Consider this issue:You are an company looking to hit a major market on this or the other side of the world.
You’ve been attending trade shows in that market, pitching to customers, following up on referrals, and now … there on the horizon, a RFP beckons, or even better, a fully formed, real life customer.Should you be setting up a subsidiary in that country?Consider the following:Factors in favour of a local sub:
1. You need to station long standing employees in that company (especially to the extent you sell face to face services.)
2. You need to collect payments and remit taxes locally (don’t slip into the easy thought that if you don’t have a local presence a “Permanent Establishment” doesn’t exist and you are free from tax. That’s a detailed examination and not always conclusive, even if you don’t have a PE under that country’s rules- for example state and city taxes in the US.)
3. You’re worried about getting sued by customers, partners, employees, or the local government for all the rules you don’t know about in a country where you have three employees working out of their bedrooms.Factors against:
c. You don’t know how much real business there actually is (for you) in that location.
d. You don’t have the money to set up a subsidiary.
d. You don’t have the money to pay for the expertise to maintain the subsidiary (annual corporate filings, bank account setup, payroll setup, understanding and preparing documents complying with local laws on employment, tax, etc.)
e. You don’t have the organisational bandwidth to set up local management.Doing business across multiple countries is an exercise that is high-risk, high-cost (especially if you want to manage liability risk.)
If you are small, you may want to consider a variety of models of international expansion.
You may want to decouple elements of your operation and contract them out to arm’s length third parties in your target countries (rather than your own entities) until you are large enough to absorb them back and deal with the complexity. These, depending on what you sell, will be functions like local sales, local distribution, and licensing.
Now, keep in mind, even if you don’t set up a subsidiary in a foreign country, to address point 3. you should consider channelling your overseas activities through local subs in your own country (that you can manage in a more cost-effective manner.)
Continue reading “Setting up an international subsidiary”