Consider a representative office when entering the US market
I am often asked by multinational companies when they are initially considering entering the US market about how best to establish themselves. They want to learn about the market to determine if expanding into the US is feasible. Taxation is top of mind and they want to understand their options when setting up company offices to minimize the impact of taxes while they test the waters .
A “representative office” is often the best choice. A representative office is a business location with limited functionality that is opened in a city, county, state or country where the enterprise is not yet licensed to operate. A representative office typically engages in a limited range of business support activities that can include things like advertising and other promotional activities, basic market research and the purchase of goods for the foreign company headquarters. As long as activities are limited in nature it is not necessary to establish a formal legal entity such as a branch or a corporation. Thus, the activities will not be subject to federal income tax. There may be state or local taxation issues to consider depending upon the exact state or municipal location of the office, but for the most part, a representative office limits the amount of taxation by limiting the activities.
The other area in which a representative office limits activities involves the employees of these offices. Many foreign companies prefer to minimize their exposure by using US citizens or green card holders familiar with their parent company to staff the representative office. A representative office allows the foreign parent company to learn from the US based office and staff and explore the feasibility before fully committing to expansion. If the parent company assigns a foreign national to the representative office, then they need to engage counsel familiar with visa or other immigrations rules to properly arrange the foreign national’s employment by the representative office. CFOs2GO is happy to make referrals to trusted local legal counsel as a courtesy to our clients. As the offices’ activities progress management needs to continue to communicate closely with US legal and tax advisors to insure that their activities still fit within the representative office limitations.
Doug Kennedy is a senior member of the International Practice group and serves numerous foreign companies as they set up U.S. operations and U.S companies as they set up foreign operations. He advises on the topics of payroll, taxation, and general areas of governmental compliance.
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