Foreign investment in the United States

Reinhart Boerner Van Deuren s.c.

www.reinhartlaw.com

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Foreign Investment

in the

United States

A Guide Detailing the

Most Important Legal Considerations

for Foreign Investors in the United States

Foreign Investment in the United States | A Guide for Investors

INTRODUCTION

The purpose of this guide is to introduce foreign investors and their legal counsel to the types of

legal considerations and issues that are most likely to be important to them in importing their

products, establishing a new operation, purchasing an existing operation, and operating safely

and successfully in the U.S. market.

For such a guide to be useful in a practical way, it must be relatively short. The most difficult

challenge is how to decide what matters are important enough to discuss and which to exclude.

We decided to include issues which, based on our judgment as practicing business lawyers,

met one or more of the following criteria:

• The U.S. legal issue is so important in the U.S. legal system that every foreign investor

should know something about it.

• The issue has some aspect (such as the ease with which a foreigner can be found liable

for damages, the extent of liability, the nature of the subject matter being regulated, and

so forth) which is likely to be surprising, unexpected or even wholly incomprehensible to

a foreign investor or a foreign lawyer accustomed to another business culture and

another legal system.

• The issue is so common that it is virtually unavoidable.

No attempt was made to be complete in the sense of itemizing every legal matter a foreign

investor might confront. Nor was any attempt made to be complete in the sense of providing a

thorough, in depth analysis of every issue mentioned. Rather, we have first identified the sort of

issue which might arise and the context in which it might arise for the benefit of the foreign

businessperson or his counsel, and, secondly, provided some hint or suggestion as to how the

issue might be avoided or resolved where that is possible. Accordingly, the foreign

businessperson or lawyer reading this outline might use it as a sort of checklist of items to

consider and review before, during and after the investment. If there is any doubt created by

that review, a U.S. lawyer should be consulted.

Robert J. Misey, Jr.

Delos N. Lutton

Adam R. Konrad

Editors

Foreign Investment in the United States | A Guide for Investors

REPRESENTATIVE TRANSACTIONS

Reinhart attorneys have represented numerous foreign acquirers and U.S. targets in cross border

acquisitions, many of which range in size from $100 million to $300 million. Included in those

acquisitions are the following:

• Represented a German company in an acquisition of two U.S. pharmaceutical companies.

• Represented a French company in the auction bidding and negotiations for a purchase of

a U.S. pet food company.

• Represented a French company in an acquisition of a U.S. division of a publicly held

pharmaceutical and chemicals company, involving a simultaneous closing in three

countries.

• Represented a Finnish logistics company with the acquisition of the U.S.-based terminal

operating solutions division of a publicly held technology company, including its Indian

subsidiary.

• Represented an Icelandic acquirer in a purchase of a U.S. food processing group from a

Dutch company and negotiated an advance pricing agreement with the IRS to minimize

income subject to U.S. taxation.

• Represented a U.S. target in a partially tax free transaction involving cash, debt and

shares of a publicly held Canadian acquirer.

• Represented a Finnish manufacturing company in the asset acquisition of a U.S. based

construction maintenance and electrical contracts company.

• Represented a Hong Kong company in an acquisition of a motorsports company.

• Represented a Swiss company in an asset acquisition of a U.S. company, whose assets

included equity interests in Canadian, United Kingdom and Chinese companies.

• Represented a Finnish manufacturer of forestry harvesting equipment in an asset

acquisition in the United States.

• Represented a seller, one of the largest cheese processors in the United States, in a

transaction with a publicly held Canadian dairy cooperative.

• Represented a Finnish materials management equipment manufacturer in an acquisition

of a target with companies in the United States, Germany, Ireland and the Netherlands.

Foreign Investment in the United States | A Guide for Investors

iii

CONTRIBUTING AUTHORS

Jeremy Bridge practices in the area of intellectual property law. He can be reached at either

815-654-5626 or jbridge@reinhartlaw.com.

Cathy Davies practices in the area of international business law and distribution networks. She

can be reached at either 414-298-8335 or cdavies@reinhartlaw.com.

Rebecca Greene practices in the area of employee benefits. She can be reached at either

414-298-8244 or rgreene@reinhartlaw.com.

Eric Hagemeier practices in the area of capitalization and corporate finance. He can be reached

at either 262-951-4546 or ehagemei@reinhartlaw.com.

Kevin Howley practices in the areas of business law and corporate acquisitions. He can be

reached at either 414-298-8188 or khowley@reinhartlaw.com.

Rebecca Frihart Kennedy practices in the area of litigation. She can be reached at either

414-298-8736 or rkennedy@reinhartlaw.com.

Jessica King practices in the area of estate planning. She can be reached at either

414-298-8202 or jbking@reinhartlaw.com.

Adam Konrad practices in the areas of business law and corporate acquisitions. He can be

reached at either 414-298-8737 or akonrad@reinhartlaw.com.

Benjamin Kurten practices in the area of immigration law. He can be reached at either

414-298-8222 or bkurten@reinhartlaw.com.

Benjamin Lombard practices in the area of federal and state securities law. He can be reached

at either 414-298-8225 or blombard@reinhartlaw.com.

Delos Lutton practices in the area of international business law. He can be reached at either

414-298-8117 or dlutton@reinhartlaw.com.

Robert Misey practices in the area of international taxation and tax controversy. He can be

reached at either 414-298-8135 or rmisey@reinhartlaw.com.

Michael Simpson practices in the area of environmental law. He can be reached at either

414-298-8124 or msimpson@reinhartlaw.com.

David Sisson practices in the area of labor and employment law. He can be reached at either

414-298-8332 or dsisson@reinhartlaw.com.

Jussi Snellman practices in the areas of business law and institutional investment. He can be

reached at either 608-229-2243 or jsnellma@reinhartlaw.com.

Foreign Investment in the United States | A Guide for Investors

PREFACE

Reinhart Boerner Van Deuren s.c. is a National Law Journal Top 250 law firm based in the

midwestern United States. A full service business law firm, Reinhart has been serving its

clients' international business needs—from mergers and acquisitions and related integration

issues to taxation and everything in between—for more than 100 years.

This guide is protected by copyright and may not be recreated or reproduced without the

express written consent of Reinhart Boerner Van Deuren s.c.

This guide is not intended as legal advice. Legal advice can be given only after establishing an

attorney client relationship and determination of the individual circumstances of a particular

person. If you would like more information or to receive legal advice, please contact a licensed

attorney in the relevant jurisdiction.

Any advice expressed in this writing as to tax matters was neither written nor intended by the

sender or Reinhart Boerner Van Deuren s.c. to be used and cannot be used by any taxpayer

for the purpose of avoiding tax penalties that may be imposed on the taxpayer. If any such tax

advice is made to any person or party other than to our client to whom the advice is directed

and intended, then the advice expressed is being delivered to support the promotion or

marketing (by a person other than Reinhart Boerner Van Deuren s.c.) of the transaction or

matter discussed or referenced. Each taxpayer should seek advice based on the taxpayer's

particular circumstances from an independent tax advisor.

Foreign Investment in the United States | A Guide for Investors

TABLE OF CONTENTS

Page

I. IMPORTING AND EXPORTING MONEY: INVESTMENT STRUCTURE AND

REPATRIATION OF PROFITS 1

A. Tax Analysis 1

1. General Overview of U.S. Taxation 1

2. U.S. Trade or Business: Taxation on a Net Basis 1

(a) Gross Income 1

(b) Deductions 1

(i) Interest 2

(ii) Royalties 2

(iii) Rent 2

(iv) Personal Services 2

(v) Depreciation 2

3. “Passive” Investment Income of Nonresidents: Taxation on a Gross Basis 2

4. Special Rules and Planning Points 2

(a) Residency 2

(b) Source Rules 3

(i) Interest 3

(ii) Dividends 3

(iii) Royalties 3

(iv) Rent 3

(v) Salaries and Wages 3

(vi) Sales of Personal Property 3

(d) Earnings Stripping Rules and Branch Level Interest Tax 4

(i) Earnings Stripping 4

(ii) Branch Level Interest Tax 4

(e) Treaty Reductions and Treaty Shopping Rules 4

(f) Transfer Pricing Rules 5

(i) Related Party Sales of Goods 5

(ii) Loans 5

(iii) Services 5

(iv) Rents and Royalties 5

(g) Capital Gains 6

(h) Foreign Investment in Real Property 6

(i) Portfolio Interest and Interest on Bank Deposits 6

(j) Matching Rules 6

(k) Withholding on Foreign Partners 6

5. Income and Estate Taxation of Foreign Individual Investors 6

6. Choice of U.S. Entity: Tax Issues 7

Foreign Investment in the United States | A Guide for Investors

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B. Limitation of Liability 7

1. Limited Corporate Liability—General Rule 7

2. Important Exceptions to the General Rule 7

(a) Piercing the Corporate Veil of a Subsidiary to Reach the Parent Corporation 7

(b) Jurisdiction 8

C. Local Presence and Organizational Factors 9

1. Form of Organization 9

2. Officers 9

3. Name 9

4. Charitable and Public Activity 9

D. Financing Source Alternatives 9

1. Debt Financing 9

2. Public and Private Equity Financing 10

3. Venture Capital 10

4. Installment Sales or Other Seller Financing 10

5. Leasing 10

E. Restrictions (if Applicable) on Foreign Ownership 10

1. Industries Where Specific Investment Restrictions May Apply 10

(a) Aviation 10

(b) Maritime 11

(d) Telecommunications 11

2. State Ownership Restrictions 11

II. IMPORTING AND EXPORTING GOODS: U.S. CUSTOMS AND BUREAU OF EXPORT

ADMINISTRATION 12

A. Importing Into the United States 12

1. Classification of Goods Under the Harmonized Coding System 12

2. Valuation 12

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3. Exemptions, Preferences and Trade Agreements 12

(a) The Generalized System of Preferences 12

(b) Trade Agreements 12

(i) ATA Carnets 13

(ii) Duty Drawbacks 13

4. Antidumping, Countervailing Duties and Unfair Trade Practices Issues 13

(a) Antidumping 13

(b) Countervailing Duties 13

5. Marking Requirements 13

(a) Determination of the Ultimate Purchaser 13

(b) Substantial Transformation 13

6. Distributors and Agents 14

B. Exporting From the United States 14

1. The Export Administration Regulations (EAR) 14

(a) Determining Applicable License Requirements 14

(b) Ways to Export 14

(i) No License Required 14

(ii) License Exception 14

(iii) License 14

(i) Deemed Exports 15

(ii) No Circumvention Through Re-Exports 15

(d) Penalties for Violating the EAR 15

2. Other Export Restrictions 15

3. Antidiversion and Antiboycott Laws 15

(a) Antidiversion Regulation 15

(b) Antiboycott Laws 15

III. IMPORTING PEOPLE: U.S. IMMIGRATION LAWS AND INDIVIDUAL TAX PLANNING 16

A. When is a Visa Necessary? 16

B. Overview of Visa Categories and Compliance 16

1. Nonimmigrant Visas 16

(a) B-1/B-2 Visa Category 16

(b) TN (Trade National) Visa Category 16

(d) E-2 Visa Category 17

(d) L-1 (A, B) Visa Category 17

(e) H-1B Visa Category 17

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2. Immigrant Visas 17

3. Investor Visas 18

4. General Considerations Affecting Visa Selection 18

(a) Short Visits 18

(b) Job Requirements and Individual Qualifications 18

(d) Work History and Knowledge 18

(e) Investment 19

(f) Salary Considerations 19

(g) Processing Time and Expense 19

5. Key Considerations For Companies Just Starting A U.S. Presence 19

C. Tax Planning for Foreign Executives Transferred or Temporarily Assigned to United States 19

1. General Treatment of Nonresident Aliens and Resident Aliens under U.S. Income

Tax Law 19

(a) Nonresident Aliens 20

(b) Resident Aliens 20

2. Planning Points and Special Rules: Income Taxes 20

(a) Determining Residence for U.S. Tax Purposes and its Effect 20

(b) Elections to be Treated as Resident Alien 21

(d) Community Property Rules 21

(e) Nonresident Alien Moving Expenses 21

(f) Nonresident Alien Investment Real Property Election 21

(g) Portfolio Investments 21

(h) Selling and Purchasing a Residence 22

(i) Social Security Tax 22

3. Planning to Save U.S. Estate and Gift Taxes 22

(a) Residency as Domicile 22

(b) Application of U.S. Estate and Gift Tax to Aliens 22

(i) Gift Tax 22

[a] Property Taxed 22

[b] Charitable Deduction 22

[c] Annual Exclusion 22

[d] Marital Deductions 23

(ii) Estate Tax 23

[a] Property Taxed 23

[b] Charitable Deduction 23

[c] Marital Deduction 23

[d] Foreign Tax Credits 23

(iii) Unified Estate and Gift Tax Credit 24

[a] Resident Aliens 24

[b] Nonresident Aliens 24

(iv) Effect of Treaties 24

Foreign Investment in the United States | A Guide for Investors

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IV. SPECIAL LIABILITY CONCERNS 25

A. Precautions on Managing Civil Litigation in the United States 25

1. Managing the Extreme Breadth of the U.S. Discovery System 25

(a) Evidence That Can be Discovered 25

(i) Depositions Upon Oral Examinations or Written Questions 25

(ii) Written Interrogatories 25

(iii) Production of Documents or Things 25

(iv) Physical and Mental Examinations 25

(v) Requests for Admission 25

(vi) Electronic Discovery 25

(b) Attorney/Client Privilege 26

(i) Element No. 1 26

(ii) Element No. 2 26

(iii) Element No. 3 26

(iv) Element No. 4 26

(d) Methods of Preserving Work Product 27

2. Arbitration as an Alternative to Litigation 27

3. Avoiding Litigation and Arbitration Altogether 27

B. U.S. Environmental Laws 28

1. Creation of Liability 28

2. Comprehensive Environmental Response, Compensation and Liability

Act of 1980 (CERCLA) (commonly known as “Superfund”) 28

(a) Purpose 28

(b) Other Actions 28

(d) Owners or Operators 28

(e) Standard of Liability 28

(f) Defenses to Liability 28

3. Other Environmental Legislation 29

(a) Resource Conservation and Recovery Act (RCRA) 29

(b) Clean Air Act 29

(d) Toxic Substances Control Act 29

(e) Emergency Planning and Community Right To Know Act (EPCRA) 29

4. Hints to Minimize Exposure 29

C. Federal and State Securities Laws 30

1. Key Definitions 30

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(a) Security 30

(b) Offer 30

2. Antifraud (Disclosure) Provisions 30

3. Registration of Offerings of Securities 31

(a) The Securities Act of 1933 31

(b) Securities Exchange Act of 1934 31

4. Registration Exemptions 31

(a) Private Placements 31

(b) Rule 701 32

D. Products Liability 32

1. Breach of Warranty 32

(a) Express Warranty 32

(b) Implied Warranty 32

2. Common Law Negligence 32

3. Duties of Manufacturer or Supplier 32

4. Strict Liability 33

5. Post Sale Duty to Warn 33

6. The Issue of Joint and Several Liability 33

7. Traditional Defenses to Products Liability 33

(a) Contributory or Comparative Fault 33

(b) Assumption of Risk 34

(d) Misuse 34

(e) Alteration of the Product 34

(f) Compliance With U.S. Standards and Regulations 34

(g) Contract Specifications 34

(h) Statutes of Limitation and Repose 34

(i) Economic Loss Doctrine 35

8. What Can Be Done to Reduce the Risk of Liability? 35

(a) Insurance 35

(b) Compliance 35

(d) Disclosure 35

(e) Stock Acquisitions 35

(f) Asset Acquisitions 35

(g) Contractual Provisions 35

Foreign Investment in the United States | A Guide for Investors

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V. SPECIAL OPERATIONAL CONSIDERATIONS WITH U.S. LAWS 36

A. Reporting Requirements for Foreign Investments 36

1. International Investment and Trade in Services Survey Act 36

(a) Quarterly Survey 36

(b) Annual Survey 36

2. The Agricultural Foreign Investment Disclosure Act 37

3. Treasury Department Information Reporting and Record Keeping 37

(a) Financial Institution Disclosure 37

(b) Transfer of Currency 37

(d) Transactions with Designated Foreign Financial Agencies 37

B. Acquisition Approvals or Reviews 37

1. Hart Scott Rodino Antitrust Improvements Act 38

(a) Size of the Transaction 38

(b) Size of the Parties 38

2. Exon Florio 39

(a) Acquisition 39

(b) Control 39

3. U.S. Export Control Laws and Licenses 39

(a) Export Administration Regulations 39

(b) Trading With the Enemy Act 39

(d) The Atomic Energy Act of 1954, as amended 39

C. U.S. Labor and Employment Laws Generally Apply to Foreign Corporations Doing Business

in the United States 39

1. Federal Labor Law: Union Issues 39

(a) Collective Bargaining Obligations 40

(i) Inherited Bargaining Relationship 40

(ii) Union Organizing Activity 40

(b) Disputes Between Employers and Unions 40

(i) Grievance and Arbitration 40

(ii) Unfair Labor Practice Charges 40

2. Federal And State Employment Laws 40

(a) Anti-Discrimination Laws 40

(i) Federal Statutes 40

[a] Title VII 40

[b] Americans With Disabilities Act (ADA) 40

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[c] Age Discrimination in Employment Act (ADEA) 41

(ii) State Laws 41

(b) Application To Foreign Corporations Operating Within the United States 41

3. Effect of FCN Treaties on Application of Title VII to Foreign Corporations Operating in the

United States 41

(a) General Rule 41

(b) Differing Treatment Among the Circuit Courts 41

4. Effect of an Employee’s Status (Managerial versus Rank and File) on the Outcome of

Antidiscrimination

Claims Against Foreign Corporations Operating in the United States 42

5. Employee Benefits and Other Protections 42

(a) Family and Medical Leave Statutes 42

(b) Plant Closing Laws 42

(d) Unemployment Compensation 43

(e) Employer Monitoring 43

6. Wage and Hour Issues 43

(a) Overtime Laws 43

(b) Compensable Work Time 43

D. Intellectual Property Protection 44

1. Patents 44

(a) Source of Protection 44

(b) Duration 44

(d) Applicant 44

(e) First-to-File 44

(f) Limited Grace Period for Public Disclosures 45

(g) Publication 45

(h) Renewal Fees 45

2. Copyrights 45

(a) Source of Protection 45

(b) Works Protected 45

(d) Berne Convention 46

3. Trademarks 46

(a) Source of Protection 46

(b) Definition 46

(d) Use Requirement 46

(e) Priority Benefits to Foreign Registrants 47

(f) Affidavits of Use Required 47

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(g) Incontestability 47

(h) Renewals Unlimited 47

(i) Licensing 47

4. Trade Secrets 47

(a) Definition 47

(b) Rights of Trade Secret Owner 47

E. U.S. Health Care and Pension Laws 48

1. Publicly-Funded or Mandated Health System 48

2. Pension Plan Regulation 48

(a) Liability for Violating ERISA and Internal Revenue Code Requirements Applicable to

Pension Plans 48

(i) Fiduciary Responsibilities 48

(ii) Rules for Operating Pension Plans 49

(b) Plans Exempt From ERISA 49

(d) Union Pension Plans 49

(e) Pension Plans Maintained by Foreign Corporations 49

Foreign Investment in the United States | A Guide for Investors

I. IMPORTING AND EXPORTING MONEY: INVESTMENT STRUCTURE

AND REPATRIATION OF PROFITS

A. Tax Analysis. In the context of international transactions, U.S. tax analysis seeks the optimum

structure after considering U.S. and foreign taxation of domestic and foreign corporations,

branches, subsidiaries, joint ventures and individuals, and provisions for taxation and deduction

of interest, royalties, rent, personal services and dividends. Complicated enough, the search is

further complicated by differing tax rates depending on whether a tax treaty applies, which in

turn may be affected by anti-treaty-shopping rules (especially in newer tax treaties). There are

seldom any easy answers, but there are some general rules and planning points that can be

useful.

