1) New client in a European country and the local provider prefers to deal with a local company. I have encountered this specific request many times. I believe that a foreign client prefer local invoices, so, if a problem arose, it is simply easier to litigate locally than internationally. The U.S. company is forced to create a new operating entity in that country.
2) Company intends to market and hire in the other country. As I related to a company intending to hire in the U.S., it behooves to create the entity locally for a couple of reasons – to comply with local laws and shield the parent company from potential lawsuit liability by only exposing the foreign subsidiary.
3) Company plans to raise capital in that country. In a world of venture capital where geography is critical to funding (in another blog), I have witnessed Israeli companies create Silicon Valley entities to attract local financing. Waze, a recent acquisition by Google, is an excellent example of that. It began as an Israeli company and then established operations in the U.S.
4) Company needs to reduce its tax exposure in the U.S. to raise capital for growth. Last week, I had a casual meeting with a pharmaceutical executive, who related to me that his employer-company, located in California, currently pays 30% income tax rate. A U.S. competitor recently restructured operations and moved its principal office offshore – its tax rate now? 10%. With that additional 20% savings, that pharmaceutical competitor now had additional capital for new business development and acquisitions. So foreign operations can play a very major strategic economic value.
5) Company needs to facilitate growth in the foreign operations with superior infrastructure. Some technology companies prefer to create a foreign entity since that operation can access superior employees and the telecommunications infrastructure is reliable and accessible.
These are actual situations I have encountered before. And offshore company creation is the preliminary step. Because of tax treaties and their large disparities in the tax treatments to cross-border income transfers, tax experts always recommend the creation of an intermediary holding company. For Latin America subsidiaries, the holding companies are located in the Netherlands. For example, a U.S. company with a Brazilian entity will have a Netherlands holding company.
Another example where foreign investors invest in U.S. entities but need to avoid U.S. taxation and reporting. It is common sense for a foreign investor – if he or she is not a U.S. citizen and does not reside in the U.S., why should that person be paying U.S. taxes? Again, what matters is how one structures the legal entities.
Now, unlike U.S. based created companies, these foreign company creations tend to have more complex legal processing. Some countries require minimal capitalization. Others require a local citizenry on the Board of Directors. Filing fees can be higher and the turnaround time somewhat longer. But if the offshore creation leads to substantial tax savings or the securing of a foreign client, is it worth it?