What to Consider When Creating a U.S. Presence as a Foreign Parent Company
by Michael J. Coletti, CPA, and Sheila J. Grice, CPA, Mazars USA LLP –
February 28, 2018
Every day, international companies come to America. Foreign trade initiatives and advances in technology continue to pave the way for global expansion, and the consumer outlook in the U.S. is strengthening alongside the economy. As such, entering the U.S. market is attractive, but establishing a business in America can be challenging. The top considerations when entering the U.S. market include the following:
- Formation and structure of the U.S. entity
- Location of operations, including offices, employees, inventory and customers
- Accounting and operational support
Formation and Structure of the U.S. Entity
There are various ways in which a foreign company can form an entity in the U.S., whether through a subsidiary, a branch, a joint venture or a partnership. Each structure has its pros and cons, depending on the business plan and the ultimate exit strategy. Typically, for a foreign company the go-to structure is a corporate subsidiary where that entity pays U.S. federal and state income taxes on its taxable income, with the other structures having an allocation approach to taxable income. Other factors to consider include how the entity will be capitalized (debt or equity or both), whether the U.S. operations will be profitable in the first few years and, if not, how the operations will be funded. There should be some type of initial equity contribution to satisfy the IRS rules. Funding the U.S. company with debt is the preferred method, because with the foreign entity as a secured creditor, repaying of the debt would be tax free, and there would be an interest deduction. While these are some highlights, there are complicated rules around this type of foreign transaction, so it’s important to ensure they are documented properly. Finally, the organization as a whole should be taken into consideration when deciding how and where the U.S. entity will be formed and the impact of any compliance requirements under U.S. law.
Location of Operations
The foreign company normally determines its U.S. location based on the location of a major customer or the demand for its product. Another consideration is the tax incentives offered by federal, state and local jurisdictions, which can generate significant tax savings for the company. Doing business in multiple states also holds the potential of creating tax nexus, which may add additional filing requirements for the entity. This includes formal business registrations to obtain authority to conduct business in each nexus state. The requirements of the various jurisdictions are sometimes difficult to understand for a foreign company. An example of creating nexus would be when inventory is direct shipped or stored at a customer’s facility, but the sale of the inventory has not been recognized.
Employees are another key component to the decision, whether to hire U.S. citizens and/or to have non-resident aliens transfer from the foreign country to work in the U.S. Usually, the foreign company wants to have personnel familiar with their products, culture and the management team, but typically these individuals do not adapt to the U.S. marketplace and struggle with the complexities of regulation and tax compliance. In the end, it’s important for the foreign national to have good advisors or hire a U.S. citizen with industry experience.
Accounting and Operational Support
Consideration should be given to the potential financial transactions of the U.S. entity:
- If the U.S. entity will transact business with its foreign parent or commonly owned foreign entities, consideration should be given to transfer pricing regulations.
- The hiring of employees will subject the U.S. entity to compliance requirements under state and local labor laws including payment of minimum wages, mandatory insurance, employee benefits and employer taxes.
- A U.S. bank account should be opened in most cases for the U.S. entity to receive customer payments and direct payment to suppliers.
- Select a system for recordkeeping and give special consideration to combining the U.S. entity’s financial activity with other organizational entities. A cloud-based system that is accessible internationally allows all parties to review financial transactions regardless of time zone.
These are the challenges that tend to arise first for international companies seeking to enter the U.S. market, no matter the nature of the business or the specific industry. Having a good management team in place to plan and work with advisors is critical to facilitating the process and getting the entity securely established.
Michael J. Coletti
Michael J. Coletti, CPA, is a partner with Mazars USA LLP. He is a member of the NJCPA Retirement Savings Committee and the Accounting & Auditing Standards and Cooperation with Bankers interest groups. Michael can be reached at Michael.Coletti@mazarsusa.com.
Sheila J. Grice
Sheila J. Grice, CPA, CGMA, is a senior manager with Mazars USA LLP. She is a member of the NJCPA and can be reached at firstname.lastname@example.org.
This article appeared in the March/April 2018 issue of New Jersey CPA magazine. Read the full issue.