1. General Overview of U.S. Taxation. The most important U.S. taxes are applied at the

federal level. (Significant state taxes also usually apply but are not considered in this

outline.) The most important taxes are U.S. corporate and individual income taxes and U.S.

estate and gift taxes. (Estate and gift taxes are considered later in this outline.) In general,

U.S. income taxation of businesses or individuals starts with gross income (worldwide for

U.S. citizens and residents; U.S. source for foreigners). Certain deductions may be allowed

to arrive at taxable income, to which the statutory rates of tax are applied. Accordingly, the

most important issues for the foreign investor are to determine:

(a) which transactions are subject to withholding;

(b) what income must be reported;

(d) what rates of tax apply.

2. U.S. Trade or Business: Taxation on a Net Basis. In general, active businesses (whether in

the form of U.S. corporations, branches of foreign corporations, limited liability companies,

proprietorships or partnerships) that are engaged in a U.S. trade or business are taxed on

their net profits after deduction of expenses attributable to the business. In the case of pro

prietorships, limited liability companies, partnerships and certain corporations called S

corporations (which are not available to foreign owners), the income, deductions, profits

and losses are taxed directly to the partners or owners rather than at the entity level.

(a) Gross Income. In the case of U.S. corporations and resident individuals, this includes all

income from whatever source, worldwide.1 In the case of foreign businesses conducted

in the United States, this includes only income effectively connected to the operation of

the U.S. trade or business.2

(b) Deductions. From gross income are deducted the expenses attributable to producing

the income. U.S. corporations and resident individuals are generally allowed deductions

of expenses worldwide, while foreign businesses in the United States are limited to

deductions attributable to the production of income from U.S. sources.3 Deductions

include the following:

1 I.R.C. § 61.

2 I.R.C. §§ 871(b), 882(a)(1).

3 I.R.C. §§ 161, 873(a), 882(c).

Foreign Investment in the United States | A Guide for Investors

(i) Interest. Interest paid is usually allowed but special rules limit the deductibility of

interest payable to foreign affiliates in order to prevent "stripping" the earnings from

the United States through interest deductions.4

(ii) Royalties. Royalties paid for the use of intellectual property rights (IPRs) are usually

deductible.5

(iii) Rent. Rent paid by the trade or business for the use of real property is usually

deductible and important for foreign investors who may be concerned about

application of the Foreign Investment in Real Property Tax Act of 1980.6

(iv) Personal Services. Reasonable compensation paid to employees is usually

deductible.7

(v) Depreciation. Allowances for depreciation of tangible and certain IPRs used in the

trade or business are deductible.8 For this reason it may be appropriate to transfer

cash to the United States to purchase such assets and obtain a higher basis for

depreciation, rather than transfer these assets in kind from abroad without a sale

and thereby retain the existing (lower) basis for depreciation that the property had in

the hands of the transferor investor.9

forth in the Internal Revenue Code.10 Dividends are generally not deductible by the

payor and dividends paid to foreign owners will be subject to a withholding tax of 30%

(often lower if a tax treaty applies).11 To put branches and subsidiaries of foreign

corporations on a more equal footing, branches of foreign corporations must pay a

branch profits tax equal to the amount of dividends deemed to be paid (generally equal

to the amount of net profits not reinvested in the U.S. trade or business).12

3. "Passive" Investment Income of Nonresidents: Taxation on a Gross Basis. U.S. citizens

and residents are taxed on their worldwide income whatever or wherever the source. A

nonresident, including a foreign corporation, that engages in a U.S. trade or business is, as

explained above, taxed on a net basis even though a number of special rules may apply.

The United States also taxes nonresidents on their "passive" or investment income not

connected to a U.S. trade or business if it is considered to come from a U.S. source. Such

taxation is accomplished by imposing a withholding tax of 30% of the gross amount of such

income at its source, although tax treaties frequently reduce this 30% rate.13 This

withholding tax applies to U.S. source interest, dividends, rents, salaries, wages and other

"fixed or determinable annual or periodical gains, profits, and income" (e.g., royalty

payments) as long as such amounts are not effectively connected to a U.S. trade or

business.

4. Special Rules and Planning Points.

(a) Residency. Corporations are residents of the United States if organized under U.S.

4 I.R.C. §§ 163, 884. See also section I.A.4(d).

5 I.R.C. § 162.

6 I.R.C. §§ 162(a)(3), 897. See also section I.A.4(h).

7 I.R.C. § 162(a)(1).

8 I.R.C. § 167.

9 I.R.C. §§ 167(c), 1011.

10 I.R.C. §§ 1, 11.

11 I.R.C. §§ 871(a)(1), 881(a).

12 I.R.C. § 884.

13 I.R.C. §§ 871(a)(1), 881(a).

Foreign Investment in the United States | A Guide for Investors

laws. Citizenship or residence of the shareholders is irrelevant.14 Individuals are

residents if they hold a "green card" (are lawful permanent residents) or meet a

substantial presence test.15 Under the substantial presence test, an individual who

spends 183 days or more in the United States in a calendar year is considered a

resident, and a formula (number of days present in current year, plus one-third of days

in prior year, plus one-sixth of days in second prior year equals 183 or more) can result

in deemed residence unless the individual proves his tax home is elsewhere.16 Under

this rule, a foreigner who never spends more than 121 days in the United States in a

calendar year will never be a resident.

(b) Source Rules. Source rules determine whether income, which is not effectively

connected to a U.S. trade or business, is taxable to a nonresident alien. The rules are

not always logical.

(i) Interest. Interest is treated as U.S. source if paid by a U.S. corporation, citizen or

resident.17

(ii) Dividends. Dividends paid by a U.S. corporation are U.S. source.18

(iii) Royalties. Royalties paid for the use of IPRs (e.g., patents or know-how) in the

United States are U.S. source, even if both the payor and the payee are not U.S.

persons.19

(iv) Rent. Rent for the use of property located in the United States is U.S. source.20

(v) Salaries and Wages. Payments for personal services performed in the United States

are U.S. source, regardless of the nationality or residence of the payor or the payee,

with certain minor exceptions for payments to nonresident aliens temporarily present

for 90 days or less performing services for a nonresident parent corporation or

certain other foreign offices.21

(vi) Sales of Personal Property. Sales of personal property are generally sourced by the

residence of the seller. Special rules apply to inventory.22

Performing personal services in the United States is almost always considered to be a

U.S. trade or business, with a small exception for commercial travelers on short,

temporary visits.23 Otherwise, a trade or business is what is normally thought of as a

business, involving continuous and regular activity rather than sporadic, irregular or

minimal activity.24 Once it has been established that a foreign person is conducting a

U.S. trade or business, effectively connected income is generally all of a foreign

person's income from U.S. sources, except for any income that the statute requires be

treated differently (e.g., some of the "passive" income described at section I.A.3.)25

Note, however, that tax treaties often provide that effectively connected income will not

14 I.R.C. § 7701(a)(4).

15 I.R.C. § 7701(b).

16 I.R.C. § 7701(b)(3).

17 I.R.C. § 861(a)(1)(A).

18 I.R.C. § 861(a)(2).

19 I.R.C. § 861(a)(4).

20 I.R.C. § 861(a)(4).

21 I.R.C. § 861(a)(3).

22 I.R.C. § 865.

23 I.R.C. § 864(b).

Foreign Investment in the United States | A Guide for Investors

be taxed by the United States unless the treaty resident taxpayer has a "permanent

establishment" (as defined in the treaty) in the United States, thereby providing a more

reliable rule for triggering taxation than the more general "trade or business" threshold,

which is sometimes uncertain in application because "U.S. trade or business" is not

defined in the Internal Revenue Code.

(d) Earnings Stripping Rules and Branch Level Interest Tax. Special rules can limit the

deductibility of interest paid by a U.S. subsidiary to a foreign affiliate in a treaty

jurisdiction when the interest is taxed at favored rates. Another special rule treats

interest paid by a U.S. branch of a foreign corporation as if it were paid by a U.S.

subsidiary.

(i) Earnings Stripping. If a U.S. corporation has a debt-to-equity ratio greater than 1.5

to 1, the benefit of the interest deduction for interest in excess of 50% of adjusted

taxable income (essentially pre-interest cash flow) is limited if paid to a related

person (e.g., a foreign parent) who is not taxed on the interest under U.S. law.

Many treaties reduce the rate of tax on interest received from U.S. sources to less

than the standard 30% statutory rate and, to the extent of the reduction, the

recipient is treated as not taxed.26 The effect of this is to limit the ability of a foreign

investor to strip the earnings out of its U.S. subsidiary through interest charges in a

tax advantaged way. As to the calculated amount, the investor gets the benefit of

the treaty rate, but its subsidiary is denied the deduction.

(ii) Branch Level Interest Tax. This tax treats interest paid by a branch as though it had

been paid by a subsidiary, which attempts to level the playing field between U.S.

branches and subsidiaries of foreign corporations. This results in payments to the

foreign "parent" (and other foreign recipients) in a 30% tax, which is equivalent to

the normal flat rate tax on interest paid to foreign taxpayers and which is also

subject to exemptions (as to which, see below) for portfolio and bank deposit

interest.27 Additional tax withholding applies if the interest deduction allowed the

branch in calculating effectively connected taxable income exceeds the interest

actually paid by the branch.28

(e) Treaty Reductions and Treaty Shopping Rules. The United States has entered into a

number of bilateral tax treaties that often affect the rules applicable to a given foreign

investor. Treaties are currently in effect with most major European countries, Japan,

Canada, Australia, New Zealand, the People's Republic of China, South Korea, India,

Pakistan and some North African countries. The United States does not have a treaty

with Hong Kong, which is considered separate from the People's Republic of China for

tax purposes. Although similarities among treaties are common, each treaty is

separate and must be checked, as there can be subtle differences. In addition to

defining "permanent establishment" as discussed above, the treaties often:

(i) trigger the application of the earnings stripping rules discussed above because of

rate reductions in taxation of interest;

(ii) reduce the applicability of the branch profits taxes discussed above, but the

benefits are limited to "true" residents of the treaty country by requiring that

corporate beneficiaries be owned in minimum proportions by treaty country

residents;

24 Rev. Rul. 73-522, 1973-2 C.B. 226.

25 I.R.C. § 864(c).

26 I.R.C. § 163(j).

27 I.R.C. § 884(f)(1)(A).

28 I.R.C. § 884(f)(1)(B).

Foreign Investment in the United States | A Guide for Investors

(iii) reduce the rate of tax applicable to passive investment income (fixed or

determinable annual or periodic income) taxed on a gross basis, ordinarily at a flat

rate of 30%, so that the tax on dividends may be reduced (for example) to 5% on

corporate shareholders owning 10% or more of the payor's stock and 15% on

other shareholders; the rate applicable to interest may be reduced to 10% or to

zero; and the rate applicable to royalty payments may also be reduced; and

(iv) increase the limits for personal services income that can be received by

commercial travelers without U.S. taxation if paid abroad, or establish rules

exempting treaty resident independent contractors' services in the United States

from U.S. taxation if stays are limited in duration and the individual has no fixed

place of business in the United States. More recent statutes and treaties tend to

deny treaty benefits to persons who are seen as abusing treaties by arranging

foreign holding companies or other structures for the purpose of obtaining treaty

benefits. Residence and minimum resident ownership requirements already exist

in some treaties and will probably become more common in the future as

Congress and the U.S. Internal Revenue Service (IRS) try to limit benefits and limit

treaty shopping. Accordingly, the specific treaty always be checked for residence

and similar requirements.

(f) Transfer Pricing Rules. The IRS may adjust income and deductions among taxpayers

under common control, in order to more clearly reflect the income and tax of the

various related parties.29 This rule applies to domestic corporations as well, but in the

international context it has special significance to:

(i) Related Party Sales of Goods. To determine the validity of prices charged between

related parties, the IRS primarily uses the comparable profits method (CPM),

which requires the less complex of the parties to earn profits within a range of

comparable companies. Foreign-owned U.S. subsidiaries that perform distribution

or similar functions often use the CPM to significantly reduce U.S. taxes while

repatriating cash.

(ii) Loans. The IRS may examine the rate charged in light of relevant commercial

factors to determine if inappropriate income shifting (loss of tax revenue) is

occurring and adjust accordingly.

(iii) Services. Material services such as marketing, management or administration

could be examined to determine if arm's length amounts were charged to one

party by the other.

(iv) Rents and Royalties. If arm's length rates are not charged or, in the case of

intangibles, if the royalty amount is not "commensurate with the income

attributable to the intangible," the IRS can adjust the rates to those paid in arm's

length transactions or otherwise to properly reflect income. This can be especially

significant in a joint venture where one party supplies IPRs and another supplies

capital or other property. An adjustment in rates can result in unanticipated

allocations of taxable income to a party that may not have sufficient cash to pay

the corresponding tax. Accordingly, careful determination of rates, careful

structuring and careful drafting of the joint venture agreements are important.

29 I.R.C. § 482.

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(g) Capital Gains. With a few exceptions, most notably transfers of U.S. real property

interests discussed below, capital gains of nonresident aliens and foreign corporations

that are not effectively connected to a U.S. trade or business escape U.S. taxation

because they are not fixed or determinable annual or periodic income.30 Accordingly,

portfolio capital gains from stock and bond investments in the United States are not taxed

to nonresident aliens.

(h) Foreign Investment in Real Property. Gain from the sale of a U.S. real property interest is

taxable to nonresident aliens and foreign corporations as U.S. source effectively

connected income, even if the foreign person is not otherwise engaged in a U.S. trade or

business.31 This result is designed to prevent foreign persons from enjoying the benefit of

capital gains on appreciation in U.S. real property without paying tax on the otherwise

exempt capital gains. A U.S. real property interest includes any direct or indirect interest

(except as a creditor) in real property located in the United States and this includes stock

ownership of any corporation if the value of the U.S. real property owned by the

corporation equals or exceeds 50% of the total value of all its real property plus its other

business assets. The result without proper planning could be inadvertent exposure to U.S.

taxation of capital gains unrelated to U.S. real property, which can normally escape U.S.

taxation when attributable to portfolio investment of nonresident aliens and foreign

corporations.

(i) Portfolio Interest and Interest on Bank Deposits. Nonresident aliens and foreign

corporations may enjoy an exemption from U.S. taxation on certain "portfolio interest,"

which generally means any interest on registered form debt instruments (and certain other

debt) if the payee owns less than 10% of the stock of the payor and the payee is not a

bank.32 Also exempt from U.S. taxation of nonresident aliens and foreign corporations is

interest paid by banks or savings and loan associations on deposits which are not

effectively connected with a U.S. trade or business.33

(j) Matching Rules. As a general rule, related taxpayers must match the deduction with the

receipt of an item of income. The IRS has issued regulations that would require foreign

related taxpayers to follow these rules by postponing any deduction by a U.S. payor of

amounts (interest, royalties and other fixed or determinable, annual or periodic income

which would be subject to withholding) owed to a foreign related person (e.g., a foreign

parent corporation) until the amounts are actually paid.34

(k) Withholding on Foreign Partners. A partnership (or a limited liability company taxed as a

partnership) must withhold tax at the highest rate in effect. The withholding is imposed on

the effectively connected income of the foreign partner, regardless of whether cash

representing the income is ever distributed to the foreign partner.

5. Income and Estate Taxation of Foreign Individual Investors. Some of the most important

individual income tax rules are discussed above. It is worth repeating that personal services

income is usually effectively connected income, taxed on a net basis with limited deductions

at graduated rates (against which any withholding is credited); that a tax treaty may

substantially alter the rules applicable to individuals by raising, for example, the amount of

income that can be received or the duration of a visit that will be allowed without U.S. taxation;

and that residence for U.S. tax purposes will subject all of the individual's worldwide income to

taxation in the United States. In addition:

30 I.R.C. §§ 871(a), 881(a).

31 I.R.C. §§ 861(a)(5), 897.

32 I.R.C. §§ 871(h), 881(c).

33 I.R.C. §§ 871(i), 881(d).

34 I.R.C. § 267(a)(3); Treas. Reg. § 1.267(a)-3.

Foreign Investment in the United States | A Guide for Investors

(a) Special income tax rules for individuals often affect individual planning decisions and the

timing of various events.35

(b) Offshore investment trusts are often desirable to hold a nonresident (and, sometimes, a

resident) alien investor's interest in a U.S. corporation engaged in business in the United

States. Shares of a U.S. corporation owned directly by a resident or nonresident alien are

subject to the U.S. estate tax, while shares held indirectly through a foreign corporation

(usually established in a low tax or no tax "tax haven" jurisdiction) are not subject to the

estate tax if held by an alien not domiciled in the United States at the time of death.36

6. Choice of U.S. Entity: Tax Issues. In many cases it will be worth obtaining the assistance of

an experienced U.S. tax attorney before deciding whether a U.S. investment should be made

in the form of a corporation, a branch, a limited liability company or a partnership. No general

rule can decide the best choice, as the choice involves a number of factors including the size

of any early losses or future profits expected, the likelihood of repatriating profits versus

reinvestment in the United States, the tax rates at the time of the investment, any differences

between tax rates on individuals and corporations, the taxes payable in other jurisdictions,

whether a tax treaty applies and whether the investor is an individual or a legal entity, such as

a foreign corporation.

