership of goods in cross-border delivery
• EU sanctions: How to Build a Complementary Supply Chain
• EU customs procedures for import: practical guide
• Structure of the holding in Europe: faults
• Access to the EU market: legal roadmap
• Termination of the EU Distribution Agreement: risks and compensation
• VAT in the supply chain: Deferred payments and triangulation
• How to Create an International Supply Contract Without Critical Errors

Conclusion

Structuring the EU’s international supply chain requires not a collection of disparate contracts, but a single legal architecture aimed at commercial sustainability.

A strong structure is not built on finding the lowest tax rate, but on asset protection, property control, VAT management, and a willingness to divorce any counterparty.

In international trade, the winner is not the one who imported the goods faster. The winner is the one who knows in advance how to return their money, goods and customers if the chain breaks at any link.