Establishing a Presence Abroad

Posted by Norka M. Schell
Material extracted from International Trade For Nonspecialist
Author Franklin C. Jesse, Jr.

You have decided to establish your business presence in a foreign country with one or more employees. There are three basic choices as to the legal status of that foreign operation that you may consider:

Choice (1) A Liaison or Representative Office;
Choice (2) A Branch of the United States Company; or
Choice (3) A Subsidiary of the United States Company.

A liaison office is an office whose activities are limited to promotional and liaison work. The number of employees is usually limited to a few.

In countries that require prior approval before "doing business," a liaison office can often be established without approval, since it does not have official status.

The activities of a liaison office usually must be limited to general promotion; storing or displaying merchandise; advertising; purchase of goods or the collection of information, conducting market research, and the like. Booking orders, opening letters of credit, manufacturing, and distribution of products would create "permanent establishment" or constitute "doing business" and would thus destroy the liaison office status.

Double tax treaties usually exempt these offices from income taxation by the host country.

Branches or Subsidiaries: When the level of foreign activity exceeds that permitted for liaison, a branch or subsidiary or the United States company must be established in the foreign country. Registration is usually required regardless of the form chosen.

Many countries provide for more than one kind of corporation or company having limited liability. The choice of corporation is between a closely held corporation and a "public corporation" form.

A closely held corporation is usually less expensive to organize, easier to manage, and subject to less reporting and labor restrictions.

A "public corporation" does not have to be publicly held. It is somewhat more costly to organize and administer, and it is sometimes subject to greater regulation in the areas of reporting and labor relations.