As an Irish lawyer based in Silicon Valley, I regularly speak to fast-growing companies that are entering into new international markets for the first time. Companies frequently ask me to advise on the best way to structure their overseas business. Should they use a branch or subsidiary? Should they form a new entity or acquire existing operations? Do they even need a formal business registration in the overseas jurisdiction?
Other companies simply go ahead and engage with customers in the overseas jurisdiction without giving too much thought to structuring options. While this can work out for some companies, it is risky territory as – however minimal your activities in the overseas jurisdiction – you may end up triggering unexpected legal and tax consequences that cause you headaches in the future.
I have set out below a summary of some of the more common ways that companies enter new markets and some key factors to bear in mind in relation to each option. Of course, the full range of options available to you will vary from location to location and, what's right for you will depend on your particular business model and international strategy. Needless to say, you should always speak to legal and tax advisors in the relevant jurisdiction before taking any steps to enter into a new market.
1. Form a new subsidiary When companies enter into a new market, they will often opt to establish a new subsidiary. Within the EU, most countries allow you to form a limited liability subsidiary. The primary benefit of this option is that the shareholder of the overseas subsidiary (let's say, a US parent company) will have limited liability with respect to the operations of the subsidiary. So, in other words, by using a subsidiary, the US parent company can ring-fence liabilities associated with its international operations.
2. Register a branch
Some companies prefer to do business in an overseas location using a branch. The primary difference between a subsidiary and a branch is that a branch does not have separate legal personality from the parent company – so the US parent would be directly liable for the debts and obligations of the overseas branch and there is no ring-fencing of liabilities.
There seems to be a perception among some companies that the corporate maintenance burden associated with a branch may be significantly lower than for a subsidiary. While this may be correct to an extent - in the sense that a branch may not be subject to the full rigors of the local company law regime - the on-going compliance requirements applicable to a branch should not be under-estimated. For example, in an EU context, branches of overseas companies are required, as a general rule, to formally register as branches with the local companies house in the relevant EU jurisdiction. They are also subject to various on-going corporate filing requirements (relating to company accounts, corporate changes etc).
Equally, while certain local company law requirements may not apply to the branch, other local legal requirements may apply irrespective of whether the overseas company is doing business through a subsidiary or a branch. For example, in an EU country, if the branch hires local employees, EU employment laws will apply just as they would in the case of a subsidiary; similarly, EU consumer protection laws will apply where the branch deals with EU consumers. With that in mind, a branch should not necessarily be viewed as a "low maintenance" option for your overseas business.
3. Enter the market directly
Other companies expanding overseas opt to engage directly with customers in the overseas jurisdiction (i.e. through the US parent) without making any kind of formal business registration. While this approach is not uncommon, and may work for your business in certain jurisdictions (particularly if your activities in the jurisdiction in question are likely to be minimal), it should be done with caution.
Even with minimal activities in the overseas jurisdiction, you may trigger local business registration requirements. In an EU country, for example, if the overseas activities are sufficient to amount to a "branch" for EU legal purposes, then there would be a positive requirement to formally register as a branch in the relevant EU jurisdiction. There may also be other local business registration requirements that could apply depending on the EU jurisdiction in question – and you would need to confirm these requirements in each jurisdiction on a case by case basis.
Equally, as with a branch, there may be local laws and regulations – such as employment or consumer laws – that may apply to your overseas activities irrespective of how you structure your business. For example, under the forthcoming EU General Data Protection Regulation, overseas businesses can be subject to EU data privacy laws simply by virtue of the fact that they offer goods or services to, or monitor the behaviour of, EU individuals – this is irrespective of whether they have formed a subsidiary or registered a branch or made any other kind of formal business registration in the EU.
You may also trigger unwelcome tax consequences in the local jurisdiction if your activities in the jurisdiction are sufficient to amount to a "permanent establishment" for local tax purposes.
So what is the best approach for you?
While all of the approaches above are viable as potential options for entering a new market, the reality is that the structure that will work best for you will invariably be determined by a combination of (a) the needs of your particular business in that jurisdiction having regard to your overall international strategy; (b) your overall tax planning objectives; and (c) local legal requirements.
However you structure your overseas operations, you will need to carry out full due diligence to understand exactly how local taxes, laws and regulations will impact your business. With that in mind, before you enter any new market (even if you are leaning towards a minimum engagement model like option 3), you should speak to experienced legal and tax professionals in the local market to ensure you fully understand the potential consequences and risks. They will help you to identify an overseas structure that works best for your business, without triggering unwelcome tax or legal consequences in the future.