International Expansion and Growth Insights | Structure

Written on 3 Oct 2019

Over the course of the next few weeks, our legal experts will be writing about the top 10 most widely discussed but often overlooked topics when expanding overseas. This is a guide for American companies planning to grow their business in Europe, Asia and beyond. If any of these issues are relevant to you and your business, contact us directly and we'd be happy to help.

Why is structure so important?

When considering the structure of your company when you expand overseas, the starting point should be whether you intend to have a permanent office or base in the new market. Having a tax “permanent establishment” means that your presence is sufficient for the tax authority to require a local registration and return. Often having an address, an employee, a local sales focused marketing campaign (even if only online) can be sufficient to trigger that obligation. Proactively targeting a new market will generally mean a permanent establishment, soon if not immediately.

The relevance other than a tax question is whether local corporate entity registration is required. Most jurisdictions distinguish between a branch office and subsidiary. There are sometimes other options which allow for investigative or sales-only based activities, although they can often be restrictive for future growth.

A branch office is simply another office of its parent. It doesn’t have a separate legal personality. Anything it does has an impact on its parent. In a cross-border scenario that means that the US parent company will bear the liability of the activities of its overseas presence and the directors of the parent company have responsibilities overseas. There is no “corporate veil” in legal terms. It may also mean financial information needs to be disclosed on public registries, which for US private companies can require publishing financial data of the parent company that it considers highly confidential.

Businesses often decide to set up overseas using a separate legal entity, a wholly-owned subsidiary. There are some countries which require partial local ownership or non-100% ownership by the parent company, but generally a subsidiary means control from the parent company and whilst the relevant corporate filings will still be required, the data being disclosed relates only to the local operations (and all local businesses are on equal footing when it comes to such obligation).

Tax structuring can sometimes lead to multiple layer structures, including having regional holding companies in attractive tax regimes or sometimes a US subsidiary which then holds overseas branches or subsidiaries. Offshore jurisdictions can become useful or relevant. The global structure generally should be considered once overseas success has been determined, as multiple-layer group structure compliance can be onerous and expensive.

When considering structure it is also worth understanding compliance obligations – whichever structure is used. Are local resident directors required? What are the fiduciary duties for directors and do they differ from officers? Are local addresses for service required and which filing obligations need to be adhered to?

There are many responsibilities and failure to comply that can lead to stringent penalties. But there are also a range of professional services available to whom compliance can be outsourced.