Thinking of expanding your business overseas? The first question is usually, “What’s the best way to start? Should I set up an office immediately or use an independent contractor familiar with the country?” As with all business decisions, the answer depends on the nature of the business goals:
- Is the expansion to service an existing customer?
- Is the expansion to reach a new population of customers?
- Does the expansion serve a marketing purpose, such as the ability to say, “We have manufacturing in country X”, a low-cost jurisdiction?”
The business goals will drive the process. Sometimes a company is looking for a way to test market conditions prior to making a substantial investment. They may do this by considering the use of an independent contractor in the target country. The advantage is there are very little if any, capital investment or administrative compliance costs to hiring an independent contractor. However, there are some important considerations if you go this route:
- What are the duties of the independent representative/distributor? Many countries have rules similar to the US that would examine whether the “independent” contractor is truly independent. If not, the independent contractor could be considered an employee, thereby making the US company subject to all the employment laws, taxes, and payments of an employer in the jurisdiction.
- What type of authority does the independent contractor have? Can they execute contracts on behalf of the US Company? If an agent regularly exercises the authority to enter into contracts, they are likely to be creating a taxable presence in countries where the US has an income tax treaty. The threshold may be lower for non-treaty countries.
- Will you have enough control over an independent contractor to protect your brand and customer list? It is important to understand the local laws related to the status and rights of an independent contractor/distributor. A contract should be in place that protects the company and supports its subcontractor versus employee status, as well as the rights and obligations of each party. Legal counsel familiar with the local laws of the target country should write the contract to avoid unintended consequences.
To learn more about establishing operations overseas, contact Clayton & McKervey’s team of international tax and accounting specialists.