B. Limitation of Liability

1. Limited Corporate Liability: General Rule. As a general rule, foreign parent corporations (and

individual shareholders) are not liable for the acts of the U.S. corporations they own. Instead,

the law protects the parent by recognizing a barrier—or corporate veil—between subsidiaries

and parents (and individual investors and corporations). The same principle applies to the

owners of limited liability companies who are not liable as such for the acts or debts of the

limited liability company. (The discussion below refers to the owner as the "parent," whether

the owner is a company or an individual and to the U.S. company as the "subsidiary,"

whether that company is a corporation or a limited liability company.)

2. Important Exceptions to the General Rule

(a) Piercing the Corporate Veil of a Subsidiary to Reach the Parent. In certain circumstances,

courts will disregard the barrier—or "pierce the corporate veil"—between subsidiary and

parent and hold the parent directly liable for the subsidiary's acts. Those circumstances

are present when a number of the following factors exist:

(i) the parent exercises intrusive control so that the subsidiary makes no independent

decisions;

(ii) the parent and subsidiary are regarded as a single business entity;

(iii) the parent and subsidiary present themselves to the public as a single business entity;

(iv) the subsidiary greatly depends on the parent for financial or administrative support;

(v) the parent fraudulently manipulates the subsidiary's assets to the detriment of the

subsidiary's creditors;

(vi) the subsidiary is inadequately capitalized so that it is unable to meet customary

35 See also section III.C.1.

36 I.R.C. § 2104(a). See also section III.C.3.

Foreign Investment in the United States | A Guide for Investors

operating and other expenses; and

(vii) the subsidiary fails to follow corporate or other formalities required by its state of

incorporation.

A U.S. court will be more likely to pierce the corporate veil and hold the parent liable when

many of the above circumstances are met. When only a few of these circumstances are

met, veil piercing is generally less likely, absent fraud.

(b) Jurisdiction. A foreign parent's first line of defense to a suit in the United States related to

its subsidiary's activities is often to challenge the court's jurisdiction over the foreign

parent. Foreign nationals and companies doing business in the United States may be

subject to the jurisdiction of both federal and state courts in the United States.

(i) In determining whether a foreign parent is doing business in a given state for

jurisdictional purposes, a court usually looks first to the law of the forum state and then

to federal constitutional standards. The definition of what constitutes "doing business"

varies from state to state. Several states have enacted statutes allowing the exercise

of jurisdiction in any case, subject only to the limits of jurisdictional power imposed by

the U.S. Constitution.37

(ii) Under the U.S. Constitution, a foreign person need only have "minimum contacts" with

the forum state so that forcing the defendant to defend the action in the state "does

not offend traditional notions of fair play and substantial justice."38

(iii) When specific jurisdiction is sought (for example, in a product liability suit), due

process is satisfied if the defendant "has purposefully directed his activities at

residents of the forum [state], and litigation results from alleged injuries that arise out

of or relate to those activities."39

(iv) Once "minimum contacts" have been found, a court looks to several factors to

determine whether jurisdiction is fair and reasonable:

[a] the burden on the defendant;

[b] the interests of the forum state;

[c] the plaintiff's interest in obtaining relief;

[d] the interstate judicial system's interest in obtaining the most efficient resolution of

controversies; and

[e] the shared interest of the several states in furthering the fundamental substantive

social policies.40

When the defendant is headquartered outside the United States, applicable law

recognizes that the burden of defending a lawsuit in the forum state can be severe and

ought to be accorded significant weight in the foregoing analysis.41 But "when

minimum contacts have been established, often the interests of the plaintiff and the

forum in the exercise of jurisdiction will justify even the serious burdens placed on the

foreign defendant."42

37 See, e.g., R.I. Gen. Laws § 9-5-33 (Rhode Island's "long arm" statute).

38 Int'l Shoe Co. v. Wash. Office of Unemployment Comp. & Placement, 326 U.S. 310, 316 (1945).

39 Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985).

40 Asahi Metal Indus. Co. v. Superior Court of Cal., 480 U.S. 102, 113 (1987).

41 Id. at 114.

42 Id.

Foreign Investment in the United States | A Guide for Investors

C. Local Presence and Organizational Factors

1. Form of Organization. The vast majority of U.S. businesses are in the form of business

corporations organized under state law, which limits investor liability in most cases to the

amount invested in the corporation. Partnerships are sometimes used for specific ventures

such as real estate transactions or joint ventures with limited life. Business corporations can

usually have any number of shareholders, directors and officers and are usually organized by

lawyers on behalf of their clients. The names of directors are often required to be filed with a

state agency.

A form of company called a "limited liability company" or "LLC" is allowed under state laws.

Similar to the French S.A.R.L. or the German GmbH, these companies are also in common

general use, especially for pooled investment vehicles, real estate developments and

wherever complex capital structures are needed in order to allocate profits and capital

disproportionately among owners in differing circumstances. LLCs can be managed directly

by the LLC owners or by appointed managers.

See section I.A.6 for a discussion of some tax planning issues associated with different types

of business entities.

2. Officers. The typical officers in a U.S. corporation, in order of seniority, are Chairman,

President, Vice President, Secretary and Treasurer. The latter two positions are often not

important in ordinary business transactions, but the Secretary is often needed to sign

corporate documents such as stock certificates.

3. Name. Americans seem to have a love/hate relationship with foreign investment. They love it

when it creates jobs; they hate it when it seems too competitive with local businesses. In

order not to be too obvious, many foreign investors organize their corporations under

"American" names if their original name might seem too "foreign" or cause anxiety among

customers. On the other hand, sometimes an evocative foreign name, especially if it is related

to food, clothing, cosmetics and similar products, can provide a marketing advantage.

4. Charitable and Public Activity. It is common in U.S. business life for business corporations to

build local goodwill by sponsoring or contributing to local charity drives, charity events or

community causes. This is especially true of large, consumer oriented corporations such as

banks.

D. Financing Source Alternatives

1. Debt Financing. Subject to the securities law registration requirements discussed in

section IV.C., foreign investors may engage in public and private sales of their debt securities

to finance U.S. investment. As a practical matter, because of the cost involved and the degree

of disclosure required by the SEC, public debt offerings are generally available only to large

companies seeking to raise at least $15 million. (Note: This threshold may still be impractical

in certain circumstances and is substantially lower than what is typical.) Privately placed debt

offerings (particularly under Regulation D) are often much more practical for the typical

borrower.

Conventional bank financing is available on both a short- and medium-term basis. In

evaluating a loan proposal, banks typically will examine the available collateral and may

extend loans secured by real estate (up to 80% of the value), accounts receivable (70%-90%

of qualified receivables), inventory (roughly 50% of booked value depending on the nature of

Foreign Investment in the United States | A Guide for Investors

the inventory) and equipment (40%-60% of saleable value). The actual value of the collateral

that banks will consider in determining whether to extend loans will vary by borrower and the

borrower's industry.

2. Public and Private Equity Financing. Foreign investors may gain access to U.S. capital

markets through public and private equity financing. The breadth of the securities regulations

discussed in section IV.C generally make a public offering of less than $5 million to $7 million

of equity securities impractical. (Note: This threshold may still be impractical in certain

circumstances and is substantially lower than what is typical.)

Alternatively, a foreign investor may privately place its equity. While private placements may

have the advantages of confidentiality, flexibility and less rigorous disclosure obligations,

liquidity can be a concern to investors, who almost always demand a contractual right to resell

their equity under certain circumstances.

3. Venture Capital. Venture capital financing may be available to foreign investors to service

their seed capital, development capital or mezzanine capital needs. Significant costs incurred

in thoroughly documenting the venture capital relationship and developing a suitable business

and financing plan are often prerequisites to successfully obtaining venture capital. Because

of the relatively high risk accepted by the venture capitalist, this can be the most costly form of

financing. The foreign investor must not only have an excellent business plan and prospects

for success, but also be willing to share ownership and control with prospective investors to

effectively attract venture capital.

4. Installment Sales or Other Seller Financing. The installment sale method of acquiring assets

and stock is accomplished by paying a portion of the purchase price at the closing and paying

the remainder of the purchase price over time. It is generally only possible where the seller is

willing to defer payment of a portion of the purchase price (typically when the seller desires to

limit or defer taxable gain) and is satisfied with the buyer's credit standing or collateral.

5. Leasing. Leasing is a major source of financing for equipment purchases in the U.S. Leasing

offers the lessor the flexibility to make capital acquisitions with little or no down payment and

installments over an extended period of time.

E. Restrictions (if Applicable) on Foreign Ownership

While the federal government imposes few outright prohibitions on foreign investment in the

United States, foreign investment may be subject to certain information reporting, record

maintenance rules and ownership limitations in specific industries. Additionally, several states

impose certain restrictions (e.g., on acreage or use) or residency or registration requirements on

foreign nationals and corporations from owning real estate.43

1. Industries Where Specific Investment Restrictions May Apply

(a) Aviation. While international aviation rights are generally governed by treaty, domestic air

carriage in the United States is limited to aircraft registered in the United States. Subject

to certain exemptions, such aircraft may be registered by U.S. citizens only, partnerships

in which all partners are U.S. citizens or U.S. registered corporations in which the chief

executive officer and two thirds of the directors are U.S. citizens and more than 75% of

the stock is held or controlled by U.S. citizens.44

43 See, e.g., S.C. Code Ann. §§ 27-13-30; Ohio Rev. Code § 5301.254.

44 See 49 U.S.C. §§ 40102(a)(15)(A), 41102.

Foreign Investment in the United States | A Guide for Investors

(b) Maritime. Coastal and fresh water shipping in the United States (as opposed to the

international transport of goods or persons) is restricted to vessels that are built and

registered in the United States and owned by U.S. persons.45 Similarly, only fishing

vessels registered in the United States may fish within U.S. territorial waters.46

or a license which may be obtained from the U.S. Comptroller of the Currency for a

national bank or from the appropriate state banking supervisor for a state or other bank.

Unless waived by the Comptroller, all directors of national banks are required to be U.S.

citizens. Other state and federal regulations apply.

(d) Telecommunications. All radio and television broadcasting in the United States requires a

license from the Federal Communications Commission (FCC). The Federal

Communications Act of 1934 prohibits the granting of such licenses to foreign

governments, individuals, corporations or other foreign entities.47

2. State Ownership Restrictions. A number of states prohibit substantial foreign ownership of

agricultural or other real estate. Additionally, some states require citizenship and residency

requirements for participants in insurance, banking and other industries.

45 46 U.S.C. App. § 883.

46 16 U.S.C. § 1857(2).

47 47 U.S.C. §§ 310(a), (b).

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II. IMPORTING AND EXPORTING GOODS: U.S. CUSTOMS AND BUREAU

OF EXPORT ADMINISTRATION

A. Importing Into the United States

Goods imported into the United States can be either dutiable or duty free under the U.S. import

laws. Rates of duty may vary depending upon the country of origin, with most goods dutiable at

the most favored nation rates. As a practical matter, customs agents and brokers are retained to

handle the vast majority of import transactions for the account of the importer.

1. Classification of Goods Under the Harmonized Coding System. To determine the duty status

of a good, the good must first be classified according to the Harmonized Tariff Schedule. This

schedule is updated frequently and is available online at the website for the United States

International Trade Commission.48

2. Valuation. Once classified, the importer must value the goods to determine the amount of duty

owed, if any. Duty rates can be stated on an ad valorem basis, on a specific (i.e., per unit)

basis or by a combination of these methods. The transaction value will usually equal the price

actually paid or payable for the goods plus certain costs and assists.49 If the transaction value

is unavailable (e.g., the goods are imported on a consigned basis), the following methods,

listed in preferential order, are used to determine value:

(a) the transaction value of identical goods;50

(b) the transaction value of similar goods;51

(d) the computed value.53

3. Exemptions, Preferences and Trade Agreements

(a) The Generalized System of Preferences. The Generalized System of Preferences

provides duty free treatment for certain goods imported from certain developing

countries.54

(b) Trade Agreements. Trade agreements may also provide for duty-free or reduced duty

treatment on imports from specific countries.

Such agreements include the multilateral North American Free Trade Agreement among

the United States, Canada and Mexico, as well as several bilateral agreements between

the United States and countries such as Israel, Singapore, and Australia.

48 http://www.usitc.gov.

49 19 U.S.C. § 1401a(b).

50 19 U.S.C. § 1401a(c).

51 19 U.S.C. § 1401a(c).

52 19 U.S.C. § 1401a(d).

53 19 U.S.C. § 1401a(e).

54 See 19 U.S.C. § 2461, et seq.

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(i) ATA Carnets. An ATA carnet is an international customs document which can be used

for the temporary import of goods into a country in lieu of customary documents. The

United States allows ATA carnets for the admission of professional equipment,

samples and advertising material for up to one year.

(ii) Duty Drawbacks. Drawbacks are refunds of up to 99% of duties paid on goods

imported into the United States that are then used in the manufacture or production of

goods which are later exported.55

4. Antidumping, Countervailing Duties and Unfair Trade Practices Issues

(a) Antidumping. Antidumping duties may be assessed if imported goods are sold in the

United States for less than their fair value, causing or threatening material injury to, or

preventing the establishment of, an industry in the United States.56

(b) Countervailing Duties. Countervailing duties may be assessed to counter subsidies

provided by the government of the exporting company, which have the effect of causing or

threatening material injury to, or preventing the establishment of, an industry in the United

States.57 Countervailing duties may be partially offset by drawbacks.

including market disruption, violation of trade agreements and other import practices

designed to restrain trade or harm U.S. industries.58

5. Marking Requirements. All goods imported into the United States, unless specifically

excepted, must be marked to show the "ultimate purchaser" of the country of origin of the

good.59 The country of origin marking not only notifies U.S. customers of the good's source

but may also affect the assessment of duties, the administration of country-specific quotas,

and other arrangements. Two concepts are critical to the marking process:

(a) Determination of the Ultimate Purchaser. Because the marking obligations extend only to

the ultimate purchaser of a good, it is often important to determine who the ultimate

purchaser is. With respect to goods originating from Canada or Mexico, the ultimate

purchaser is the last person to purchase the good in the form in which it was imported.60

With respect to all other imports, the ultimate purchaser is the last person to receive the

good in the form in which it was imported.61

(b) Substantial Transformation. As a corollary to the general rules, a person who substantially

transforms an imported good is often deemed to be the ultimate purchaser. "Substantial

transformation" occurs when the article acquires a new name, character and use.62 The

substantial transformation concept can affect not only the determination of the ultimate

55 19 U.S.C. § 1313; 19 C.F.R. § 191, et seq.

56 19 U.S.C. § 1673.

57 19 U.S.C. § 1671.

58 See generally 19 U.S.C. §§ 1337, 2411, 2436.

59 19 U.S.C. § 1304(a).

60 19 C.F.R. § 134.1(d).

61 Id.

62 United States v. Gibson Thomsen Co., Inc., 27 C.C.P.A. 267 (1940).

Foreign Investment in the United States | A Guide for Investors

purchaser of the goods but also the country of origin of the goods.63 If a product is

substantially transformed (e.g., Malaysian rubber is imported into Canada and

transformed into automobile tires in Canada that are then exported to the United States),

the product's origin is the country where the transformation occurred. The country of origin

of the rubber is Malaysia and the country of origin of the tires is Canada. The ultimate

purchaser of the Malaysian rubber is the Canadian tire manufacturer, and the ultimate

purchaser of the Canadian tires is the U.S. owner of the automobile who buys them from a

dealer to put on his car.

6. Distributors and Agents. Foreign investors should consult a U.S. lawyer to consider the

implications of applicable state laws on establishing and altering relationships with U.S.

distributors and agents, and to prepare appropriate written agreements setting forth rights and

duties that comport with applicable law. Many laws affecting product distribution relationships

vary from state to state and often special industry laws will apply to certain kinds of products

(e.g., automobiles, agricultural equipment and outdoor power equipment). Although such

agreements usually cover many of the same matters covered in similar situations abroad,

there is no standard U.S. format and the law governing distributors and agents (and the

potential cost of terminating or making material changes to relationships) varies considerably

from state to state. A well-written agreement can reduce risks and costs during and at the end

of the relationship. Registration of manufacturers' agents and distributors or agreements

covering them is not necessary in the United States.

B. Exporting From the United States

1. The Export Administration Regulations (EAR). The EAR cover both tangible items such as

goods and intangible items such as technology. Nevertheless, many items will not require an

export license. The U.S. Department of Commerce's Bureau of Industry and Security (BIS)

is responsible for administering the EAR and making license determinations.

(a) Determining Applicable License Requirements. The first step in determining what license

requirements, if any, apply to a particular good is to classify the good according to various

criteria in the EAR. Once classified, the license requirements and other restrictions on

exports of the good to certain locations, users or for certain uses can be ascertained.64

(b) Ways to Export:

(i) No License Required. Many goods (particularly low technology consumer goods) will

not require an export license, although the export of any good to an embargoed

country, to an end user of concern or in support of a prohibited end use, may be

prohibited or require a license.

(ii) License Exception. If a license is required, a license exception may be available.65

(iii) License. If the goods require a license to be exported, the exporter must apply to the

BIS for an export license prior to export. If the application is approved, the exporter will

receive a license number and expiration date to use on its export documents. A BISissued

license is usually valid for two years.

