Not without my Daughter! Entering the U.S. market can have many forms. One option is maybe selling goods or services directly from your home country to U.S. customers. Additionally, you could have a representative office in the U.S. which paves the way for your market entry. Another option could be to go through a local agent or distributor or to enter into a joint venture. It all depends on what makes the most sense economically and how much control you want to be able to exert. If you want to commit to the U.S. market more fully and you don’t want to share your profits with third parties and want to be able to control your business activities in the U.S. you may want to establish a branch office or form a subsidiary. What Is a Subsidiary? In its most basic form, a subsidiary (daughter company) is simply a legal entity that is owned or controlled by another entity (parent company). Compared to a branch office which is only a different office location of a legal entity abroad. This distinction is extremely important for tax and liability purposes as I will explain. Benefits of a Subsidiary over a Branch Office First and foremost a subsidiary is its own legal entity. From a liability perspective, only the subsidiary is liable for damages caused by its employees or breach of contract. The subsidiary therefore shields the parent company from liability. A branch office on the other hand is not a separate legal entity and the foreign company doing business in the U.S. is directly exposed to liability. From a tax perspective, a subsidiary also has its benefits. A subsidiary, when structured right as a corporation, is a U.S. person for tax purposes which means that it will be taxed like any other U.S. corporation at the corporate tax rate of 21%. Under the rules of international taxation, a branch office will create a “permanent establishment” for the foreign company in the U.S. This means that the foreign company itself will be taxed in the U.S. on all the income it creates with this branch in the U.S. at the corporate tax rate and additionally will have to pay 30% of U.S. branch profit tax. If structured right a subsidiary can avoid the U.S. branch profit tax. Under most tax treaties there are also many other benefits available for subsidiaries. Of course, forming a subsidiary company–particularly in a new country–also carries significant legal and financial risks. That is why it is important to work with an international business and tax attorney who has experience in such transactions. Do you have more questions about subsidiaries? Contact me today to schedule an initial consultation if you would like to discuss if a subsidiary company is the right business decisions for you.
We may live in a global economy, but businesses are still required to follow certain national and local laws. This can make cross-border deals quite complicated. For example, if a U.S. company decides to form a subsidiary in Germany, what are the legal and tax implications for both businesses? This is where working with an international business attorney who specializes in cross-border transactions is essential. Cross-Border Transactions A cross-border transaction is basically any transfer of property, goods or services between individuals or business entities who reside in different jurisdictions. The transaction itself may be something as simple as buying widgets over the internet from China or as complex as multi-tier joint venture investment structures in another country with complex service and distribution agreements. Cross-Border Deals Examples The following includes other types of cross-border transactions from my own practice: A U.S. and German company form a joint venture. A U.S. distributor of devices entered into a joint venture with a German manufacturer. The joint venture became the exclusive distributor for the manufacturer’s products in the U.S. We structured the joint venture as a corporation and I worked closely with German tax counsel to structure the deal so no tax problems would come up down the road. The shareholder and the distribution agreement required careful drafting regarding control rights product description, territory, and non-compete. German individuals transfer intellectual property to a U.S. company in return for shares. Two German software engineers transferred IP rights to an algorithm to their U.S. startup company. The company was formed in Delaware and the parties chose Delaware law as governing law and agreed on binding arbitration in Hamburg, Germany. A U.S. company negotiates a distribution agreement with a German manufacturer. The U.S. company had distributed world leading products of a German manufacturer for years without a written distribution agreement. Now the U.S. distributor was to be acquired by a large U.S. company which wanted to see a written distribution agreement. The U.S. distributor turned to me to negotiate a written distribution agreement with the German manufacturer. Unfortunately, we found out that the U.S. distributor had no distribution rights at all, merely a right to sell as an authorized dealer. The German manufacturer did not want to enter into a binding distribution agreement and the deal fell through. A German company seeks to acquire or buyout a U.S. company. A German manufacturer of special devices wanted to buy its U.S. distributor. The U.S. distributor owed the German manufacturer a considerable amount of money for ordered products. The German manufacturer asked for help and we tried to turn debt into equity and acquire the U.S. distributor. I drafted a letter of intent and share purchase agreement and conducted the preliminary due diligence. Unfortunately, the U.S. distributor filed for chapter 11 and we had to register the claims in the following bankruptcy proceeding. A U.S. company buys real estate in Germany. A U.S. real estate developer company buys a large property in Germany. I was called to assist in the deal together with U.S. and German co-counsel to avoid tax traps and to ensure a smooth transition of the project and the sale of the property once the project is finished. What Makes Cross Border Transactions Tricky? Any of these types of cross border deals can raise a host of legal issues on both sides. First and foremost, there are tax considerations. This requires not only consideration of the tax laws of the individual countries involved, but also any tax-related treaties between the two governments. Next, the cross-border transaction may face broader regulatory scrutiny. In the case of a merger or acquisition, antitrust authorities in both the United States and the European Union may need to review the deal. This can lead to a situation where one regulator approves the transaction while the other may require certain conditions, or even oppose the deal outright via a legal proceeding. And even in simpler, non-merger transactions, there are still legal and cultural differences. Particularly in the United States, where each state (and even each municipality) has its own laws that may affect a particular business deal, it is imperative to work with experienced counsel who can help the parties navigate unfamiliar terrain. One of the most critical decisions that the parties to a cross-border transaction will make is the choice of governing law applicable to the deal. Most courts in most countries will respect the parties’ right to decide which country’s law to apply. But the choice itself will depend on a number of factors. And again, within the United States the choice of law will often come down to a particular state, as that is where most contract and business law matters are handled. Get Help with Your Cross-Border Transaction If you are contemplating a cross-border transaction, it is in your best interest to contact a qualified international business attorney sooner rather than later. Call me today to schedule an initial consultation.