Direct distribution

Ownership structures

May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?

Generally yes unless the supplier’s country, the supplier itself or its principal is the subject of a trade embargo or sanctions. As of December 2018, the countries on the embargo list are the Crimea region of Ukraine, Cuba, Iran, North Korea and Syria. In addition, there are sanctions affecting specified persons and categories of persons relating to the following countries or areas: Afghanistan, the Balkans, Belarus, Burundi, Central African Republic, Democratic Republic of the Congo, Iraq, Lebanon, Libya, Nicaragua, Russia, Somalia, South Sudan, Venezuela, Yemen and Zimbabwe. The lists of embargoed countries and sanctioned individuals and entities are maintained by the Office of Foreign Assets Control (OFAC) of the US Department of Treasury. For details, see the OFAC sanctions page at www.treasury.gov/resource-center/sanctions.

There are also certain industries in which foreign ownership is restricted or regulated, either nationally or by certain states, such as defence contracting, banking and alcoholic beverages.

May a foreign supplier be a partial owner with a local company of the importer of its products?

Generally yes, subject to the embargoes, sanctions and certain industries noted in question 1.

What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?

Any importer, whether foreign-owned or not, should operate through a form of entity whose liability is limited to the assets of the entity, to minimise the risk of the owners’ assets being available to satisfy claims for the activities of the business. The most common of these are the corporation and the limited liability company (LLC). These are formed under state law by filing documents with the chosen US state, and that state’s laws will govern the entity as to its internal governance and the relationships among the owners and the entity.

While LLCs are generally more flexible with respect to governance, economic structure and corporate formalities, for a foreign parent a corporation will often be preferable from a tax perspective, depending on applicable tax treaties between the United States and the foreign parent’s home jurisdiction, as well as the tax laws of that jurisdiction (see question 6).

Restrictions

Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?

Generally there are no restrictions, subject to the responses to questions 1 and 2. US states generally do require, if an entity is ‘doing business’ in the state, that it ‘qualify’ to do business, which involves a filing with the state, agreement to be subject to jurisdiction of the state, and appointment of an agent for service of legal process in the state. The definition of ‘doing business’ varies somewhat by state and is extremely fact-based, but generally includes the operation of a business facility in the state. Typically, a company that fails to qualify when it is required to do so will not be entitled to maintain any action or proceeding in the courts of the state. Of course, there are likely to be tax consequences for a foreign business that operates directly in the United States.

Equity interests

May the foreign supplier own an equity interest in the local entity that distributes its products?

See questions 1 and 2.

Tax considerations

What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?

Foreign businesses and individuals are generally subject to federal (national US) income tax on their taxable income that is deemed to be ‘effectively connected’ with a US trade or business (‘effectively connected income’ or ‘ECI’) at the normal rates applicable to US persons. Non-US persons must file a US income tax return to report such income and may deduct the expenses of the US business. A foreign corporation that has ECI is subject to an additional 30 per cent US branch profits tax on its after-tax net income. A foreign person is also subject to a 30 per cent US withholding tax on US-source ‘fixed or determinable annual or periodic’ income, which generally includes dividend income.

If a foreign entity provides services in the US, and those services are performed by employees of the foreign entity, the foreign entity will be engaged in a US business. This means that the foreign entity will have to file a US tax return and report and pay tax on its ECI from those services. Also, if the foreign entity invested in a US operating business directly or through an entity treated as a partnership for US tax purposes, the foreign entity itself would be required to file a US tax return and pay taxes on its share of any ECI generated by the operating business.

In order to alleviate both the implications of having to file a tax return in the US and the payment of the branch profits tax, the foreign entity could establish a US subsidiary corporation to employ the individuals who will perform services in the US or to hold the foreign parent’s investment in a US operating business. The US subsidiary would file a US tax return and would be subject to US tax at regular US corporate income tax rates on the income generated by the US business, less its business expenses. If the US subsidiary makes any distributions to the foreign parent during the time that it was operating or holding an investment in a business in the US, the distributions would be subject to a US dividend withholding tax at a rate of 30 per cent (or any lesser rate provided in an applicable income tax treaty between the US and the foreign entity’s home country). When the US subsidiary sells its US business or its investment in a US business, the US subsidiary would be subject to US tax on any net gain realised on the sale. However, the US subsidiary could then fully liquidate and distribute the proceeds from its business or its investment to its foreign parent, and that liquidating distribution would not be subject to US withholding taxes. Accordingly, a foreign business or individual can avoid a second level of US tax (ie, branch profits tax or dividend withholding tax) on its US business or its investment in a US business if it makes its investment through a wholly-owned US corporation, and the US corporation does not make any distributions to the foreign parent until it fully liquidates.

However, depending on the tax rules of jurisdiction where the foreign business is located and the structure of the foreign company, it may be preferable to structure the US subsidiary entity as a US partnership that elects to be treated as a corporation for US tax purposes. This structure will have the same US tax benefits of investment through a US corporation as discussed above and may also allow the investing company or its equity owners to receive a tax credit in its local jurisdiction for the US corporate taxes paid by the US subsidiary. Often income tax treaties between the US and other countries can affect the preferred structure and offer opportunities to reduce the total tax burden from a foreign business’s US operations.