Why create an international company as a subsidiary, affiliate or holding company?

ImageAs I have worked with various multinational companies seeking to restructure or expand operations in foreign lands, I have been exposed to many strategic reasons for such corporate development:

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?


About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
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