63 See 19 C.F.R. §134.1(b).

64 See 15 C.F.R. § 732.1.

65 See 15 C.F.R. § 740.

Foreign Investment in the United States | A Guide for Investors

(i) Deemed Exports. "Exports" are broadly defined to include not only cross-border

transfers of goods or technology, but also "deemed exports" of information released to

or observed by foreign nationals while in the United States.66 Additionally, the

application of knowledge or technical experience acquired in the United States to

situations abroad may also constitute a deemed export.67

For example, the tour by foreign persons on behalf of a foreign parent of its U.S.

subsidiary's facilities may be deemed to be an export by the U.S. subsidiary of

information released through observation during the tour to foreign persons and to the

parent's home country. Disclosures at conferences and trade shows may also be

deemed exports.

(ii) No Circumvention Through Re-Exports. Restrictions on exporting to a certain country,

a certain end-user or for a certain end-use may not legally be avoided by shipping the

product to a third country for re-export to the restricted country, end-user or end-use.

(d) Penalties for Violating the EAR. Potential penalties for violations of the EAR include loss

of export privileges, administrative or criminal fines and/or incarceration.

2. Other Export Restrictions. The EAR are not the only source of export restrictions. The U.S.

Department of State and the U.S. Department of the Treasury also restrict transactions with

certain parties or certain countries. For example, the Office of Foreign Assets Control of the

U.S. Department of the Treasury administers and enforces U.S. economic and trade

sanctions against certain countries and activities and the U.S. Department of State's

Munitions List restricts sales of military items (e.g., firearms, munitions, nuclear technologies)

to parties in certain countries.

3. Antidiversion and Antiboycott Laws

(a) Antidiversion Regulation. To ensure that U.S. exports go only to legally authorized

destinations, the exporter must note on its shipping documents that the goods are

licensed only for export to the named destination.

(b) Antiboycott Laws. The United States specifically prohibits U.S. persons from participating

in restrictive trade practices or boycotts against Israel and certain other countries that are

friendly to the United States.68 Severe penalties can be imposed for violations and

ignorance of the law is not a defense.

66 15 C.F.R. § 734.2(b).

67 Id.

68 15 C.F.R. § 760.

Foreign Investment in the United States | A Guide for Investors

III. IMPORTING PEOPLE: U.S. IMMIGRATION LAWS AND INDIVIDUAL

TAX PLANNING

A. When is a Visa Necessary?

1. A visa is required for travel into the United States for business, employment, studying or

merely vacationing unless a treaty provides otherwise.

2. There are two visa types:

(a) nonimmigrant visa (a temporary visa) or

(b) immigrant visa (also known as permanent lawful residence or "green card”).

3. Except when limited exceptions apply, a visa is required to enter the United States and must

be acquired at a U.S. Consulate abroad before arriving.

4. For example, suppose a foreign business person wants to come to the United States to

investigate acquiring a U.S. company. If that business person is a resident of a treaty country,

he/she probably will not require a visa. However, if he/she is not a resident of a treaty country,

a visa will be required before entering the United States. Even if there is a treaty, if that

business person will begin working in the United States, a visa will still be necessary. The

various visas available are described below.

5. Once having obtained an immigrant visa, an individual may ultimately be eligible to pursue

U.S. citizenship after a period of time in which they are in the United States as a permanent

resident.

B. Overview of Visa Categories and Compliance

1. Nonimmigrant Visas. If an individual anticipates being in the United States for a temporary

period of time, which can be from a few days to a few years, they will need a nonimmigrant

visa. Among the nonimmigrant visas are the following:

(a) B-1/B-2 Visa Category. This category is typically known as a "visitor visa." Typically, this

visa is provided for a period of time, such as five years. Within that period of validity,

actual visits are usually limited to a maximum of six months at a time. Foreign nationals

from certain countries may enter the United States to visit (for business purposes or

pleasure) for a limited period (up to 90 days) without a visa under the visa waiver

program. Active employment in the United States is generally not allowed for visitors.

(b) TN (Trade National) Visa Category. Established under NAFTA, this category permits

Canadian and Mexican professionals to enter the United States to work. These visas can

be issued for a maximum of a three year period. Most TN visas can be extended

indefinitely. The professional category of "management consultant" may apply to a variety

of situations but tends to be highly scrutinized and it is usually difficult to extend a TN visa

for a management consultant. Canadian professionals can apply for a TN visa at a port of

entry into the United States. Mexican professionals must first apply for a visa at a

consulate.

allows foreign nationals to enter the United States in order to direct and manage an

enterprise which engages in substantial trade, including trade in services and technology,

Foreign Investment in the United States | A Guide for Investors

principally between the United States and a foreign state which has a commerce or

investment treaty with the United States. More than 50% of total trade of the U.S.

company must be with a qualifying treaty country. Executive, managerial and essential

personnel of the enterprise who are also of the same citizenship of the enterprise are

allowed to apply for entry in the E-1 category. E-1 visas are generally granted for periods

of up to five years at a time.

(d) E-2 Visa Category. This category is also based on treaties in effect with other countries

and it allows individuals seeking to develop and direct the operations of an enterprise in

which he or she has invested, or of an enterprise in which he or she is actively in the

process of investing a substantial amount of capital. No particular dollar amount is defined

as constituting a "substantial" investment. A proportionality test is instead applied where

the amount of the investment is compared to the total average or actual cost for starting

up or purchasing the type of business involved. Borrowed funds may only qualify if the

investor is personally at risk for the loan. Executive, managerial or essential personnel of

the investor who are also of the same citizenship of the investor may also qualify for an

E-2 visa. E-2 visas are generally granted for periods of up to five years at a time.

(e) L-1(A, B) Visa Category. This category allows executives, managers and employees with

specialized skills to temporarily transfer from a foreign company to its U.S. subsidiary,

affiliate, parent or branch office. The L-1A visa is generally used for executives and

managers, with emphasis on the Company's organization and the applicant's managerial

or executive duties. The definitions of "manager" include management of a function, not

just management of other persons. Individuals who qualify for an L-1A visa may seek

permanent residency without the completion of the labor certification process described

below that applies to some other visa categories. The L-1B visa is generally used for

persons with advanced or unique knowledge or skill with a product, technology or process

that is either proprietary or highly specialized to the enterprise and which aids the

competitiveness of the business in the United States. The L-1A visa can be held up to

seven years and the L-1B visa can be held up to five years. This type of visa may be used

in connection with the establishment of a new office in the United States under strict

requirements.

(f) H-1B Visa Category. This category is known as a "temporary professional visa." This visa

allows professionals to temporarily enter the United States to accept employment in a

"specialty occupation," typically defined as a position requiring a minimum of a bachelor's

degree or the equivalent. This visa is often utilized by engineers, health professionals,

professors, information technology and other professionals as a way to obtain work

experience in the United States. This visa may be extended up to six years and, in some

cases, a longer period if the individual is the subject of a pending immigrant petition. This

visa recognizes "dual intent"—the ability to seek permanent residency while in United

States on a temporary visa. This visa type has an annual cap established by Congress.

For this reason, in recent years, it has become increasingly difficult to obtain this type of

visa.

2. Immigrant Visas. If a person anticipates being in the United States on a more permanent

basis, that individual will have to seek an immigrant visa. Immigrant visas are categorized as

employment-based or family-based. The employment-based immigrant visas include the

following:

(a) Priority workers, including executives and managers transferring to an affiliated company

in the United States; an outstanding professor or researcher; or an individual with

extraordinary and internationally recognized ability in the sciences, arts, education,

business or athletics.

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(b) Foreign nationals of "exceptional ability" in the sciences, arts and business or

professionals holding an advanced degree (or the equivalent). In some instances, an

individual may be eligible for a national interest waiver if their work will benefit the U.S.

population, the infrastructure or the government on a national basis. National interest

waivers are generally difficult to obtain.

(d) Skilled workers (need two years training and experience).

(e) Unskilled workers.

Immigrant visas are generally more available to individuals satisfying the criteria in the earlier

categories described above. Significantly, most employment based preferences require a

labor certification application. These are obtained following a recruitment effort where it is

demonstrated that no qualified U.S. worker is available. The process is referred to as "PERM"

labor certification and that process is subject to the approval of the U.S. Department of Labor.

If approved, approval is valid only for the position described and only in the area of intended

employment covered by the application. The employer must be able to pay the foreign

national's salary and the employer and the individual must intend for the foreign national to

undertake the permanent position.

3. Investor Visas. There are nonimmigrant and immigrant visas available based on investments

made in a U.S. business. For nonimmigrant visas, the investment must be substantial and

may depend on the nature of the business and investment. For immigrant purposes, the

investment normally must be at least $1 million, although a lesser amount ($500,000) may be

sufficient in some areas. In addition, there are a number of authorized pilot programs where a

$500,000 investment may be made and the other criteria can be established by making the

investment in an area designated for the pilot program.

4. General Considerations Affecting Visa Selection

(a) Short Visits. A B-1 visa is appropriate for short visits for business purposes. The individual

cannot be paid by the U.S. business. Longer visits and/or payments being made by a U.S.

company will usually require a more specialized visa, such as an H or L visa.

(b) Job Requirements and Individual Qualifications. If a job is normally performed by an

individual with a U.S. bachelor's degree or equivalent, several visa options may exist. One

of the preferred visa option is the H-1B visa. However, this visa type is not always

available and that may affect whether it is a viable option.

E visa requires the foreign national and the company to meet certain treaty and nationality

requirements. If these are not present, this visa would not be an option. Also, if the foreign

national is from Canada, Mexico, Australia or certain other countries, special visas may be

available.

(d) Work History and Knowledge. The L visa may be an option for multinational enterprises

that have at least one affiliated company in the United States and if the individual seeking

entry into the United States has worked for at least one year out of the past three years in

an executive, managerial or highly specialized position. Knowledge of proprietary products

or processes is helpful to demonstrate why an L visa is appropriate.

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(e) Investment. If a foreign national has invested in a U.S. operation, the investor and other

foreign nationals may qualify for nonimmigrant and immigrant visa options.

(f) Salary Considerations. Some visa types (e.g., H-1B) require payment of the prevailing

wage for a given position. Some visa types (L-1A/L-1B) offer flexibility as to which

company (foreign or U.S.) pays the salary of a foreign national.

(g) Processing Time and Expense. Most visa petitions are processed through a USCIS

service center and take several months to process, although some programs accept

additional fees to expedite processing if timing is a concern. Certain visas can be filed

directly at the U.S. Consulate in the foreign national's home country or residence (e.g.,

E visa, blanket L visa). Yet others are able to be processed upon entry, such as is the

case with certain visas available to Canadians.

5. Key Considerations For Companies Just Starting A U.S. Presence

(a) The B-1 business visitor visa is useful for relatively short visits to attend business

meetings, consult with business associates and negotiate the terms of an arrangement.

(b) The L-1 visa transfer for a new office can provide time to get operations up and running.

This visa will require filing an extension after the original limited duration and ability to

show the business is viable and needs a manager, executive and/or persons with

specialized knowledge.

investment and/or whether there is qualifying trade before the visa is approved. In such

cases, it may be easier to show a substantial investment than trade.

C. Tax Planning for Foreign Executives Transferred or Temporarily Assigned to the United

States

This part of the guide responds to the first tax oriented questions that are usually asked by foreign

executives contemplating working in the United States. As usual, tax planning and analysis is no

easy task because of the number of different circumstances which can arise and the substantial

complexity of U.S. tax law. Nevertheless, general rules and planning points are given here to help

start the executive or his legal or tax counsel down the right road to questions such as:

• When should I go?

• How long should I stay?

• How will I be taxed while in the United States?

• What happens if I become a resident?

• What about my home? Should I sell it? When?

• What about my investments?

• What about using an offshore trust?

• What if I die while in the United States—what will be taxed?

1. General Treatment of Nonresident Aliens and Resident Aliens under U.S. Income Tax Law.

Briefly (see section I.A for more detail), the United States taxes its citizens and residents on

their worldwide income from any source. On the other hand, nonresident aliens are taxed only

on their income deemed to be from U.S. sources. Such income is divided into two types, the

first being passive investment income taxed at a flat 30% rate, the other being income

effectively connected to a U.S. trade or business, taxed at the graduated rates applicable to

residents after deduction of expenses attributable to the trade or business.

Foreign Investment in the United States | A Guide for Investors

(a) Nonresident Aliens. See section I.A for residency rules, the source of income, the

existence of a U.S. trade or business, what constitutes effectively connected income and

a number of special rules.

(b) Resident Aliens. As to residents, no attempt will be made to describe the U.S. tax system,

since it is very complex and our intent is to focus on things which are different or unique to

foreign investors. However, a brief introduction to the structure of this system is helpful in

understanding the choices a foreign executive must make in planning a move.

(i) First, gross income is determined by adding all income of whatever kind from whatever

source, anywhere in the world.

(ii) Next, business expenses are deducted (such as for business rent) if the individual is

operating a business.

(iii) Next, personal deductions and exemptions allowed by statute are subtracted (for

example, deductions for real estate taxes, residential mortgage interest and charitable

contributions) to arrive at taxable income.

(iv) Finally, taxable income is taxed at graduated rates (currently up to 39.6%) based on

certain rate schedules, the most important of which are for married taxpayers filing

joint returns, for single individuals and for married taxpayers filing separately.

(v) A foreign tax credit system allows credits against U.S. tax liability for foreign taxes

paid, but is limited to the amount of U.S. tax attributable to the foreign source income,

for foreign taxes paid with respect to foreign source income.69

2. Planning Points and Special Rules: Income Taxes. It may be helpful to plan the timing and

other aspects of a move to the United States, depending on whether the objective, after

considering both U.S. and foreign tax effects, is to reduce income taxed in the United States,

increase income taxed in the United States, increase or decrease the amounts attributable to

the pre-resident period or the post resident period, or even change the character of the

income and deductions attributable to an item.

(a) Determining Residence for U.S. Tax Purposes and its Effect. The tax treatment of a

foreign national in the United States will depend on whether he or she is regarded as a

"nonresident alien" or a "resident alien" for U.S. tax purposes. A foreign national is a

resident if he is a lawful permanent resident (the green card test) or spends 183 days or

more in a calendar year in the United States (or cumulatively over three years under a

weighting formula) (the "substantial presence" test).70 The effective date of residency is

the earlier of: (i) the first day the individual is physically present in the United States while

holding a green card or (ii) the first day the individual meets the "substantial presence"

test.71 Additionally, for residency starting date purposes (but not for purposes of the

substantial presence test), up to ten days of presence in the United States may be

disregarded, provided the individual establishes he or she has a closer connection to a

foreign country than the United States on those particular days.72 This exception only

applies if all of the continuous days during a particular stay may be excluded (i.e., if the

individual is continuously present in the United States for more than ten days, the

exception will not apply).73 Accordingly, moving to the United States early in the year will

result in more worldwide income being taxable as a resident. Moving to the United States

69 I.R.C. §§ 901, 904.

70 See section I.A.

71 I.R.C. § 7701(b)(1)(A).

72 I.R.C. § 7701(b)(2)(C).

73 Treas. Reg. § 301.7701(b)-4(c)(1).

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later in the year will either result in less worldwide income taxed as a resident or will result

in only U.S. source income being taxed that year, and in either event the resulting tax

brackets may be lower than would apply if the entire year's income were taxable.

(b) Elections to be Treated as Resident Alien. A new resident alien taxpayer may qualify for

an election to be treated as a resident with his or her resident spouse, for the entire

taxable year. Or a nonresident alien may, with his or her resident or citizen spouse elect to

be treated as a resident alien.74 The election may be beneficial as it would allow use of the

married filing jointly rate schedule, which could result in lower taxes to the couple, but any

such benefit must be balanced by the effect of paying U.S. tax on all worldwide income of

both spouses for the entire year. Another election may allow a foreign national who does

not meet the other residency requirements, but who is present for at least 31 days in a

year and in the following year meets the residency requirement, to elect to be treated as a

resident for a substantial part of the year.75

while temporarily away from home may be deductible if the executive realistically expects

such temporary employment to last for one year or less, and the temporary employment in

fact does last for one year or less.76

(d) Community Property Rules. Special rules allocate income between spouses for U.S. tax

purposes if one or both is a nonresident alien and a joint return is not filed. For example,

income from personal services is attributed to the person who rendered the services.77

(e) Nonresident Alien Moving Expenses. Expenses of moving to the United States in order to

earn a salary should be deductible as moving expenses since the salary will be treated as

U.S. source effectively connected income, as will any employer reimbursement of the

moving expenses.78

(f) Nonresident Alien Investment Real Property Election. If a nonresident alien purchases

income-producing real property in the United States, he or she may elect to treat the

investment as a U.S. trade or business and thereby qualify to deduct expenses (such as

interest and depreciation) from income before it is taxed.79 Otherwise, rents from the

property would be passive investment income taxable on a gross basis at 30%. Gain from

the disposition of real property will be effectively connected business income in any

event.80

(g) Portfolio Investments. Trading or holding a personal portfolio of stocks and bonds will, for

a resident alien, result in the same taxes on worldwide income (including tax on interest

and capital gains income and on certain controlled foreign corporation income and

passive foreign investment company income) as would be the case with a U.S. citizen. If

capital gains would not be taxed in the executive's foreign jurisdiction, he or she may want

to sell appreciated assets before moving to the United States or before establishing

residence here. If sold after the effective date of residence in the United States, all of the

gain accrued after the asset was originally purchased will be taxed in the United States. A

nonresident alien, on the other hand, may generally trade stocks and bonds for his or her

74 I.R.C. §§ 6013(g), (h).

75 I.R.C. § 7701(b)(4).

76 Rev. Rul. 93-86, 1993-2 C.B. 71.

77 I.R.C. § 879(a)(1).

78 I.R.C. § 217.

79 I.R.C. § 871(d).

80 I.R.C. § 897(a)(1).

Foreign Investment in the United States | A Guide for Investors

own account without carrying on a trade or business.81 Additionally, nonresident aliens are

generally not taxed by the United States on capital gains (except for gains from the sale of

U.S. real property interests), certain portfolio interest and bank deposit interest from U.S.

sources.82

(h) Selling and Purchasing a Residence. If a foreign residence is sold by an individual prior to

establishing residency, no U.S. tax will be due (although of course a foreign tax may be

due). If, after the individual becomes a U.S. resident, the foreign residence is retained and

held as rental property, the related expenses can be deducted from the taxable rental

income. If, while a U.S. resident, the individual sells the foreign residence, a portion of the

gain from the sale may be excludable from the individual's gross income, depending on

how the residence was used prior to the sale.83 If the individual expatriates before the

sale, gain from the sale of the foreign residence will generally escape U.S. taxation.

