By Svetlana Kamyshanskaya, Primum Law Group
If you think that the international expansion of your business will be complex, you are definitely not the first ones to tell us so! This article sets forth seven ‘Big Picture’ legal issues connected with your planned expansion – and they apply to all business activities and business models.
Many foreign companies do business in the US as corporations. In the US a corporation is created under the laws of one state as well as under federal law.
You don’t necessarily have to form a corporate entity in the US in order to start selling your goods here, nor relocate your corporate center to the US. A foreign company is not required to conduct business in the US through a US entity and could instead open a branch office. Note, though, that the choice of corporate structure will affect the business’s taxation in the US.
The most common types of domestic business entities are Corporations, Limited Liability Companies (LLCs) and Partnerships – and have different financing, management and taxation options which you should understand before deciding on a structure.
Transferring employees from the home market to the US could be a part of your international expansion strategy and, in this case, immigration law should be taken into account.
All foreigners coming to the US to work must obtain a visa. Note that not all visa types can be converted into the green card or allow permanent resident status. Any immigration violation (such as ‘overstaying the visa’) can result in removal from the US or denial of re-entry into the US.
Given the complexity of US tax law, specialist tax advice is important for all companies doing business in the US.
Whatever the form of incorporation of your US operations, it will be subject to separate federal, state, and local taxes. The federal Internal Revenue Service (IRS) collects income tax, capital gains tax, tax on dividends and earned interest, other passive income and employee payroll taxes. States/localities collect their own taxes.
The US is party to bilateral tax treaties with numerous foreign countries. If your home country has a tax treaty with the US, the tax treaty should be consulted as your business’s primary tax planning tool.
All treaties aim to facilitate commerce between countries while preventing double taxation and tax evasion – and often there are tax advantages embedded in them.
Income Tax & Tax Credits
A corporation formed in the US is subject to federal income taxes on all of its net taxable income – meaning income earned anywhere in the world. There are many deductions available to taxpayer businesses that reduce the taxable income but the rules governing those deductions are complex.
Companies in certain sectors may also be eligible for tax credits, which are often used to incentivize investment in emerging or favored industries. Tax credits are particularly valuable compared to deductions because they reduce a company’s tax bill dollar-for-dollar.
Foreign companies doing business in the US may not shift profits to a foreign parent company to avoid taxes. The practice of ‘transfer pricing’ occurs when a foreign parent company charges the US subsidiary exorbitant (i.e.: far above the practiced market rate) prices for goods or services in order to move pre-tax money overseas.
Individual/Expatriate Income Tax
Individuals that are US citizens or US resident aliens are subject to tax on their worldwide income, regardless of where they work or live. Generally, an individual is considered a US resident for tax purposes when they either obtain legal permanent residency status or are present in the US for at least 183 days of the latest tax year. Even if an individual is not a US resident or legal permanent resident, such individuals must still pay US federal income tax on income earned in the United States.
There are four primary forms of Intellectual Property (IP) in the US: Patents, Copyrights, Trademarks and Trade Secrets.
The US has robust IP laws that protect intangible assets adding value to businesses and distinguishing brands and products from one another – if the owner has registered the IP. Although registration is not required, it confers legal benefits: the ability to enforce author rights in court and to obtain additional remedies for infringement.
Obtaining a US patent to protect your invention requires specialist attorneys and can be expensive. US copyright law gives the author of a work exclusive rights in the work and confers protection to both published and unpublished works. A trademark represents your company or product and can be registered. Legal protection of patents and copyrights can expire; trademark protection does not.
A trade secret is any information that adds value or competitive advantage to your business because it is not known to others. A trade secret could be a formula/recipe, a device, a compilation of data or a manufacturing technique. As an example, the Coca Cola Company has never patented its cola recipe but guards it as a trade secret.
When technology companies consider international expansion, it is the global IP strategy which is very important to get right. Trademarks and patents are territorial and must be filed in each country where protection is sought.
Foreign businesses coming to the United States must comply with US labor laws when hiring employees who will be working in the US.
US law notably distinguishes between ‘employees’ and ‘independent contractors’, and is, at the end of the day, a taxation and protection issue. ‘Employees’ are subject to payroll tax withholding requirements and protected by federal labor laws (such as minimum wage). ‘Independent contractors’ are not subject to tax withholding requirements and are not covered by many labor laws.
Added to this, your activity may take you into a ‘BU’ employment situation: ‘Bargaining Units’ are trade union protected employees and periodic negotiations call for trained assistance.
Contracts governing employee relationships between foreign owners in the US and foreign employees in the US must also comply with US law. Many companies enter into employment contracts with their key home-country employees – executives, officers, top managers, and others whose technical or commercial skills are integral to the business’s success in the US. It will be US law that governs this employment.
US product liability laws differ greatly from product liability laws in other countries. A majority of US states have adopted the doctrine of ‘strict liability in tort’ under which the focus of the inquiry is on the product and not the conduct of the seller.
A company anywhere in the production chain (manufacturers, wholesale distributors, retailers) can be liable if they sell a product in a defective condition that is ‘unreasonably dangerous’ to the user. The amount of damages in product liability court cases can be very high.
Because the entire production chain could potentially be liable for harm caused by a product, it is important for businesses to include ‘indemnification provisions’ in US sales contracts. An indemnification provision is an agreement by one party to compensate the other for certain costs and expenses.
In addition to negotiating such provisions, foreign companies doing business in the US should consider carrying adequate insurance coverage to protect against product liability claims.
In the US, federal and state regulatory agencies deal with the broad range of industries operating in the country. You are expected, by the very fact of being open for business, to know and be in compliance with laws governing your industry. Non-compliance leads to monetary penalties and perhaps closure of the business.
Regulatory agencies impose and enforce rules about operating and safety procedures, manufacturing processes, chemical/toxic emissions controls and much, much more. Heavy industry is not the only regulated activity: Compliance issues are in place for listed (stock exchange) corporations no matter what their activity, financial advisory companies and banks, pharmaceutical laboratories, food production companies and many other types of commercial businesses.
There are many advantages and benefits to business expansion outside your own borders, but make sure you are guided by experienced tax and legal professionals. They will explain the complexities while saving you time, energy and money. Successful entry into the US market must extend beyond merely identifying new consumers for the products and services of your company.
Primum Law Group
Primum Law Group is a boutique law firm that specializes in advising and representing international companies of all sizes and operating in all industries which are exploring how to take advantage of business opportunities offered by the US economy.
We know that the exercise of international business planning is multi-faceted and complex and we go beyond the ‘Big Picture’ with you. We’ll take you through the full strategic process and dive deep into the details your specific business needs to consider.