There comes a certain time in the life cycle of a business when global expansion becomes top of mind. And then, the idea of creating an international subsidiary company is brought to the conversation. Typically this proposal is met with a full range of responses but at the end of the day whether or not it is the right choice is unique to your business needs.
We help companies navigate their global expansion strategies 24/7 so we wanted to share some of the benefits and risks of creating, maintaining, or terminating an international subsidiary company. Every country has their own regulations, timelines, and unique elements around company creation, but here are some of the bigger ticket items that can be applied generally.
Benefits of an International Subsidiary Company
1. Highest Compliance
Establishing a company in your target country will allow for the highest levels of compliance in that country. Tax regulations and bilateral tax treaties may specifically dictate the terms of when a permanent establishment is triggered and going this extra mile covers the risk spectrum.
2. Establishing a “Market Presence”
We’ve seen instances where setting up your own local legal structure aids market perception about your commitment to that market. This is very much the exception rather than the rule, but from time to time our clients express feedback that a local client prefers to engage and contract with a locally-established company. Of course, you should bear in mind that contracting and invoicing locally means you can’t classify the entity as a cost-plus structure; this increases local maintenance costs, adds tax complexities, and requires local signatories.
One of the benefits of having a foreign subsidiary is that the local government legally recognizes your company. So, if you do run into contract issues you are able to use the local court systems to get relief. Note that this cuts both ways.
4. Physical Asset Acquisition
If your model of international expansion revolves around manufacturing, real estate acquisition, or any other business that requires you to hold equipment or physical assets then you have to create a foreign subsidiary. Foreign independent contractors, BPO’s, and the International PEO/FSaaS solutions cannot hold physical assets.
Risks of an International Subsidiary Company
1. Initial and Maintenance Cost
An international subsidiary is expensive to set up, on average, plan on $15K-$20K USD which, depending on the company can be just the hard costs or can include some extra padding for outside help. Sadly the maintenance is not cheap either; for just one employee you can expect to spend on average $40K USD per year in hard costs.
2. Time Vortex
In general, the entire subsidiary management process and the word “urgent” will not be allowed in the same sentence, but here are some specific areas to know about.
3. Set Up
International subsidiaries take a long time to set up; on average, plan on 3-4 months set up time.
4. Tear Down of an International Subsidiary
What happens if that person you hired doesn’t work out or the strategy shifts? Take both the start-up time and cost and multiply them by a factor of 3.
5. Candidate Loss
You cannot hire someone until the subsidiary is set up and fully operational; many times companies have someone in mind, but after 3-4 months your employee is long gone.
6. Post 9/11 International Banking
The KYC (Know Your Customer) and Anti-Money Laundering regulations have made setting up and maintain a foreign bank account a nightmare.
7. On-Site Requirements
Signatories on bank accounts and corporate documents must often sign in person. It is more of a time and resource availability issue rather than a cost issue.
In many cases, you must have a local Resident Director (for example learn more about Singapore’s requirements here) – and in some countries, you must have two. Are you going to give your country manager or sales resource the keys to the kingdom (and bank account)? If not, plan on outsourcing that piece where possible and budget $10K or more per year per country for a fully vetted resource.
8. Compliance Management
Staying current on changes to national/regional/local tax laws, payroll withholdings, labor law changes, and banking regulations is your responsibility. If you think about it, your company has multiple full-time resources or high paid consultants to manage these elements domestically; an international subsidiary is no different and requires the same level of scrutiny.
Creating international subsidiaries is not part of our service offering. However, we offer alternatives that are far more flexible, safer and cheaper.
We know plenty of great providers in this space if you are set on foreign company creation. Don’t hesitate to get in touch. We want to help you figure out what is the right path for your business goals.