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.