International Businesses

Considerations When Expanding Outside the U.S.

Posted on November 12, 2019 by

Sue Tuson

Sue Tuson

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Establishing a subsidiary outside the U.S. presents tremendous opportunities and benefits. Succeeding in global markets requires significant time, energy and resources on the part of business owners and decision-makers. We’ve seen the impact of businesses getting caught up in the excitement of a new expansion without having the safeguards in place to prevent costly missteps. Before expanding globally, let’s talk. We’ve guided others like you through international expansion and can provide valuable advice.

Here are the top 10 questions that we encounter when a business is expanding globally?

  1. Where should I establish my office? Common considerations include access to customers, access to human resource talent, access to vendors and logistics.  As the list of potential areas narrows additional considerations such as tax liabilities, tax incentives and administrative costs can play a role in the final decision.
  1. What type of entity should I set up? Management will need to review the types of entities/investments that are available for foreign investors?  Generally there is some type of entity that will offer limited liability that can be established.  Most closely held companies will also want to consider which type of foreign entity offers flexibility in US tax planning.  For example, closely held companies that are making a foreign investment generally opt to create an entity that allows for US “check-the-box” treatment.  This allows the US investor to elect the classification of whether the entity should be treated as a pass-through entity for US tax purposes or a corporation for US tax purposes.  This has a significant impact on US tax liabilities and definitely needs to be considered prior to establishing the foreign entity.
  1. What are regulatory compliance and tax costs? Having the correct professional advisors that will provide an understanding the taxes, business licenses, and regulatory reporting requirements will be necessary to prepare a budget for the costs of the operations and line of the resources necessary for compliance.  Some questions include:
  • What taxes will my business be subject to?
  • Is an audit required?
  • Who will advise me on income tax, employment tax, value-added tax, and other taxes encountered?
  • Do I have to withhold taxes on payments?
  • What types of transfer pricing rules exist?
  • Are there any payments that aren’t deductible?
  • What are the books and records requirements?
  • What types of accounting methods and periods are available?
  1. What are the employment laws that need to be considered? Each jurisdiction has its own employment laws.  It is important to understand your responsibilities and costs in the jurisdictions you will be hiring in.  You can’t assume that employment practices will be the same as they are in the US.
  • What types of payments to employees are mandatory?
  • What are the severance rules?
  • Can I fire an employee?
  • Do I need an employment contract with some or all employees?
  • Can I use a PEO (professional employer organization) to limit exposure?
  1. What do I need to consider when sending US employees cross-border? Often US companies will send a US employee to the foreign jurisdiction to help the new venture get off the ground.  These are generally trusted and proven employees that an employer doesn’t want to lose.  It’s important to understand the increased level of complexity from a tax perspective that both the employee and the employer faces when a US person works outside the US.  This gives both parties an opportunity to understand in advance the cost and administrative burdens that go along with a move.
  • What visas are required?
  • What is the tax impact on those employees?
  • Can they still participate in the U.S. social system and our employee benefit plans?
  • Can they still be paid in U.S. dollars?
  • Do they have to file a U.S. income tax return?
  • What are their local tax filing responsibilities?
  • How can I equalize an employee’s wages when sending them to work overseas?
  1. What can I do to protect my IP? Legal advice should be sought from advisors in the US and local jurisdiction to understand the protections available for IP.  Consideration should be given as to how to limit access to technical know-how where possible in the foreign jurisdiction.
  1. How can I limit my exposure? Legal advisors that are expert in local law should be consulted related to business contracts and can provide advice on potential exposures and what can be done to mitigate risk.  This would include an understanding of the common business contracts used in the local jurisdiction.
  1. How can I get my money out of the country? Are there any currency controls, restrictions, or withholding taxes when it’s time to take money out of the entity?  Are there any regulatory requirements related to intercompany payments?  Can the US parent company be reimbursed for expenses that it incurs on behalf of the subsidiary?  Are those payments tax deductible?  Is a transfer pricing study required? Are there any withholdings on intercompany payments?
  1. Do I understand the business culture that I will be operating in? Business cultures vary greatly across the globe, it is imperative that a business understands the common business practices and culture when attempting to expand.
  2. What happens if the expansion doesn’t work out? What’s my exit cost if I need to get out?  What costs will I need to consider related to employee severance, property leases, administrative wind-up costs, etc?

To learn more about expanding your business globally, contact Clayton & McKervey.

Sue Tuson

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With her advanced technical skills and experience with complex global businesses, Sue is known to be a creative & responsive international tax advisor.

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