(i) Social Security Tax. Foreign persons receiving salary or wages for services performed in

the United States will be subject to the U.S. social security system, which can provide

retirement and other benefits to noncitizens but which requires contributions from both the

employer and the employee (deducted from payroll checks), as long as the services are

performed in the United States. Bilateral agreements with some countries (primarily North

American and European countries) coordinate benefits and mitigate double taxation for

similar social security systems.

3. Planning to Save U.S. Estate and Gift Taxes

(a) Residency as Domicile. In analyzing the impact of the U.S. estate and gift tax on aliens,

the distinction between resident aliens and nonresident aliens is critical. The concept of

residency for estate and gift tax purposes, however, is different than residency for income

tax purposes. Residency exists if the person is domiciled in the United States. A person is

"domiciled" in the United States if he or she lives there with the intention of remaining

indefinitely.84 Factors material to the determination of domicile include the presence of his

or her family, vehicle registration and community ties.

(b) Application of U.S. Estate and Gift Tax to Aliens

(i) Gift Tax

[a] Property Taxed. For resident aliens, the United States taxes all lifetime transfers

of tangible and intangible property regardless of its location.85 For nonresident

aliens, the United States only taxes lifetime transfers of real and tangible property

located in the United States Transfers of intangible property and non-U.S. situs

property are not taxed.86

[b] Charitable Deduction. Both resident and nonresident aliens receive an unlimited

deduction for gifts to qualified charities.87 However, the definition of a qualified

charity is different for nonresident aliens than for resident aliens.88

[c] Annual Exclusion. Under current law, resident and nonresident aliens receive a

$14,000 per year per donee exclusion from the gift tax for otherwise taxable gifts.89

81 I.R.C. § 864(b)(2).

82 I.R.C. §§ 871(a)(2), (h), (i).

83 See I.R.C. § 121.

84 Treas. Regs. §§ 20.0-1(b), 25.2501-1(b).

85 I.R.C. §§ 2501, 2511. 86 I.R.C. § 2511; Treas. Reg. § 25.2511-3(a).

87 I.R.C. § 2522.

88 Id.

89 I.R.C. § 2503.

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If both spouses have U.S. residency, then gifts can be split by the couple allowing

them to transfer $28,000 per year per donee.90

[d] Marital Deductions. The availability of the unlimited marital deduction for both

resident aliens and nonresident aliens depends on the citizenship of the donee

spouse.91 If the donee spouse has U.S. citizenship, then the unlimited marital

deduction applies. If the donee spouse lacks U.S. citizenship, the resident donor

spouse's exclusion is limited to $143,000 per year (as of 2013), as adjusted for

inflation.

(ii) Estate Tax

[a] Property Taxed. For resident aliens, the gross estate includes all property owned

at death.92 For nonresident aliens, the gross estate includes U.S. situs property

owned at death,93 U.S. situs property in which the decedent maintained certain

aspects of control,94 and certain property and taxes paid during the three years

prior to death.95

[b] Charitable Deduction. Resident and nonresident aliens receive a charitable

deduction for the value of property left to qualified organizations,96 but a bequest

by a nonresident alien to a corporation or trust may only be deducted if made to a

U.S. corporation organized for charitable purposes, U.S. association or trust.97

[c] Marital Deduction. Like the gift tax treatment, the availability of the marital

deduction for the estate of both resident and nonresident aliens depends on the

citizenship of the surviving spouse. If the surviving spouse is not a U.S. citizen, no

deduction will be allowed unless:

[i] The surviving spouse becomes a U.S. citizen before filing the estate tax return

and the surviving spouse has resided in the United States from the date of

the deceased spouse's death until becoming a U.S. citizen;98

[ii] The surviving spouse later dies and the surviving spouse's estate is subject to

U.S. estate taxes (taken in the form of a tax credit);99 or

[iii] The decedent spouse transfers property to the non-U.S. citizen surviving

spouse by way of a qualified domestic trust (QDOT) (or the surviving spouse

assigns or transfers the property to the QDOT before the decedent's estate tax

return is filed).100 To qualify as a QDOT, at least one trustee must be a U.S.

citizen or domestic corporation, the decedent's executor must make an

appropriate election and the trust instrument must prohibit distributions where

the U.S. trustee does not have the power to withhold the QDOT tax.101

[d] Foreign Tax Credits. Absent a special treaty provision, the United States limits the

foreign death credit available to offset the amount of taxes paid abroad by the

estates of resident aliens to those taxes paid on property situated in the country

90 I.R.C. § 2513(a)(1).91 I.R.C. § 2523(i).

92 I.R.C. § 2031.

93 I.R.C. § 2106.

94 I.R.C. §§ 2035-2046.

95 I.R.C. § 2035.

96 I.R.C. § 2055.

97 I.R.C. § 2106(a)(2)(A); Treas. Reg. § 20.2106-1(a).

98 I.R.C. § 2056(d)(4).

99 I.R.C. § 2056(d)(3).

100 I.R.C. § 2056A.

101 Id.

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which imposes the tax. For U.S. situs property, any taxes imposed by a foreign

government cannot be credited against any U.S. tax.102

(iii) Unified Estate and Gift Tax Credit. The unified estate and gift tax credit protects

otherwise taxable aggregate lifetime gifts and transfers at death from the estate and

gift tax.

[a] Resident Aliens. Resident aliens receive an estate tax exemption103 which

effectively protects up to $5,250,000 (in 2013, as adjusted for inflation for future

years) of otherwise taxable property. This exemption also applies to lifetime gifts

(i.e., a resident alien gets a total exemption of $5,250,000 to be used during life

and/or at death). The estate and gift tax rate is 40%.

[b] Nonresident Aliens. Nonresident aliens receive a unified credit of $13,000, which

protects $60,000 of otherwise taxable aggregate lifetime gifts and transfers at

death from the estate and gift tax.104

(iv) Effect of Treaties. Tax treaties may greatly impact the tax consequences of certain

transfers. Older treaties generally award the country in which the property is located

the exclusive power to tax. Newer treaties usually give the taxing power to the country

with which the taxpayer had the closest ties.

and nonresident aliens and taxes transfers made during life or at death which benefit a

party more than one generation removed from the donor. As of 2013, the GSTT rate

stands at 40% of the taxable amount. However, a $5,250,000 (in 2013, as adjusted for

inflation for future years) permanent exemption exists to offset any transfers which are

taxed under the GSTT.105 Again, the GSTT may be affected by treaties with foreign

governments.

102 I.R.C. § 2014.

103 I.R.C. § 2505.

104 I.R.C. § 2102(b)(1).

105 I.R.C. § 2631.

Foreign Investment in the United States | A Guide for Investors

IV. SPECIAL LIABILITY CONCERNS

A. Precautions on Managing Civil Litigation in the United States

1. Managing the Extreme Breadth of the U.S. Discovery System. Both federal and state courts in

the United States allow parties to obtain, or "discover," a wide variety of evidence from

opposing parties and third parties prior to trial. The theory is that, prior to trial, broad access to

evidence in the hands of one's adversary, and nonparties that have evidence that is relevant

to the lawsuit, encourages settlement, defines issues, avoids surprises at trial, and ultimately

leads to fairer and more just results. However, the cost and time required to comply with

discovery can be a significant burden on parties to litigation.

(a) Evidence That Can Be Discovered. Federal Rule of Civil Procedure 26 (and usually some

similar state rule) allows parties to obtain discovery by one or more of the methods

itemized below. The scope of discovery—regardless of which method is used—is the

same: The information sought need only be "reasonably calculated to lead to the

discovery of admissible evidence."

(i) Depositions Upon Oral Examinations or Written Questions. Litigants in the United

States may examine opposing parties and adverse witnesses under oath, in the

presence of a court reporter, before trial. These examinations or "depositions" may

take the form of oral examinations, in which counsel for one party asks a series of oral

questions to an opposing party or witness in the presence of a court reporter who

transcribes the proceedings as they happen, or written questions.

(ii) Written Interrogatories. Parties may serve a set of written questions upon another

party prior to trial, requiring the other party to answer truthfully, under oath, to the

extent of that party's knowledge on a wide variety of factual issues underlying the

dispute. Parties receiving interrogatories are typically given 30 days in which to

respond; if a party fails to respond, a court may compel the party to respond.

(iii) Production of Documents or Things. Parties may also request that the opposing party

produce documents or things or grant permission to enter upon the opposing party's

property for inspection or, in the case of documents, copying. Document requests

frequently encompass complete business records for all time periods relevant to the

underlying dispute, tax returns, correspondence, notes, and almost any other form of

written memoranda and data stored on computer disks. This particularly broad and

potentially invasive discovery tool is blunted only by the doctrines of privilege

discussed below.

(iv) Physical and Mental Examinations. Parties may in some circumstances obtain court

permission to conduct physical and mental examinations of opposing parties and

witnesses, using physicians and mental health professionals of their own choosing.

(v) Requests for Admission. Parties may request that opposing parties admit or deny the

truth of various factual allegations.

(vi) Electronic Discovery. Effective December 1, 2006, the Federal Rules of Civil

Procedure codified significant electronic discovery obligations for parties and potential

parties to litigation. The rules require that parties identify and preserve relevant

electronically stored information (ESI) as soon as they "reasonably anticipate

litigation," so that it can be produced in response to discovery requests. The breadth of

ESI encompasses every conceivable form of electronic data, in all locations where it

resides, and includes data and metadata. In order to comply with the rules, parties and

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their counsel must have a thorough understanding of the parties' information

technology systems, be prepared to "meet and confer" with opposing parties early in

the litigation about the types and locations of ESI, and actively implement and

maintain a "litigation hold" on all potentially relevant ESI so that it is not altered or

destroyed. Sanctions for spoliation can be significant. The parties can limit their

obligations by agreement as part of the early "meet and confer" process. In large

cases, retaining an electronic discovery consultant may be advisable and there are

now many such providers across the United States.

(b) Attorney/Client Privilege. Although the scope of discovery in U.S. litigation is broad, a

party may not discover (i.e., obtain) evidence that is "privileged." One privilege that is

particularly important in commercial contexts is the attorney/client privilege, which protects

all confidential communications between an attorney and a client, subject to several

exceptions.

The precise scope of the privilege is governed by state law and varies across the United

States. In general, however, the attorney/client privilege is well established and requires

that a communication must include the following elements to be privileged and therefore

immune from discovery:

(i) Element No. 1. A "communication" from a client or client's representative. A client need

not be a human being; a corporation may be a client. If the client is a corporation, a

special subset of rules applies:

[a] a communication must be made for the purpose of obtaining legal advice;

[b] the person who made the communication must be employed by the corporation;

[c] the person who made the communication must have been authorized by a

corporate supervisor to make the communication;

[d] the corporate supervisor must have made the request so that the corporation could

obtain legal advice;

[e] the subject matter of the communication must have been within the scope of the

employee's corporate duties; and

[f] the communication must not be disseminated beyond those persons who, because

of the corporate structure, need to know its contents.

(ii) Element No. 2. Made in confidence.

(iii) Element No. 3. To an attorney.

(iv) For the purpose of seeking or obtaining legal advice.106

The privilege also extends to communications from attorneys to clients that provide legal

advice.

privilege, protects written or other tangible items from discovery, if those items were

produced in anticipation of litigation. A party seeking work product documents may

overcome the work product doctrine, but only by demonstrating a "substantial need."107

Together, the attorney/client privilege and the work product doctrine afford substantial

106 See Edna Selan Epstein, The Attorney-Client Privilege and the Work-Product Doctrine, 12-44 (American Bar Ass'n, Section of Litigation 2012).

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protection from the sweeping discovery rules in the United States, but both doctrines are

complex and easily waived (often inadvertently). Therefore, careful planning is essential.

(d) Methods of Preserving Work Product

(i) Keep work product separate from documents which are discoverable.

(ii) Mark work product documents with a stamp to identify the document as work product.

(iii) State within the document (preferably in the introduction) that the document is being

prepared "in anticipation of litigation."

(iv) To the extent possible, use outside counsel to conduct investigations or obtain facts. If

nonattorneys prepare reports for counsel, the report should state that it is prepared at

counsel's request and all related materials should be given to counsel with the report.

(v) Before preparing any reports or conducting an investigation, send a memo to the file

stating the reasonable probability of a future lawsuit.

2. Arbitration as an Alternative to Litigation

(a) Commercial arbitration has a long history in the United States; almost every state has

enacted an arbitration act and the Federal Arbitration Act in effect mandates that

agreements to arbitrate be respected. In general, the arbitration acts direct courts to issue

orders enforcing arbitration awards and offer only limited judicial review of an arbitrator's

actions and decisions.

(b) The principal advantages of arbitration are: (i) speed—arbitration often offers a more

expedient alternative to civil litigation, which can take years, and (ii) confidentiality—unlike

litigation, the decisions are not required to be made public.

the difference in a case instead of declaring either side the winner.

3. Avoiding Litigation and Arbitration Altogether. Investors should follow several general

guidelines to reduce the risk of potential litigation and arbitration.

(a) Negotiate and draft contracts carefully and thoroughly. Experienced contract drafters

foresee potential areas of dispute and direct contract negotiations accordingly. Do not try

to avoid detailed contracts in the United States.

(b) Keep thorough, meticulously organized business records. In addition to the benefits to

business, active management of record keeping produces powerful settlement tools

because potentially damaging documents are protected and potential disputes are

highlighted at an early stage, when they may be corrected.

contracts with arbitration clauses may circumvent the litigation process altogether.

However, even arbitration awards are subject to limited judicial review; thus, litigation

remains a persistent possibility in all commercial contexts.

107 See Epstein, 61-82.

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(d) Make very safe products. Analyze to predict how a given product might cause injury.

(e) Pay special attention to areas which cause high amounts of litigation or high damage

awards in the United States: Environmental laws, securities laws and product liability.

B. U.S. Environmental Laws

1. Creation of Liability. State and federal legislation imposes upon an owner or operator of real

property extensive liability for hazardous substances found on the property. Virtually any party

associated with a contaminated site may be subject to liability.

2. Comprehensive Environmental Response, Compensation, and Liability Act of 1980

(CERCLA) (commonly known as “Superfund”) 108

(a) Purpose. Superfund is the federal government's primary tool for imposing liability on those

associated with a contaminated site. Superfund allows the federal government to:

(i) clean up a site at which there has been or there is threatened to be a release

of hazardous substances and seek reimbursement from private parties; or

(ii) order private parties to undertake such action.

(b) Other Actions. State and local governments and private parties also may recover certain

response costs from potentially responsible parties (PRPs). There are limitations on the

circumstances under which CERCLA cost recovery and contribution provisions may be

used.

include:

(i) current owners or operators of a facility;

(ii) past owners or operators of a facility;

(iii) generators of hazardous substances; and

(iv) transporters of hazardous substances.

(d) Owners or Operators. Examples of owners and operators that courts have found liable for

Superfund cleanup costs include: current owners, current owners for acts of their lessees,

former owners, former owners for acts of their lessees, tenants, lenders, developers and

contractors, officers and directors, shareholders and parent corporations, successor

corporations, and government agencies. Practically speaking, virtually any party related to

a contaminated facility may be at risk.

(e) Standard of Liability. CERCLA liability is strict, retroactive and joint and several (where

harm is indivisible). There are limited defenses available.

(f) Defenses to Liability. Defenses to liability include acts of God, acts of war and acts or

omissions of third parties (the "innocent landowner" defense).109 The innocent landowner

defense is available to the following three classes of parties:

108 See generally 42 U.S.C. §§ 9601-9675.

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(i) a party that acquires an interest in a facility, and at the time of the acquisition the party

did not know and had no reason to know that any hazardous substance was disposed

of on, in or at the facility;

(ii) a government entity that acquires the facility by escheat, through involuntary transfer

or acquisition or through eminent domain; and

(iii) a party that acquires the contaminated site by inheritance or bequest.110

Additional detailed requirements for meeting the "no reason to know" component are set

forth in CERCLA and related regulations and include carrying out all appropriate inquiries.

In practice, the innocent landowner defense is difficult to use. Even when it does apply, it

does not affect liability under other laws (state or federal).

3. Other Environmental Legislation. Various federal and state environmental laws set forth

permitting, recordkeeping, reporting and other requirements, and contain penalties for

noncompliance. Local requirements also may apply. Examples of federal environmental laws

include:

(a) Resource Conservation and Recovery Act (RCRA).111 RCRA is designed to regulate and

manage hazardous waste from the time of its creation to disposal. RCRA imposes specific

requirements on waste generators and transporters and on treatment, storage and

disposal facilities. RCRA also regulates nonhazardous solid wastes and the storage of

petroleum products and other hazardous substances in underground storage tanks.

(b) Clean Air Act.112 This Act regulates air emissions and restricts the type and amount of

pollutants that may be released by a given source. The Act contains an extensive permit

program. Requirements may depend on the attainment status of the location.

of pollutants into surface waters without a permit. Storm water discharges, discharges to

wetlands, and activities in and near navigable waterways are also regulated.

(d) Toxic Substances Control Act.114 TSCA regulates the testing, reporting, manufacture,

processing and distribution of chemical substances and mixtures.

(e) Emergency Planning and Community Right To Know Act (EPCRA).115 EPCRA is designed

to provide information to state and local authorities and to the general public to help

prepare for chemical accidents. Businesses must disclose and record the nature and

extent of their chemical use.

Members of the public may enforce some federal laws using citizen suits.

4. Hints to Minimize Exposure

(a) Conduct thorough property assessments of potential sites of U.S. operations.

Environmental compliance audits of company operations also should be conducted.

109 42 U.S.C. § 9607(b).

110 42 U.S.C. § 9601(35)(A).

111 42 U.S.C. §§ 6901-6992.

112 42 U.S.C. §§ 7401-7671.

113 33 U.S.C. §§ 1251-1387.

114 15 U.S.C. §§ 2601-2692.

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Environmental engineering firms are readily available for hire throughout the United States

for this purpose.

(b) Delegate environmental compliance responsibilities only to qualified supervisory

personnel.

financial responsibility where possible.116 Also, use warranties and representations,

contingencies, and other such provisions.

(d) Be aware of the various theories under which parent corporations could be found liable

under CERCLA (for example, when they act as the operator of a subsidiary's facility or

when the corporate veil is pierced) and tailor actions accordingly.

(e) Utilize brownfields programs to obtain grants for cleaning up contaminated property and/or

state liability exemptions.

C. Federal and State Securities Laws

Perhaps no other law in the United States has spawned so much litigation over so many years

affecting so many transactions as Rule 10b-5. Rule 10b-5, described in more detail below,

mandates that the seller tell the buyer (and vice versa) everything material about the stock (or

other security) being sold before the transaction occurs. Another vitally important set of laws

requires advance registration of every offer or sale of securities which is not exempted from

federal and applicable state securities laws registration requirements. A violation of either of these

requirements (disclosure or registration) can result in serious liability, including, in some cases,

personal liability of directors and officers of the companies involved.

1. Key Definitions

(a) Security. The definition of a security is very broad and includes not only stocks and bonds

but oil and gas rights, certain partnership interests, promissory notes and investment

contracts.117 The catchall "investment contract" encompasses any arrangement where

money is invested in a common enterprise with the expectation of deriving profits from the

efforts of another.118

(b) Offer. An offer to sell includes "every attempt or offer to dispose of, or solicitation of an

offer to buy, a security or interest in a security, for value..."119 Any document or action

designed to solicit an offer to buy or procure an order for a security may be considered an

offer.

2. Antifraud (Disclosure) Provisions. The Securities Act of 1933 and the Securities Exchange Act

of 1934, as well as a host of state laws, prohibit the offer or sale of securities and their

subsequent transfer without full disclosure of all material facts either directly to the purchaser

(in a private placement) or through filings with the Securities and Exchange Commission (for

publicly traded securities). Failure to comply with these provisions may subject the seller, the

purchaser, the issuer, its officers and directors, the underwriters and the issuer's accountants

and other professionals to an array of civil and criminal liability. Among numerous other

provisions potentially creating liability, section 10(b) of the Securities Exchange Act of 1934

115 42 U.S.C. §§ 11001-11050.

116 See 42 U.S.C. § 9607(e) (liability cannot be transferred).

117 See 15 U.S.C. § 77b(a)(1) (section 2(a)(1) of the Securities Act of 1933); 15 U.S.C. § 78c(a)(10) (section 3(a)(10) of the Securities Exchange

Act of 1934).

118 S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298 (1946).

119 15 U.S.C. § 77b(a)(3) (section 2(a)(3) of the Securities Act of 1933).

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and Rule 10b-5 promulgated thereunder are especially important. Rule 10b-5 makes it

unlawful for any person to use a manipulative or deceptive practice or to make any untrue

statement of a material fact or omit a material fact in connection with the purchase or sale of

any security.120 Rule 10b-5 applies to purchasers as well as sellers. Any person who controls

a person liable under these provisions, including officers and directors of such person, may

also be liable for the violation unless the control person acted in good faith and did not induce

the violation.121 Many state laws have the same effect.

3. Registration of Offerings of Securities

(a) The Securities Act of 1933. The Securities Act of 1933 has two basic objectives: to

provide investors with material information concerning securities offered to the public

through a complex and costly registration process and to prohibit misrepresentation and

deceit in the sale of securities. In furtherance of these objectives, Section 5 of the

Securities Act of 1933 prohibits the "offer" or "sale" of a "security" unless the offer or sale

is registered with the SEC or the security or the transaction is exempt from registration

under the Act.122

(b) Securities Exchange Act of 1934. The Securities Exchange Act of 1934 regulates

purchases and sales of securities by requiring registration of any class of securities which

is publicly traded and supplements the disclosure requirements of the Securities Act of

1933 by compelling public companies to make publicly available to their shareholders and

prospective investors substantially the same information required to be disclosed by

issuers when they first register securities for sale.123 The Securities Exchange Act of 1934

also contains broad prohibitions against fraud in the purchase and sale of securities.

complied with when offering or selling securities to a resident of that state. State blue sky

laws are often even more stringent than the federal securities laws. State securities laws

may also impose civil and criminal liability upon persons offering for sale or purchase

securities to residents of such state in violation of such state's securities laws.

4. Registration Exemptions. The federal securities laws and each state's blue sky laws contain

numerous exemptions from the securities registration requirements. The exemptions are

generally divided into two categories: exempt securities and exempt transactions. Certain

securities have been declared exempt from the registration requirements because of other

protections which are afforded the holder and/or purchaser of such securities (e.g., securities

guaranteed by a governmental agency). Some transactions are also exempt from registration

because registration is not necessary for the protection of investors (e.g., securities offered

only to institutional investors that are believed to have the ability to solicit the same type of

information as would be provided by registration). An exemption from registration does not,

however, exempt the sale from the antifraud provisions of the securities laws. Two important

exemptions are:

(a) Private Placements. Section 4(2) of the Securities Act of 1933 exempts transactions by an

issuer not involving any public offering.124 The determination of whether an offering is

nonpublic depends on the relationship between the offerees and the issuer, as well as the

nature, scope, size, type and manner of the offering. (The courts generally base their

determination on whether or not the offerees and investors need the protections afforded

120 17 C.F.R. § 240.10b-5.

121 15 U.S.C. § 78t.

122 15 U.S.C. § 77e.

123 See 15 U.S.C. 78a, et seq.

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by registration.) Rules 501 through 508 of Regulation D promulgated under the Securities

Act of 1933 provide a "safe harbor" exemption for offers and sales which comply with the

Regulation D rules.

(b) Rule 701. Rule 701 exempts offers and sales of securities made in accordance with the

terms of compensatory employee benefit plans or compensation arrangements by issuers

who are not public companies. A variety of specific conditions must be met to qualify for

the exemption.125

D. Products Liability

Liability for defective products is governed by state laws in the 50 states, as well as federal law in

certain situations. Although usually similar, the law can differ significantly from state to state.

Products liability falls into four categories: (1) breach of warranty (expressed or implied); (2)

common law negligence; (3) strict liability; and (4) breach of the post-sale duty to warn. In breach

of warranty, negligence and strict liability claims, it is generally necessary to establish that: (a)

the product was defective; (b) the defect existed at the time the manufacturer or seller

relinquished control; and (c) the injury resulted from the use of the product.126

1. Breach of Warranty. A cause of action for breach of warranty ordinarily requires a contractual

relationship between the manufacturer and user. There may exist both an express warranty

and implied warranty in the same sale.127

(a) Express Warranty. An express warranty is a promise made by the seller to the buyer that a

product conforms to a certain standard.128

(b) Implied Warranty. There are generally two implied warranties: (i) the implied warranty of

merchantability and (ii) the implied warranty of fitness for an intended purpose.129 The

implied warranty of merchantability requires that a product be fit for the ordinary purpose

for which such a product would be used. The implied warranty of fitness for an intended

purpose requires that a product be fit for a particular purpose if the seller has reason to

know any particular purpose for which the product is required and the user is relying on

the seller's skill or judgment to select the product.

2. Common Law Negligence. A manufacturer or supplier of a product has a duty to exercise

ordinary care to insure that the product will not create an unreasonable risk of injury or

damage to the user or owner when used in its intended or foreseeable manner.130

3. Duties of Manufacturer or Supplier. A manufacturer, among other requirements, is therefore

required to exercise ordinary care in the manufacture of its product in the following respects:

(a) safe design of the product so that it will be fit for its intended or foreseeable purpose;

(b) construction of the product so that the materials and workmanship furnished will render

the product safe for its intended or foreseeable use; (c) adequate inspections and tests to

detect defects both as to materials and workmanship; and (d) adequate warnings of danger in

the use of the product and adequate instructions as to the proper use of a product which is

dangerous when used as intended.131 A supplier or distributor selling a product manufactured

by another may be held responsible if it fails to provide adequate warnings about dangers

124 15 U.S.C. § 77d(2).

125 17 C.F.R. 230.701.

126 See Restatement (Second) of Torts § 402A (1965); Restatement (Third) of Torts: Products Liability § 1 (1998).

127 Hellenbrand v. Bowar, 114 N.W.2d 418 (Wis. 1962).

128 See U.C.C. § 2-313.

129 See U.C.C. § 2-314.

130 Restatement (Second) of Torts § 395 (1965); 2 Frumer & Friedman, Products Liability § 10.01 (Rev. Ed. 2013); Dan B. Dobbs, The Law of

Torts § 143 (2d ed. 2000).

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associated with that product about which the supplier or distributor was or should have been

aware. A warning or instruction, when required, must be reasonably calculated to reach and

be understood by those likely to use the product. The warning must be sufficient to inform the

average user of the nature and extent of the danger which the user may encounter in the use

of the product.

4. Strict Liability. The concept of strict tort liability does not make the manufacturer or seller an

insurer, nor does it impose absolute liability.132 Rather, it relieves the injured user from proving

specific acts of negligence by the manufacturer or seller. The following elements must

generally be proved to recover under the doctrine of strict liability: (a) that the product was in

a defective condition and unreasonably dangerous; (b) that the product was defective when it

left the possession or control of the seller; (c) that the defect was a cause (substantial factor)

of the plaintiff's injury; (d) that the seller was engaged in the business of selling such products

(it does not apply to an isolated or infrequent sale); and (e) that the product was one which

the seller expected to and did reach the consumer without substantial change.133

5. Post-Sale Duty to Warn. Some jurisdictions impose a duty on manufacturers, suppliers and

distributors to warn purchasers of dangers that were not known at the time of sale, but which

are later discovered.134 The following elements must generally be proved to recover for a

breach of the post-sale duty to warn: (a) the seller knew or should have known that the

product posed a risk; (b) the risk outweighs the burden of providing a warning; and (c) a

warning can be effectively communicated and acted upon.135 A corporate successor to the

original manufacturer, supplier or distributor may be held responsible for providing post-sale

warnings in certain circumstances.136

6. The Issue of Joint and Several Liability. Traditionally, common law provided for a rule of joint

and several liability. That is, a plaintiff may collect the total damages from any one of the

persons whose fault combines to cause the injury. For example, if a plaintiff is awarded

$2 million in damages against two defendants and one of the defendants has insufficient

assets to satisfy the judgment, the plaintiff can recover $2 million against the other defendant,

even if that defendant is only found to be 1% at fault. Today, very few states continue to apply

pure joint and several liability. A few states have adopted comparative fault rules, under which

a defendant is only liable for that percentage of fault attributed to it, while a majority of states

have adopted more nuanced hybrid standards under which defendants who are apportioned a

large share of the total fault may be held liable for the full damage amount while defendants

whose fault is relatively minor are subject to liability only for a fraction of the total damages.137

7. Traditional Defenses to Products Liability.

(a) Contributory or Comparative Fault. The large majority of U.S. jurisdictions hold that a

plaintiff's failure to exercise ordinary care for his or her own safety can bar or diminish

recovery in a products liability action. In some states, a plaintiff's fault is a complete

defense to liability if the plaintiff fails to prove that the manufacturer's negligence was

more than 50% responsible for the accident.138 The differences in rules between states

131 Restatement (Second) of Torts § 395 (1965); E.L. Kellett, Manufacturer's duty to test or inspect as affecting his liability for product-caused

injury, 6 A.L.R.3d 91 (1966).

132 Dippel v. Sciano, 155 N.W.2d 55 (Wis. 1967).

133 Restatement (Second) of Torts § 402(A) (1965); Frumer §§ 8.01, 03.

134 Restatement (Third) of Torts: Products Liability § 10 (1998).

135 See, e.g., Owens-Illinois, Inc. v. Zenobia, 601 A.2d 633 (Md. 1992); Dobbs § 368.

136 Restatement (Third) of Torts § 13 (1998).

137 See, e.g., Colo. Rev. Stat. § 13-21-111.5; Brown v. Keill, 580 P.2d 867 (Kan. 1978); Paul v. N.L. Indus., Inc., 624 P.2d 68 (Okla. 1980).

138 See Wis. Stat. § 895.045.

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can produce dramatic differences in results, which is why U.S. lawyers sometimes battle

furiously over which state's law to apply.139

(b) Assumption of Risk. Assumption of risk is the voluntary exposure to known risks.

Assumption of risk also may bar or diminish a plaintiff's recovery.140

presents may be a reasonable one because users could reasonably be expected to

protect themselves. In that case, the product may not be defective at all, and the plaintiff

thus barred from recovery.141

(d) Misuse. The majority of jurisdictions find that misuse of a product will either bar or diminish

a plaintiff's recovery.142 However, if the type of misuse could have been reasonably

foreseen and warned against, misuse may not be a valid defense.

(e) Alteration of the Product. A seller may be exonerated from liability where a product is

altered after leaving the seller's hands. In most jurisdictions, the alteration must be

substantial in order to relieve a seller of liability.143

(f) Compliance With U.S. Standards and Regulations. In most cases, compliance with federal

standards and regulations alone is not sufficient to avoid product liability.144 While

compliance with federal standards and regulations is generally relevant to the issue of

liability in a products liability action, compliance does not preclude a finding that a

manufacturer was negligent for failing to take additional precautions.145 Conversely,

noncompliance with a statute may be considered strong evidence of negligence.146

Therefore, at a minimum, a manufacturer should comply with U.S. regulations and safety

standards to avoid potential liability. In addition, a manufacturer should take additional

steps if they are necessary.

(g) Contract Specifications. In a majority of cases, a manufacturer who fabricates a particular

product based exclusively on the designs of a purchaser will not be held liable if those

designs are flawed, unless the flaw is obvious.147

(h) Statutes of Limitation and Repose. Traditionally, actions for damages must be brought

within a certain time frame after the plaintiff discovers or should discover injury. The length

of this time period varies from state to state and depends upon the type of theory

underlying the claim. The time period for actions based on strict liability or negligence

claims generally begin to run when the injury occurs.148 The period in which breach of

warranty claims must be brought generally begins when the product was purchased, if the

claim is for economic loss or at the time injury was discovered if the claim involves a

personal injury.149 Some jurisdictions have enacted statutes of repose which cut off all

liability after a specific period of time.

139 See P. Hay and R. Ellis, Bridging the Gap Between Rules and Approaches in Tort Choice of Law in the U.S.: A Survey of Current Case Law,

27 Int'l Law. 369 (1993).

140 See generally, Furmer § 10.02.

141 See, e.g., Farnham v. Bombardier, Inc., 640 A.2d 47 (Vt. 1994).

142 Ellsworth v. Sherne Lingerie, Inc., 495 A.2d 348 (Md. 1985).

143 See Frederick E. Felder, Products Liability: Alteration of Product After it Leaves Hands of Manufacturer or Seller as Affecting Liability for Product-

Caused Harm, 41 A.L.R.3d 1251 (1972).

144 See Dobbs § 373.

145 Dorsey v. Honda Motor Co., 655 F.2d 650 (5th Cir. 1981).

146 Lowe v. Gen. Motors Corp., 624 F.2d 1373 (5th Cir. 1980); Nevels v. Ford Motor Co., 439 F.2d 251 (5th Cir. 1971).

147 See David G. Owen, Special Defenses in Modern Products Liability Law, 70 Mo. L. Rev. 1, 4-5 (2005).

148 Dobbs § 374.

149 Id.

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(i) Economic Loss Doctrine. Many states have adopted the "economic loss doctrine." Under

this doctrine, a plaintiff is barred from recovering economic losses (i.e., damages other

than for bodily injury or property damage) except on a breach of warranty claim.

8. What Can Be Done to Reduce the Risk of Liability?

(a) Insurance. Obtain adequate insurance.

(b) Compliance. Comply with federal and state safety standards and regulations.

they release the seller from any liability arising out of the transaction or from third parties

in which they accept ultimate liability.

(d) Disclosure. Design products and issue warnings which incorporate state of the art

technological and scientific knowledge.

(e) Stock Acquisitions. Exercise extreme care in purchasing the stock of a manufacturer of

potentially harmful products as a purchaser of stock generally inherits the liabilities from

the company's prior operations.

(f) Asset Acquisitions. Exercise great care in purchasing assets from a manufacturer of

potentially harmful products in order to properly avoid assuming liability for product liability

claims for products manufactured prior to the purchase.

(g) Contractual Provisions. Certain types of contract provisions, such as liquidated damages

clauses, consequential damage disclaimers and warranty disclaimers, can play a

significant role in limiting liability.

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V. SPECIAL OPERATIONAL CONSIDERATIONS WITH U.S. LAWS

A. Reporting Requirements for Foreign Investments

A few reporting requirements are imposed on foreign investment in the United States. U.S.

businesses must file certain reports if a foreign person or entity owns at least 10% of the U.S.

businesses' voting securities (referred to herein as a "U.S. Affiliate”). Such U.S. Affiliate must

include in its reporting the data of all U.S. business enterprises proceeding down each ownership

chain whose voting securities are more than 50% owned by the U.S. business enterprise above.

The reports are intended to provide the government with information to track the magnitude and

direction of foreign investment. The information gathered is required to be maintained in

confidence by the government and used only for statistical purposes.150

1. International Investment and Trade in Services Survey Act. The International Investment and

Trade in Services Survey Act authorizes the President to conduct studies and surveys on

foreign direct investment in the United States, U.S. investment abroad and international trade

in services.151 Three types of reports are required:

(a) Quarterly Survey. A U.S. Affiliate of a foreign person must file a Form BE-605 on a

quarterly basis disclosing transactions with its foreign parent and foreign affiliates of the

foreign parent. The Form BE-605 is required for any U.S. Affiliate that was established,

acquired, liquidated, sold or became inactive during the reporting period. Quarterly reports

may be filed within 30 days of the close of each calendar or fiscal quarter, except the

report for the fourth quarter which may be filed 45 days after the close of the quarter. A

U.S. Affiliate may be exempt if: (i) the values of total assets, annual sales and/or gross

operating revenues and (ii) annual net income are each equal to or less than $60 million,

in which case the U.S. Affiliate may file a Claim for Exemption to indicate its exemption

from future quarterly filings.

