Expanding a business internationally is a major milestone that requires planning and attention. A critical choice is determining how you will establish your business presence and how that will impact legal and compliance obligations within the country and for the parent company. This includes everything from complying with local regulations, optimizing the efficiency of global business activities, global tax strategies, and human resources issues such as hiring and the provision of benefits.
When selecting the right entity for your international operations it’s important to understand the differences in entity structures and the requirements each must fulfill with the local government. Having this insight will help ensure the structure chosen best meets your organization’s needs, provides reliable risk protection, and supports your global business strategy.
In this article, we explore different forms of structuring an international entity and commonly used entity types in top jurisdictions around the world.
Establishing the type of presence your business will have in-country
The entity that your business ultimately chooses to establish in-country depends on the type of business and how the operation will be structured. Will your business have a permanent establishment in the market, or will it seek other forms of representation?
A permanent establishment is defined differently in each country but is typically described as any commercial activity that is performed and generates revenue through a fixed place of business. A “revenue-generating” activity can mean different things in different countries but is usually determined by factors such as product or service types, staffing levels, if you’ve leased or purchased office space, local contracting processes, etc. More importantly, a permanent establishment is viewed as a corporate tax nexus and will be liable for paying local income tax relevant to its commercial activity.
Business owners, executives, and their counsel, whether in-house or outside, must consider whether the company’s activities trigger a permanent establishment classification and assess the risks and benefits of operating as such.
Understanding international entity structures
Based on the type of presence that you are aiming to establish in-country there are different ways of structuring international entities. Selecting the type of structure is a critical step in any global business opportunity and is one of the five things to know when expanding internationally. Even beyond an expansion, it is also an important consideration when multi-national companies are restructuring their global operations either during a merger or acquisition, sell-offs, even when consolidating.
Each jurisdiction will have its own set of local requirements for each and they should be reviewed considering the business’ goals for the entity. Although these can vary from country to country, the three most common international entity structures include:
- Representative office: Established when a company wants to have a minimal presence in a country and only conduct non-transactional (i.e. non-sales) activities. It’s the easiest form of structure to establish while providing an opportunity for a company to build or maintain its local contacts, business relationships, and/or its brand in the local market.
- Branch office: It is viewed as an extension of the parent company; therefore, it is not considered a separate legal or financial entity to its parent. Unlike a representative office, the branch office engages in sales activities and transactions in the country or region it is formed. Establishing a branch office can be expensive and cumbersome and brings the same local legal obligations to its foreign parent company. To limit the local risks to the parent company, a subsidiary presents a suitable alternative.
Learn more about the differences between these two forms of structures in the article Branch Office vs. Subsidiary? It’s a Critical Choice When Expanding Your Business Globally.
- Subsidiary: A subsidiary is a legal entity that is distinct from the parent company. While it is quite a large undertaking to set up a subsidiary in a foreign country, it is a good choice for limiting the legal and financial exposure of the parent company’s interest and its own activities. A subsidiary may be 100% wholly owned by the parent or controlled at a lesser percentage. Subsidiaries can be complex to establish and require numerous government registrations, fees, and/or specific capital investments. Because subsidiaries are viewed as legal residents for tax purposes, they are more likely to be subject to stringent regulatory oversight in the jurisdiction in which they are formed.
Depending on your business’ strategy, you may choose to structure your international operations as either a representative office, a branch office, or a subsidiary. Be sure to consider how the selection impacts annual compliance and reporting, direct and indirect taxes, scalability, as well as hiring decisions.
Choosing the right local legal entity type that works for your business
Let’s assume your business is exploring the formation of a subsidiary. The next step is to understand the legal entity types available in the jurisdiction in which the company will be incorporated.
The decision will be influenced by several factors. Key among these is the company’s investors and/or partners, its investment strategy, the degree of independence sought from the parent company, risk/reward tolerance, and local requirements such as ease of formation, and ongoing compliance obligations.
The following table lists the most commonly used international entity types in some of the top global jurisdictions: