Posted by Norka M. Schell
Materials extracted from
International Trade For The Nonspecialist
Second Edition
By Paul H. Vishny
And Internatioanl Business Transactions
Third Edition
By Ralph H. Folsom, Michael Wallac Gordon and John A Spanogle, Jr.
When a company makes the decision to establish a presence abroad, it faces numerous questions about the legal form of that presence. The company's presence may be as simple as a U.S. - based sales representative working out of her hotel room, or it may be more complicated, involving the formation of, or acquisition of an ownership interest in, a legal entity under the laws of the foreign country. On either end of the spectrum, it is critical to have competent advice as to the legal consequences of the presence abroad.
Virtually all countries have forms of business entities that are similar to corporations and limited liabilities companies in the United States, but appearances can be deceiving. For example, in some countries, there are limitations on the percentage of shares that any single shareholder may vote. Whereas U.S. companies formed under the new limited liability company laws may be non-taxable entities, in most other countries limited liability companies are, like corporation, taxable. Many countries have minimum capital requirements for certain types of legal entities. In some places, the higher capital requirements, more difficult registration requirements, or other factors involved in the formation and operation of a particular form of business entity will give the impression that a company using that form has greater substance and stability than a company using another form.
Establishing a presence and conducting business abroad means acting under the laws of the foreign jurisdiction, and thus requires a thorough understanding of the applicable local laws. Company laws and commercial laws and practice are unique in each jurisdiction. In most cases, on-the-ground legal representation is critical.
The threshold question in establishing a place of business in a foreign country is the form in which business will be conducted. The most popular forms for U.S. companies doing business abroad are branch offices and corporate subsidiaries. But it may be that a liaison office, instead of a branch, or a joint venture, rather than a subsidiary, would be more appropriate in a particular situation.
The choice of legal entity often depends largely on: (1) the proposed activities of the foreign office and whether local law in the foreign country imposes any restrictions on the foreign company's activities through a particular legal form; (2) whether the legal form provides limited liability to the foreign company; (3) whether the legal form results in taxation of the foreign company, and the degree of taxation of the local presence, in the foreign jurisdiction. The taxation issue may be the most complicated, depending on U.S. tax law, foreign tax law, and the tax treaty between these countries, if any.
Liaison Offices
Some countries allow a limited business presence known as a liaison office, which may or may not be required to be registered with the local authorities. A liaison office is not a legal entity separate from the foreign company, but is an office (or perhaps a single employee) through which the foreign company may engage in certain limited activities in the foreign country. Local laws governing these types of offices should be consulted to determine the permitted activities.
Whether the activities of the liaison office are subject to taxation in the foreign jurisdiction depends on the local tax law and the tax treaty between the countries.
Branch Offices
A branch office is an extension of the foreign company constituting a direct legal presence in the foreign jurisdiction. A branch typically may conduct the full range of business on behalf of the foreign country. Because this legal presence will expose all of the assets of the foreign company to claims arising in the foreign country, many companies attempt to limit their liability by forming a subsidiary in its home country, and having that entity establish the branch office in the target country.
Establishment of a branch office will generally expose the foreign company to taxation in the foreign country with respect to that portion of its income that is sourced in the foreign country. Taxation of the branch office may be minimized by forming a subsidiary to establish the branch.
Subsidiaries
A subsidiary is a legal entity separate from the foreign company. A primary objective of establishing a separate entity is to limit the liability of the foreign company. Depending on the laws of the foreign jurisdiction and the form of legal entity used, the liability of the parent company is generally limited to its capital contribution to the subsidiary. However, "piercing the corporate veil" is not only a United States concept. A wholly-owned foreign subsidiary that is thinly capitalized, controlled and managed by its parents, and serving the business interests of its parent may be deemed, for liability purposes, to be part of a single enterprise with the parent, subjecting the parent to the liabilities of the subsidiary.
A subsidiary with limited liability will almost certainly be subject to taxation in the foreign jurisdiction.
A company that choose to establish a foreign subsidiary may have the option of purchasing an "off the shelf" company rather than forming a new entity. In many countries, the incorporation process is lengthy, with the necessary approvals taking anywhere from six weeks to six months.
Joint Ventures
A joint venture entity may be established to penetrate a foreign market, using the good will and experience of an established local company and/or complementary technology or capacities, to promote the products and services of the foreign investor, or to engage in an entirely separate business. A joint venture has to advantage over a wholly-owned subsidiary of spreading costs and risks, but it often entails complicated issues of management and control and may be subject to greater regulatory requirements.
Forming and operating a joint venture is generally more complicated that forming and operating a wholly-owned entity. In addition to the documents usually required for the formation of a subsidiary, a joint venture requires the development of a joint venture agreement. Such agreement covers issues typically addressed in a domestic shareholders agreement, including restrictions on transfer, buy-sell arrangements, and especially management and control provisions. In some countries, this document is required to be filed along with other registration documents. Joint ventures often also face greater regulation than do wholly-owned entities, such as notification and approval requirements applicable under antitrust laws when competitors enter into a joint venture.