(b) Annual Survey. A U.S. Affiliate must file one of several versions of Form BE-15 annually.

Generally, a U.S. Affiliate that is majority owned by foreign parents (directly or indirectly)

and that has total assets, sales, gross operating revenues or net income greater than

$275 million will file Form BE-15A. A U.S. Affiliate that is majority owned by foreign

parents (directly or indirectly) with total assets, sales, gross operating revenues or net

income greater than $120 million but less than or equal to $275 million will file

Form BE-15B. A U.S. Affiliate that is minority owned by foreign parents (directly or

indirectly) with total assets, sales or gross operating revenues or net income greater than

$120 million will also file Form BE-15B. A U.S. Affiliate with total assets, sales, gross

operating revenues or net income greater than $40 million but less than or equal to

$120 million may be required to file Form BE-15EZ. U.S. Affiliates with total assets, sales,

gross operating revenues and net income are all less than or equal to $40 million will file a

BE-15 Claim for Exemption. Special consolidation rules may also apply to aggregate the

assets, sales and net income of multiple foreign affiliates.

Form BE-12 in lieu of the BE-15 annual report. The next benchmark survey will be issued

for 2017. U.S. Affiliates that are majority owned by foreign parents (directly or indirectly)

with total assets, sales, gross operating revenues or net income greater than $300 million

will generally file a Form BE-12(A). U.S. Affiliates that are: (i) majority owned by foreign

parents (directly or indirectly) with total assets, sales, gross operating revenues or net

150 22 U.S.C. § 3102(10).

151 22 U.S.C. §§ 3101-3108.

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income greater than $60 million but less than or equal to $300 million or (ii) minority

owned by foreign parents (directly or indirectly) with total assets, sales, gross operating

revenues or net income greater than $60 million will generally file Form BE-12(B). U.S.

Affiliates with total assets, sales, gross operating revenues or net income less than or

equal to $60 million will generally file Form BE-12C, provided that such U.S. Affiliates with

total assets, sales or gross operating revenues and net income equal to $20 million or less

may only be required to complete selected data on the BE-12C form. Exemptions may be

available for U.S. Affiliates with foreign parents that own less than 10% of the voting rights

of the U.S. Affiliate, that are consolidated into another U.S. Affiliate or if the U.S. Affiliate

was liquidated or dissolved.

2. The Agricultural Foreign Investment Disclosure Act. The Agricultural Foreign Investment

Disclosure Act152 requires reporting by any foreign person with an interest in U.S. agricultural

land.153

NOTE: A "foreign person" for purposes of this Act includes a U.S. corporation in which one or

more foreign persons holds "a significant interest or substantial control."154 Such an interest is

held if one or more foreign persons acting in concert hold more than a 10% interest in the

U.S. entity, or if foreign persons not acting in concert hold more than 50% in the aggregate.155

3. Treasury Department Information Reporting and Record Keeping. The Currency Transaction

Reporting Act responds to two perceived problem areas: inadequate financial record keeping

by financial institutions, and the use by U.S. residents of financial facilities in foreign

jurisdictions with secrecy laws.156 Disclosure is required in four situations:

(a) Financial Institution Disclosure. Financial institutions are required to disclose each

deposit, withdrawal, exchange of currency or other payment or transfer by, through or to

such financial institution that involves a transaction in currency of more than $10,000.157

(b) Transfer of Currency. Each person who physically transports, mails or ships in excess of

$10,000 into or out of the United States must file a Report of International Transportation

of Currency or Monetary instruments with the U.S. Customs Service.158

authority over a foreign financial account is required to report the existence of such to the

IRS.159

(d) Transactions with Designated Foreign Financial Agencies. The Treasury is authorized to

promulgate regulations requiring specified financial institutions to disclose certain

transactions entered into with foreign financial institutions.160

B. Acquisition Approvals or Reviews

Any entity contemplating the establishment of a U.S. presence through a merger or acquisition

must carefully review the applicability of various notification requirements.

152 7 U.S.C. §§ 3501-3508.

153 7 U.S.C. § 3501.

154 7 U.S.C. § 3508(3)(C)(iii).

155 7 C.F.R. § 781.2(k).

156 See 1970 U.S. Code Cong. and Adm. News, 4394, 4395.

157 31 U.S.C. § 5313(a); 31 C.F.R. § 1010.410.

158 31 U.S.C. § 5315; 31 C.F.R. § 1010.340(a).

159 31 C.F.R. § 1010350(a).

160 31 C.F.R. § 1010.360(a).

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1. Hart Scott Rodino Antitrust Improvements Act.161 The Hart Scott Rodino Antitrust

Improvements Act of 1976 may require the filing of a notification with the Federal Trade

Commission and the Department of Justice prior to a merger, acquisition or formation of a

joint venture.162 Unless otherwise exempt, a filing is required if either of the two tests below is

satisfied:

(a) Size of the Transaction. As a result of the transaction, the acquirer will hold $283.6 million

or more of the target's voting securities and/or assets; OR

(b) Size of the Parties. As a result of the transaction, the acquirer will hold less than

$283.6 million but more than $70.9 million of the target's stock and assets, and

(i) The acquiring or target party has net sales or total assets of at least $141.8 million;

and

(ii) The other party has net sales or total assets of at least $14.2 million.

The dollar thresholds above are updated annually to reflect changes to the U.S. gross

national product. Accordingly, the actual thresholds may vary.

The above rules apply to acquisitions of U.S. targets, regardless of whether the acquirer is

U.S. or foreign. Where the target is foreign, however, the acquisition may be exempt from

the rules, depending upon: (a) whether the acquisition is of the target's assets or stock,

(b) the volume of the target's sale in or into the United States, (c) the amount of the

target's U.S. assets (other than investment assets) and (d) whether either the target or the

acquirer are ultimately controlled by a foreign state.

For example, the acquisition of foreign assets may be exempt if the assets did not

generate more than $70.9 million in sales in or into the United States in the target's most

recent fiscal year.163 If sales exceeded $70.9 million, the acquisition may still be exempt if:

(a) both the acquirer and the target are foreign, (b) aggregate sales of the acquirer and the

target into the United States are less than $156 million, (c) aggregate total U.S. assets

(other than investment assets) of the acquirer and target are less than $156 million and (d)

the transaction will not result in the acquirer holding $283.6 million or more of the target's

voting securities and/or assets.164

The acquisition of voting securities in a foreign target by a U.S. acquirer may be exempt if

neither the target's (a) total U.S. assets (other than investment assets) nor (b) total sales in

or into the United States for its most recent fiscal year exceeds $70.9 million.165

The acquisition of voting securities in a foreign target by a foreign acquirer may be exempt

unless the acquisition confers control of the target and the target has: (a) total U.S. assets

(other than investment assets) or (b) total sales in or into the United States for its most

recent fiscal year that exceed $70.9 million. If the target's U.S. assets exceed

$70.9 million, the acquisition may still be exempt if: (a) both the acquirer and the target

are foreign, (b) aggregate sales of the acquirer and the target into the United States are

less than $156 million, (c) aggregate total U.S. assets (other than investment assets) of

161 The Federal Trade Commission is required to revise the thresholds annually based on the change in gross national product. The numbers

provided here are baseline as of 2013.

162 15 U.S.C. § 18a.

163 16 C.F.R. § 802.50(a).

164 16 C.F.R. § 802.50(b).

165 16 C.F.R. § 802.51(a).

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the acquirer and target are less than $156 million and (d) the transaction will not result in

the acquirer holding $283.6 million or more of the target's voting securities and/or

assets.166

Finally, where a foreign state is the ultimate parent of either the acquirer or the target, an

acquisition may be exempt where the assets or stock acquired are located in or issued by

an entity organized under the laws of that foreign state.167

2. Exon Florio. The Exon Florio Amendment to the Omnibus Trade and Competitiveness Act of

1988 authorizes the President to disallow an acquisition for national security reasons.168 The

Foreign Investment and National Security Act of 2007 clarified this authority and prior

administrative practice by formally establishing the Committee on Foreign Investment in the

U.S. (CFIUS) and codifying CFIUS's role and responsibilities in reviewing foreign investments.

Parties to an acquisition may request CFIUS to review the investment for national security

implications. In many cases, if CFIUS does not notify the parties that further investigation is

required within 30 days, the transaction is effectively approved.169 In cases where the

investment involves a foreign government, the transaction affects critical infrastructure or

national security is implicated, however, an additional 45-day investigation period is required.

If no review is sought, the President retains the right to order divestiture. Issues to evaluate

include:

(a) Acquisition. Does the action constitute an acquisition or similar transaction?

(b) Control. Would it result in the foreign control of a U.S. person?

infrastructure or national security?

3. U.S. Export Control Laws and Licenses. Other laws which may affect a foreign investor's

ability to acquire or operate a U.S. business include:

(a) Export Administration Regulations.170

(b) Trading With the Enemy Act.171 Prohibits trade with certain countries even if other

democracies freely trade with certain of these countries.

the U.S. Munitions List may only be exported after the requisite license is obtained.

(d) The Atomic Energy Act of 1954, as Amended.173 Restricts nuclear exports.

C. U.S. Labor and Employment Laws Generally Apply to Foreign Corporations Doing

Business in the United States

1. Federal Labor Law: Union Issues. The National Labor Relations Act (NLRA)174 and related

statutes form a body of law governing relations between employers and groups of employees

166 16 C.F.R. § 802.51(b).

167 16 C.F.R. § 802.52.

168 50 U.S.C. App. § 2170.

169 50 U.S.C. App. § 2170(a).

170 See section II.B.1.

171 50 U.S.C. App. §§ 1 44.

172 22 U.S.C. §§ 2778.

173 42 U.S.C. §§ 2011, et seq.

174 29 U.S.C. §§ 151-169.

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represented collectively, typically by unions.

(a) Collective Bargaining Obligations. An employer must negotiate with a designated agent of

a properly certified bargaining unit over the terms and conditions of employment affecting

that unit. Typically, they negotiate multi-year collective bargaining agreements that govern

wages and other employee benefits.

(i) Inherited Bargaining Relationship. A successor company may inherit the bargaining

obligations of a predecessor and may be required to honor the terms of a current

collective bargaining agreement, depending on the nature of the acquisition (i.e., asset

vs. stock sale) and the post-sale continuity of business.

(ii) Union Organizing Activity. Previously unrepresented employee groups may seek

collective representation through an organizing campaign. Section 7 of the NLRA

outlines the rights employees have in connection with such campaigns.

(b) Disputes Between Employers and Unions

(i) Grievance and Arbitration. Most controversies between employers and unions involve

disagreements over compliance with collective bargaining agreement terms. Those

controversies are usually resolved through a multi-step dispute resolution procedure,

beginning informally and, if necessary, proceeding to final, binding arbitration.

(ii) Unfair Labor Practice Charges. The National Labor Relations Board (NLRB)

investigates and adjudicates alleged unfair labor practices by employers and unions.

Federal courts have the authority to review decisions by the NLRB.

2. Federal and State Employment Laws. The rights and obligations of employers and

employees, apart from the collective bargaining context, are established in a variety of

overlapping federal and state statutes. Despite addressing the same subjects, critical

differences can exist between federal and state law, as well as among individual states.

(a) Anti-Discrimination Laws. The federal Equal Employment Opportunity Commission

(EEOC) and individual state agencies each investigate discrimination complaints. After an

initial determination, an EEOC complaint may be litigated in federal court. State claims are

adjudicated by the relevant state agency. Individual state laws may protect certain

categories of employees that federal laws do not.

(i) Federal Statutes. The primary statutes are:

[a] Title VII. Title VII of the Civil Rights Act of 1964175 prohibits discrimination on the

basis of an employee's race, color, religion, sex or national origin. Title VII (as with

most other federal employment laws) applies to employers with 15 or more

employees and covers part-time as well as full-time workers.

[b] Americans with Disabilities Act (ADA). The ADA not only prohibits discrimination

against disabled individuals, but also requires employers to provide "reasonable

accommodation" enabling those individuals to perform the essential functions of a

job. This may require an employer to invest in equipment, provide time off or even

restructure a job. Whether an individual is considered "disabled" and precisely

what accommodations are "reasonable" are often contested issues.

175 42 U.S.C. §§ 2000e-17.

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[c] Age Discrimination in Employment Act (ADEA). The ADEA prohibits

discrimination against employees who are 40 years of age or older.

(ii) State Laws. Individual states may prohibit discrimination based on a variety of

protected characteristics, including but not limited to an individual's marital status,

sexual orientation, use of lawful products outside of work, prior arrest or conviction

record, or because of the employee's inclusion in some other recognized protected

category.

(b) Application to Foreign Corporations Operating within the United States

(i) While all of the antidiscrimination laws apply to foreign companies operating within the

United States, a Friendship, Commerce and Navigation treaty (FCN Treaty) may affect

the extent to which a court will apply Title VII to foreign companies.176

(ii) The ADEA applies even if an FCN Treaty protects the foreign corporation. Similarly,

the ADA will likely apply to foreign corporations regardless of the existence of an FCN

Treaty.177

3. Effect of FCN Treaties on Application of Title VII to Foreign Corporations Operating in the

United States

(a) General Rule. While the precise effect varies from jurisdiction to jurisdiction, the circuit

courts agree that FCN Treaties enable companies to favor citizens from their own country

for management and specialist positions. The FCN Treaty with Japan provides that

"[c]ompanies of either Party shall be permitted to engage, within the territories of the other

Party, accountants and other technical experts, executive personnel, attorneys, agents

and other specialists of their choice."178 The United States has entered similar treaties with

many other countries including France, Germany, Greece, Denmark and Italy, among

others.

(b) Differing Treatment among the Circuit Courts

(i) The Court of Appeals for the Fifth Circuit has held that the FCN Treaty between Japan

and the United States provides complete protection from Title VII claims as they

pertain to management level employees.179 "Companies have a right to decide which

executives and technicians will manage their investment in the host country, without

regard to host country laws."180

(ii) Companies operating in the Third, Sixth and Seventh Circuits may discriminate on the

basis of citizenship in selecting management level employees but cannot discriminate

on the basis of race, national origin or age.181

(iii) The Court of Appeals for the Second Circuit has reconciled FCN Treaty provisions with

Title VII antidiscrimination laws by requiring that a threshold test be met. It is not

unlawful to discriminate on the basis of national origin where "national origin is a bona

176 Spiess v. C. Itoh & Co. (America), Inc., 643 F.2d 353 (5th Cir. 1981), vacated on other grounds, 457 U.S. 1128 (1982); MacNamara v. Korean

Air Lines, 863 F.2d 1135 (3d Cir. 1988), cert. denied, 493 U.S. 944 (1989).

177 MacNamara, 863 F.2d at 1146; Wickes v. Olympic Airways, 745 F.2d 363, 364 (6th Cir. 1984); Fortino v. Quasar Co., 950 F.2d 389, 393

(7th Cir. 1991).

178 Treaty of Friendship, Commerce and Navigation, U.S. Japan art. VIII(1) April 2, 1953, 4 U.S.T. 2063.

179 Spiess, 643 F.2d at 360-61 (5th Cir. 1981).

180 Id. at 361.

181 MacNamara, 863 F.2d at 1138; Wickes, 745 F.2d at 364; Fortino, 950 F.2d 389.

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fide occupational qualification reasonably necessary for the normal operation of that

particular business or enterprise..."182

(i) In Sumitomo Shoji America, Inc. v. Avagliano, the Supreme Court held "that an

American subsidiary of a foreign parent was not protected by [an FCN] treaty."183 The

Supreme Court chose to leave open the issue of whether a subsidiary may assert the

treaty rights of its parent.184

(ii) In Fortino v. Quasar Co., 950 F.2d 389, 393 (7th Cir. 1991), the Seventh Circuit held

that an American subsidiary can assert the treaty rights of its parent corporation,

where the parent dictated the discriminatory conduct and where asserting the treaty

rights was necessary to preserve the validity of the treaty. The Fortino decision has,

however, been subsequently criticized or distinguished by several courts.185

4. Effect of an Employee's Status (Managerial versus Rank and File) on the Outcome of

Antidiscrimination Claims Against Foreign Corporations Operating in the United States.

Whether an employee is a manager or a rank-and-file employee is relevant only in a

discrimination case if an FCN defense is being asserted. Companies protected by FCN

Treaties must still comply with all U.S. antidiscrimination laws with regard to their rank-and-file

employees.186 In order to determine whether an employee qualifies as a manager or

executive, it is necessary to focus on the "overall responsibility" of the employee and to

determine whether the foreign business has decided that a foreign national is required.187

5. Employee Benefits and Other Protections. Various state and federal laws guarantee

employees certain benefits and protect their job status.

(a) Family and Medical Leave Statutes. The federal Family and Medical Leave Act (FMLA)188

provides eligible employees with the right to take up to 12 work weeks of unpaid leave

during a 12-month period for the birth or adoption of a child, for an employee's own

"serious heath condition," or the "serious health condition" of the employee's spouse, child

or parent, or for qualifying exigencies arising from certain military service by a spouse,

child or parent. In addition, the FMLA makes up to 26 work weeks of military caregiver

leave available to eligible employees in qualifying circumstances. The FMLA applies to

employers employing 50 or more employees for at least 20 calendar work weeks in the

current or preceding calendar year. Many states have similar statutes providing different,

and in some cases enhanced, benefits. The interplay between the FMLA and a

comparable state law can be critical in determining an employee's rights.

(b) Plant Closing Laws. The federal Worker Adjustment Retraining Notification Act (WARN)189

generally requires employers with 100 or more employees and meeting other threshold

requirements to provide employees with at least 60 days' notice of acts that may be

characterized as "plant closings" or "mass layoffs." A successor owner can be held liable

for a predecessor's noncompliance with notice requirements. Some states have their own

versions of WARN with different notice requirements and different criteria for minimum

numbers of affected employees.

182 Avagliano v. Sumitomo Shoji Am., Inc., 638 F.2d 552, 559 (2d Cir. 1981), rev'd on other grounds, 457 U.S. 176 (1982) (citing section 703(e)

of Title VII, 42 U.S.C. § 2000e-2(e)).

