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Bringing Your Foreign Business to the US: Part One

The United States is a very appealing market for non-U.S. companies. We’re a nation of consumers and generally U.S. tariff and import laws are welcome to foreign businesses.  For the foreign company looking to make an entry into U.S. markets there are several possible avenues, each with its own distinct advantages and disadvantages.  This post examines four ways companies can bring their products and services to America and establish a U.S. Business Presence.

Method #1: Open a Branch

Perhaps the most obvious path of entry for a foreign company looking to establish a U.S. presence is to open up a branch office in the United States .  Unfortunately, this may be the least desirable option.There are many appealing aspects to opening a new branch in the U.S.  This option affords you the greatest possible control over the distribution and selling of your product and there are no middlemen to reduce your profits.  Your people will staff  the new office and they likely already know your business and your products well.

Most of these advantages, however, tend to sound better in theory than they actually unfold in practice.  Your employees, for example, may know your products intimately, but chances are they are not as knowledgeable about the U.S. markets.  While you have complete control over the process from factory to store shelf, you may not execute the process as efficiently as possible.   Efficiency is often further reduced by the red tape of qualifying to do business in various states.  It should also be noted that opening a branch will require a likely sizable capital investment.

A major concern that may make it disadvantageous to establishing a U.S. branch office of a foreign business rests in the tax consequences.. A foreign corporation with a branch in the U.S. may  be classified as being engaged in business in the U.S. and therefore be subject to federal and state taxes, including possibly on some activities of the home office located outside the United States that might otherwise be exempt from U.S. taxation.  The U.S. has tax treaties with many different countries that may add additional rules and complexity.  Establishing a U.S. branch office can disqualify a foreign corporation from some of the benefits those treaties might otherwise provide.  Furthermore, branch profits that are not reinvested within the United States may be subject to a branch profits tax.

For the reasons outlined above opening a U.S. branch office of a foreign business is almost never the ideal method of entry into the U.S.  The other three methods discussed in this post are, essentially, attempts to overcome the disadvantages of the branch method.

Method #2: Incorporate a Subsidiary

In many ways, this method of establishing a U.S. presence is very similar to opening a branch.  The lion’s share of the process of distribution and sales remains within your company’s control.  The offices you open in the U.S. will most likely be staffed by employees transferred from the home office.  Since you’re not dealing with middlemen for sales or distribution, you avoid profit reduction.

Subsidiaries may be able to avoid some of the adverse tax consequences of branch offices.  Some of the facts and circumstances that will affect tax treatment are whether  the subsidiary and the parent are kept reasonably separate—e.g. they have different directors and officers—and whether  the transactions between them take place outside U.S. jurisdiction.  There are of course other  factors that may influence tax treatment and every situation is unique.  Regardless, the operations of the subsidiary itself will of course still be taxed as the subsidiary is a U.S. corporation, incorporated within a U.S. state.  Perhaps most importantly a subsidiary operation may not disqualify a corporation from the benefits of applicable tax treaties.  Subsidiaries still require a fair amount of capital investment and they must still meet state qualifications for doing business.  Still, overall a subsidiary is often preferable to a branch office.

Continued in part two.

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