In a world of globalization, you may be wondering about the best way to do business abroad (or, if you are currently abroad, in the United States). How should you navigate foreign contracts, and how should you structure your business abroad? This article will cover some of the basics of international business.
Foreign Business Entity
If you are debating between keeping your existing business entity or setting up a new one abroad, the answer is the latter. It is always easiest for local companies to do business with one another, especially when it comes to signing contracts, because the laws of only one country need to be considered. If you plan on fundraising abroad, foreign investors will also find it easier to deal with the paperwork of the country in which they live. From a legal standpoint, to avoid conflicts with respect to the laws of different jurisdictions, it makes the most sense to set up a business abroad as opposed to using your existing business to ink deals.
With that said, you can structure the new business as a subsidiary or partner of your existing one, so that revenues between the entities flow accordingly. You may want to work with a local attorney to draft the documents in a way that works best for the situation, such as if you want to retain the same management in both entities, or if you want to do something else creative.
Taxation Matters
Most western countries impose a tax on capital gains, though rates may differ significantly between jurisdictions. Depending on the type of business you set up, you may be able to get away with pay tax at the corporate level for passthrough or similar entities. In such cases, profits are distributed directly to stakeholders and counted as personal income in their jurisdictions of residence. For other types of businesses, companies are subject to a corporate tax, with the remainder to be distributed directly to stakeholders.
Why does this matter? You may want to shop around for the lowest tax rates or the business structures that offer the most tax advantages, especially if your new business is a subsidiary of the existing one. Speak to an accountant to see how tax laws and regulations in the foreign jurisdiction will affect the relationship between your existing entity and the new entity.
Multi-Layer Entities
If your business is a fund or investment vehicle, you may want to consider structuring your business in a multi-layer fashion, with an umbrella entity set up where you are located and lower level entities set up in the foreign jurisdictions where you intend on operating. You may even want to structure entities on top of one another in a stack. For example, you may have a fund or investment vehicle set up in France that feeds into an entity in Mauritius, which then feeds into an entity in Singapore. Keep in mind your strategic and investment goals when designing this type of structure.
In A Nutshell
To summarize the main point of this article, it is always helpful to have a local entity set up in the foreign jurisdiction that you want to operate, especially if you want to sign contracts with other local businesses or customers, or for tax or investment purposes. Before you branch into new countries, try to develop local partnerships in this jurisdiction to help you tap into projects or resources, especially if licenses or special networks are required.