183 Sumitomo, 457 U.S. 176, 187 (1982).

184 Id. at 189.

185 See, e.g., Kirmse v. Hotel Nikko, 59 Cal. Rptr. 2d 96 (Ct. App. 1996).

186 See generally Spiess, 643 F.2d 353; MacNamara, 863 F.2d 1141; Quasar, 950 F.2d 389.

187 MacNamara, 863 F.2d at 1142.

188 29 U.S.C. §§ 2601-2654.

189 29 U.S.C. §§ 2101-2109.

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states and adjudicated before state agencies. Employees may receive a portion of their

wages as reimbursement for periods of lost work and may be compensated for injuries

deemed permanent. In addition, states may require employers to reinstate an injured

employee when he or she has sufficiently healed. Most employers are required to carry

workers' compensation insurance. In turn, the workers' compensation reimbursement

scheme is typically the exclusive remedy for an injured employee and, consequently, an

employer has protection from what might otherwise be substantial and unpredictable

liability.

(d) Unemployment Compensation. Unemployment benefits are controlled by state law.

Employers are required to pay an unemployment compensation tax based on their

unemployment benefit histories. Employees who lose their jobs other than for substantial

cause (typically only very egregious conduct) collect specified payments for a period of

time based on their recent earnings.

(e) Employer Monitoring. Various federal and state laws limit the degree to which an employer

can monitor or demand information about an employee. For example, employers are

limited in their ability to: (i) demand that employees submit to polygraphs tests, (ii) inquire

about an employee's medical history, (iii) subject an employee to certain medical testing

or (iv) review an employee's credit record. Questions routinely arise regarding an

employer's ability to demand drug or alcohol testing, as well as the discretion to monitor

an employee's e-mail, internet activity, locker space or other property that arguably

belongs to an employer. The boundaries of acceptable monitoring often depend on the

particular circumstances.

6. Wage and Hour Issues. The U.S. Department of Labor administers federal wage and hour

laws. Individual state agencies administer state laws, most of which contain restrictions that

parallel federal counterparts.

(a) Overtime Laws. Employers are typically required to pay at least the statutory minimum

wage for employee labor and to pay time and one half of the hourly wage for time in

excess of 40 hours a week. However, certain categories of employees, including most

executives, administrative and professional workers and others are considered "exempt"

from the overtime laws. These are generally salaried employees with variable schedules

which can greatly exceed 40 hours per week. Properly categorizing "exempt" versus

"nonexempt" employees is often difficult and, regrettably, new federal standards fail to

provide clear guidelines. It is important for employers to carefully analyze their "exempt"

designations on a job-by-job basis as accurately as possible based on the minimal

guidance provided in federal regulations.

(b) Compensable Work Time. Most other significant wage disputes involve the time for which

an employee is entitled to be compensated. For example, an employee may be "on call"

for 24 hours or more, but work a small fraction, if any, of that time. The degree to which an

employer controls an employee's activities and, consequently, the amount of freedom an

employee enjoys during "on call" time will affect whether he or she must be compensated

for all or part of the applicable period. Likewise, whether an employee is due

compensation for training activities or time spent traveling to or from a work site often

depends on the degree of control the employer exercises and the primary purpose of the

activity.

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D. Intellectual Property Protection

Protectable intellectual property in the United States consists primarily of patents, copyrights,

trademarks and trade secrets. Each category is governed by its own unique laws or mix of laws—

some state, some federal, some statutory, some common law. A foreign entity which exercises

intellectual property rights in the United States should first ensure that its rights are properly

protected in the United States With the exception of copyrights, most intellectual property rights

held by a foreign entity in its home country will not extend into the United States unless

appropriate steps are taken in a timely fashion.

1. Patents

(a) Source of Protection. Patent protection is based on the U.S. Constitution's authorization of

legislation to "promote the Progress of Science and useful Arts, by securing for limited

Times to... Inventors the exclusive Right to their Discoveries."190 Patents are governed by

federal statutes which preempt any state or common law protections. Patent matters in

the United States are handled through the U.S. Patent and Trademark Office (the

USPTO), which is run by the U.S. Department of Commerce. Only individuals who have

passed the patent bar examination of the USPTO may prosecute patent applications in

the United States for others, although any patent applicant may prosecute an application

on his or her own behalf.

(b) Duration. Utility patents generally have a term of 20 years from the filing date. This term

may be adjusted for delays by the USPTO during the granting procedure or for a qualified

regulatory review period of a pharmaceutical, a medical device, a food or a color additive.

Additionally, patents based on applications filed prior to June 8, 1995 will have a term of

17 years from the later of the issuance of the patent or 20 years from the filing date.

Design patents last for 14 years from the issuance of the patent. Plant patents expire 20

years from the filing date.

signatory to the Patent Cooperation Treaty of June 19, 1970 and so grants applicants

priority dating back to the filing of their original patent applications overseas if their

equivalent International Patent Applications were timely filed under the terms of the Treaty.

Additionally, the USPTO has patent prosecution highway (PPH) arrangements with

various intellectual property authorities around the world (e.g.¸ authorities in Australia,

Canada, Denmark, the EU, Finland, Germany, Japan, Korea, Singapore, the United

Kingdom, etc.). Through these arrangements, an applicant may be able to obtain a "fast

track" examination of its patent application in one PPH jurisdiction when at least one

application has been recognized as patentable in another PPH jurisdiction.

(d) Applicant. A patent application may be filed on behalf of the: (i) inventor(s), (ii) the

assignee of the invention, (iii) a party to which an inventor has an obligation to assign or

(iv) a party that otherwise shows a sufficient proprietary interest in the invention.

(e) First-to-File. Under current law, absent some limited exceptions, the first applicant who

files a patent application will be entitled to the patent. The invention date is no longer

relevant to determining which party is entitled to a patent for a particular invention.

190 U.S. Const. art. I, § 8, cl. 8.

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(f) Limited Grace Period for Public Disclosures. The United States no longer has the broad

one-year grace period for filing a patent application after public disclosure or publication of

the invention. The United States provides a limited one-year grace period that allows an

applicant to apply for patent protection up to one year after the public disclosure of the

invention if the disclosure is made by the inventor or is a disclosure of the inventor's own

work. The grace period may not apply to publications or other patent defeating disclosures

made by a third party. However, depending on the facts, an inventor's prior disclosure that

predates a third party's disclosure of the invention may eliminate the patent defeating

effects of the third-party disclosure. This is unlike nations whose patent laws include an

"absolute novelty" requirement regardless of the party making the public disclosure. Thus,

seeing a device in public without a "patent pending" notice is no guarantee that a patent

application has not been or will not be filed on that device.

(g) Publication. Patent applications are published 18 months after they are filed or after the

earliest priority date of the application. In certain cases, if an applicant does not want to

file in any country other than the United States, the application may be kept secret until

the patent issues.

(h) Renewal Fees. Annual renewal fees are not required for U.S. patents, but three

maintenance fees must be paid at the USPTO during the term of a patent. These fees

must be paid 3-1/2, 7-1/2 and 11-1/2 years after a patent issues. Late payments are

possible, with a surcharge, up to six months after a deadline. Failure to pay a

maintenance fee within the six-month grace period will cause the patent to expire and the

invention to enter the public domain.191 No maintenance fees are required for design

patents.

2. Copyrights

(a) Source of Protection. Like patent protection, copyright protection in the United States is

based upon Article 1, Section 8 of the U.S. Constitution and copyright protection from

infringement (use) by others is governed solely by federal law.192 All copyright registrations

in the United States are handled through the U.S. Copyright Office at the Library of

Congress in Washington D.C. Unlike patent matters, there is no special examination that

must be passed before an attorney can represent a client at the Copyright Office.

(b) Works Protected. Copyrights grant exclusive rights in works of literature, music, drama,

sculpture, architecture, graphic art, audiovisual art, even computer software—any "original

works of authorship fixed in any tangible medium of expression"193—and are governed by

17 U.S.C. § 101, et seq. Copyrights in a work vest in the author as soon as the work is

created, even if registration does not occur until later. Registration provides additional

rights but is not necessary to maintain basic copyright protection. Placing a copyright

notice on works has not been required under U.S. law since 1989, but is recommended to

put potential infringers on notice.

whether it has been published, and, if so, the date of first publication. As a general rule, for

works created after January 1, 1978, copyright protection lasts for the life of the author

plus an additional 70 years. For an anonymous work, a pseudonymous work or a work

191 35 U.S.C. § 41(b).

192 See 17 U.S.C. § 301(a).

193 17 U.S.C. § 102(a).

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made-for-hire, the copyright endures for a term of 95 years from the year of its first

publication or a term of 120 years from the term of its creation, whichever expires first. For

works first published prior to 1978, the term will vary depending on several factors. Works

created on or after January 1, 1978, are not subject to renewal registration. As to works

published or registered prior to January 1, 1978, renewal registration is optional after 28

years.

(d) Berne Convention. U.S. copyright law has been harmonized with that of the international

community to a greater degree than any other branch of intellectual property law in the

United States. The United Statates is a signatory to the Universal Copyright Convention

and the Berne Convention, and has amended its domestic copyright protection scheme to

meet the requirements of those international agreements. As a result, the United States

has copyright agreements in place with the vast majority of the world's nations, and most

works of authorship created overseas are automatically granted copyright protection

within the United States.

3. Trademarks

(a) Source of Protection. Trademarks may be enforced by a wide variety of laws, both state

and federal, statutory and common, but registration in the USPTO under the federal

Lanham Act194 is the best method of protection. State registrations are also available, but

offer little protection over that automatically afforded a trademark by common law once it

is put into use.

(b) Definition. A trademark is "any word, name, symbol, or device, or any combination thereof,

used by a person... to identify and distinguish his or her goods, including a unique

product, from those manufactured or sold by others and to indicate the source of the

goods, even if that source is unknown."195 Service marks are also protectable under U.S.

law, and are treated identically to trademarks used on goods. (The term "trademark" is

used in this summary to include service marks as well.) The distinctive, nonfunctional

configuration or appearance of a product or package is protectable as "trade dress" under

U.S. trademark law.196

owners with a powerful enforcement weapon by granting access to federal courts and

trebling damages against willful infringers.197 Registration may be conducted either by the

mark's owner or the owner's U.S. attorney. There is no equivalent of the patent bar

examination requirement for attorneys practicing trademark law.

(d) Use Requirement. Trademark rights in the United States have their roots in the common

law, which requires that the trademarks be in actual use before they may be registered. It

is possible to reserve a particular mark for federal registration by filing an "intent to use"

application with the USPTO, but that mark must be put into use in commerce in the United

States, across either a state or international border, before the registration will be granted.

The "intent to use" option is the closest thing in the United States to the "first to file"

systems of many civil law countries, but will not grant rights superior to those held by a

party that used a mark prior to the "intent to use" application's filing date.

194 15 U.S.C. § 1051, et seq.

195 15 U.S.C. § 1127.

196 Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763 (1992).

197 15 U.S.C. §§ 1117, 1121.

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(e) Priority Benefits to Foreign Registrants. A company that has filed a trademark application

overseas can claim priority dating back to that foreign filing date if a U.S. application for

federal registration of the same mark is filed within six months of the overseas filing. In

such cases as well, however, the mark must actually be put into use in the United States

or any registration based on that foreign priority can be cancelled.

(f) Affidavits of Use Required. If, but only if, properly maintained, a trademark registration

need never expire. A trademark registered under the Lanham Act must have an affidavit or

declaration filed on its behalf between the fifth and sixth anniversaries of its registration,

confirming that the mark is still in use in commerce on the goods or services described in

the registration. Specimens evidencing that use must accompany the affidavit or

declaration. Failure to file these before the sixth anniversary of a mark's registration will

result in cancellation of the registration under section 8 of the Lanham Act,

15 U.S.C. § 1058.

(g) Incontestability. In addition to the section 8 affidavit described above, marks on the

principal register should also have a section 15 affidavit or declaration filed immediately

after their fifth anniversary. The section 15 affidavit confirms that the mark has been in

continuous use for five years, and under section 15 of the Lanham Act,198 this filing will

make the registration "incontestable." Incontestable registrations can be cancelled on

only three grounds: (i) that the mark has become the generic name of the goods or

services to which it relates; (ii) that the registration was obtained as a result of fraudulent

assertions by the applicant; or (iii) that the mark has been abandoned. Section 8 and15

affidavits are typically filed simultaneously.

(h) Renewals Unlimited. Trademark registrations may be renewed an unlimited number of

times, but the renewal must be filed during the six months preceding the end of the

registration's existing term. Trademarks registered after November 16, 1989 must be

renewed every ten years, while those registered prior to that date have an initial term of

twenty years, and ten-year renewal periods thereafter.

(i) Licensing. Licensors of trademarks must retain the right to control the quality of the

goods or services offered to the public by the licensee under the licensed mark.

Failure to ensure a suitable level of quality can result in both parties losing their rights

to the licensed mark. Licensees need not be registered, nor must the licensee's

relationship with the trademark owner be noted anywhere on the goods sold under the

licensed mark. Trademark assignments must include the goodwill of the business

associated with those marks or rights in the mark may be lost.

4. Trade Secrets

(a) Definition. A trade secret is any information that is kept confidential and derives economic

value from not being generally known by others. Although a federal protection law may be

adopted in the future, trade secrets are currently governed only by state law, either via

statute or common law. While the Uniform Trade Secrets Act has been passed by a

number of states, it is often so amended as to destroy any consistency across state lines.

Reference to local law is mandatory for any important trade secret matter.

(b) Rights of Trade Secret Owner. While protections vary from state to state, under the

Uniform Trade Secrets Act the owner of a trade secret has the right to seek both injunctive

relief and monetary damages for any misappropriation of that trade secret. If the

198 15 U.S.C. § 1065.

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misappropriation is "willful and malicious," a court may also assess exemplary damages

and attorneys' fees. Misappropriation occurs when a trade secret is acquired "by improper

means" (which includes "theft, bribery, misrepresentation, breach or inducement of a

breach of a duty to maintain secrecy, or espionage through electronic or other means”).

strictly confidential in order to maintain their rights of enforcement. Any documents

containing trade secrets should be clearly marked "CONFIDENTIAL" and confidentiality

agreements should be executed by all parties granted access to trade secrets. If properly

maintained, a trade secret may last forever.

E. U.S. Health Care and Pension Laws

1. Publicly Funded or Mandated Health System. On March 23, 2010, the federal Patient

Protection and Affordable Care Act (PPACA) was signed into law, and on June 28, 2012, the

Supreme Court upheld its key provisions. PPACA represents the most significant change in

U.S. health care since the passage of Medicare and Medicaid in 1965. Although PPACA does

not require employers to provide health insurance to their employees, beginning in 2014,

employers with more than 50 full-time employees or equivalents who fail to offer coverage or

who offer coverage that does not meet a minimum standard and is also deemed "affordable"

to the employees will be forced to pay a penalty. Medicare and Medicaid, which are federal

health care payment benefits for the elderly (Medicare) and the poor (Medicaid), continue to

be funded by employer contributions and employee payroll deductions.

2. Pension Plan Regulation. Employers are not required to offer pension plan benefits to

employees. However, if an employer does offer pension plan benefits to employees, then

such a plan will be subject to the Employee Retirement Income Security Act of 1974 (ERISA)

(and the Internal Revenue Code for tax qualified pension plans).

(a) Liability for Violating ERISA and Internal Revenue Code Requirements Applicable to

Pension Plans.

(i) Fiduciary Responsibilities. Pension plans must be administered by individuals (known

as "fiduciaries’) who will be subject to comprehensive fiduciary responsibility rules.

These rules govern administration and investment of plan assets, prohibit self-dealing

with respect to plan assets and regulate certain transactions with related parties with

respect to plan assets. A fiduciary who violates these rules (for example, by causing

the pension plan to loan money to a related corporation) is subject to personal liability

under ERISA, including fines and/or imprisonment.199

(ii) Rules for Operating Pension Plans.200 These rules govern plan design and operational

issues, including eligibility, funding, vesting, distributions, reporting and disclosure, and

coverage and nondiscrimination requirements. Plans must cover a nondiscriminatory

group of an employer's non-highly compensated employees.201 Plan assets generally

cannot be assigned or used for any purpose other than for the exclusive purpose of

providing pension benefits to plan participants (and defraying reasonable

administrative costs).202

199 29 U.S.C. §§ 1104, 1109, 1131, 1132.

200 I.R.C. § 401(a); Part 1 of Title 1 of ERISA.

201 I.R.C. §§ 401(a)(4) and 410(b).

202 I.R.C. § 401(a)(13); 29 U.S.C. §§ 1056(d), 1104(a)(1).

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(b) Plans Exempt from ERISA. "Top hat" pension plans are exempt from ERISA regulation

(with the exception of a one-time filing requirement).203 A "top hat" plan is a plan offered

only to a select group of management or highly compensated employees.

cover multiple unrelated employers in the same industry or with employees in the same

union. If an employer ceases participating in such a plan (for example, due to an asset

sale or plant closure), the withdrawn employer can be subject to withdrawal liability (its

proportionate share of the plan's underfunding).

(d) Union Pension Plans. Employers can provide pension benefits to union employees

under different plans than are offered to nonunion employees.

(e) Pension Plans Maintained by Foreign Corporations. ERISA does not apply to plans

maintained outside of the United States primarily for the benefit of persons

substantially all of whom are nonresident aliens.204 ERISA can apply to plans

maintained by foreign corporations for persons who are U.S. residents and citizens.205

203 29 U.S.C. §§ 1051(2), 1081(a)(3), 1101(a)(1).

204 29 U.S.C. § 1003(b)(4).

205 Lefkowitz v. Arcadia Trading Co. Ben. Pension Plan, 996 F.2d 600 (2d Cir. 1993) (ERISA applied to plan maintained by Hong Kong corporation

which was established solely for an employee who was U.S. citizen and resident); Bowers ex rel. NXSA-ILA v. Transportes Navieros Ecuadorianos, 719

F. Supp. 166 (S.D.N.Y. 1989) (court order requiring payment of ERISA-related liability by Ecuadorian corporation not barred by Foreign Sovereign

Immunities Act; plan was maintained in United States for employees who were U.S. residents and citizens).

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