What Entity Type Makes Sense For Your International Operations?

If your business is planning an international expansion, a key consideration is how to setup your operations. And, if your overseas business opens you up to a possible permanent establishment risk, you may to consider establishing an international entity.

But what kind of entity really makes sense for your company? It all depends on country regulations and the specific situation and details of your business, but here are a few guidelines to consider for some of the more popularly used entity types.

Representative office
A representative office allows a company to establish a minimal presence in a foreign country, so long as employees of that office only participate in what are known as "representative" activities. These are activities that may promote products and services, but do not go as far as in engaging in sales or actually signing contracts. It is an ideal arrangement for an organization looking to work more closely with its existing overseas distributors and customers, as well as monitor what's happening with its international brand.

This is by far one of the easiest ways to get setup in most countries, as there is no in-country revenue generation. The result is often that rep offices are not subject to in-country corporate tax, so there will be less need for regulatory oversight from foreign tax authorities. Companies benefit from an easier process to setup, with fewer hoops to jump through and a shorter time frame to get up and running.

However, it is important to remember that a rep office is not for all business scenarios: It is intended only for non-core, non-transactional business activities. Employee job titles/descriptions, as well as payment structure (i.e. salary vs. commission) must be in line with the purpose of the rep office.

Branch office
A branch office is an office of the company that serves a certain country or geographic area, effectively an extension of the parent company. This type of entity allows a company to engage in core activities, sales and other transactional activities overseas.

As a branch office is not a legal entity in itself, it does not have any liability protection, meaning that the foreign parent company is subject to any legal obligations that arise. Also, branches do not have tax protection, so U.S. profits could be exposed to taxes in the branch's country. Transfer pricing arrangements as well as country tax treaties need to be considered to determine how operating the branch office may impact the company's bottom line.

Subsidiary
A subsidiary is an entirely separate legal entity, created specifically to engage in business overseas. It provides a legal layer of protection between the interests of the parent company and the on-the-ground activities of the entity.

This type of entity is generally the better way to manage tax liability, as profits earned by other subsidiaries will not be impacted by the tax regulation of a given entity's country of operation. However, setting up a subsidiary is typically an arduous process, requiring multiple government registrations (and associated fees), minimum capital requirements and stringent regulatory oversight in country. Often, this is not the best choice for temporary operations overseas.