By Mo Ahmad / Debra Lewis-Mahon, Westmark Tax
Is it really the right time to seek out new opportunities by expanding to a new country? With all the travel restrictions and drastic changes to immigration policies, you might think its crazy to consider that international expansion right now. Or maybe it’s just being courageous. With the proper perspective it might be just what you need to succeed right now.
Even with the uncertainty, we are continuing to assist clients that see global expansion as a viable growth strategy. Especially between the US, UK and Canadian markets. For some, it becomes a necessity if a product or service becomes popular in a new market or opportunities dry up in the existing market. The ease of doing business globally through the internet has continued to spur global activity even in the current environment.
Based on our firsthand experience helping Canadians expand into the US (and Americans expand into Canada), the biggest piece of advice we would provide is to do your homework ahead of time: Pre-planning is crucial! Even between the US and Canada, the various legal, tax, accounting and regulatory requirements are so very different that it is sometimes hard to figure out where to start.
We’ve outlined below some of the fundamental decisions that you need to consider. These are the ‘boring’ items that you need to review - in addition to your sales/marketing strategies. We are just outlining the questions here and you need to do your homework to figure out the right answers for your situation. This will require a balancing act of various items like tax, risk mitigation and operational efficiency.
Please note that the below list is not meant to be exhaustive and its only a partial list of the things you’ll need to think about. Talk to people that have done it and make sure you get professional advice to help you determine the appropriate questions and answers for your situation.
Corporate Entity: First question will be to decide what form of business entity to establish. Most likely you will need to set up a new business entity in the US although in certain circumstances you may be able to operate in the US using your Canadian entity. You should definitely get professional help on this question as there are various entity types (with impact on tax issues) and various jurisdictions (with various Federal and State issues to consider).
The most common form for a Canadian business operating in the US will be a C corporation which is typically incorporated in Delaware. The primary reason to incorporate in Delaware is that the Delaware courts and laws are well-proven for corporate law disputes. However, this is definitely not the right solution for everyone! There are other alternatives such as the sole proprietorship, partnership and the Limited Liability Company (LLC) which is a business structure allowed by state statute. The LLC is a popular form of business entity in the US because of its liability protection and flexibility however it may not be appropriate for a Canadian business operating in the US.
There will be various legal and tax considerations in selecting a business structure and it is a very important decision as the entity type will drive a number of other considerations. You will need to balance the pros/cons of the various choices and decide on the appropriate entity type and jurisdiction for you. Once you’ve chosen an entity type then you’ll need to decide on a name and obtain the appropriate tax identification number. You will register your initial business entity in a particular state and then may need to qualify or register the business to operate in other states, if necessary.
Tax/Accounting Issues: You will need to take some time to really understand the tax issues – there will be Federal and State tax issues to consider. You will want to undertake income tax planning for Federal and State (and maybe City/County) tax purposes to determine what will be left over after paying the various levels of tax. There may also be some tax incentive programs so you’ll want to investigate this. For example, the State of California Research and Development Tax Credit allows companies to receive a 15% tax credit for qualified in-house research expenses made in California. There will be various requirements to be met however it may be worthwhile to explore these opportunities up front to determine if the business could qualify.
Once you’ve understood the tax rates then you need to consider how do you repatriate the funds back to the parent company or to shareholders. There are various strategies here and will depend on how the US company is related to the parent company and whether capitalization of the US company was by way of equity or debt. Also, you may need to consider transfer pricing rules to determine appropriate strategy here and implement intercompany agreements.
There is a very comprehensive Tax Treaty between the US and Canada which will be helpful to avoid double taxation. Be careful though if you’re doing business in California as the Tax Treaty may not apply to State tax issues. Again, need to have a good understanding of the Tax Treaty and your tax plan to avoid double taxation pitfalls.
You will also want to understand some of the tax reporting requirements for the US company and review how to keep track of the accounting/bookkeeping. Usually, this can be managed from the parent company however there will be differences in payroll, banking, currency issues, etc. so you need to educate yourself on the various differences. You will want to understand if you need to register for and charge sales taxes. Each state has their own sets of rules for sales tax.
Finally, there are various information and foreign disclosure requirements that need to be considered for US companies owned by foreign owners. It is very important to keep track of related party activities and transactions. Your accounting/bookkeeping process needs to able to keep track of the details for reporting at year end. For example, corporations file Form 5472 to provide information required \ when reportable transactions occur with a foreign or domestic related party. There are steep penalties for failure to comply with these requirements. Also, there are Foreign Bank Account Reports (FinCEN Form 114) to disclose non-US bank accounts. Steep penalties if you don’t get this reporting accurate and timely.
Other Legal and Regulatory Requirements:
There are a host of other legal and regulatory rules to consider. Some of the common items are outlined below however there will be other issues for your specific situation. Also, remember that there are Federal rules and then State rules to consider. Especially in a market like California you really need to understand both sets of rules to operate a business.
Employee Considerations: You will need to consider your strategy on whether you will hire local employees or will you move current employees from the parent company. Usually, the senior employees will move from the parent company. In this case, you need to consider the immigration requirements. In the current environment, it may take a lot longer to get an employee relocated to the new location.
Also, you’ll need to review employment agreements for the new jurisdiction and update existing provisions for confidentiality, non-compete, termination or severance and for bonus or equity compensation. If you have a stock option plan, you’ll need to review it to ensure compliance with US securities rules and draft appropriate US documents. You may also review whether there are any tax favoured compensation programs available for key employees. Finally, you’ll need to consider benefits packages and obtain health insurance coverage which can be very different in the US.
Next, you’ll need to establish a payroll system so that you can pay the US employees and register for the various workers compensation and employment insurance programs in the applicable jurisdiction. You may want to review your Canadian employee handbook or create a US equivalent to establish protocols for human resource issues.
Industry Specific Regulatory Requirements: For various industries, you’ll need to identify whether there is industry specific regulation required in the US and, if so, you’ll need to consider how you can register. In some cases, you’ll need to have the entity set up before you can register and may need a US Social Security Number to license individuals. So, if you do need to register or comply with licensing requirements make sure you consider the process for non-residents and how long it will take to get compliant. You may not be able to start the business without this.
Risk Management: This is an important consideration for the US business environment. You will need to review coverage for generally liability protection – consider if your current policy will cover the US business. Most likely, you’ll need to get separate coverage for the US business. Also, consider if you need product liability insurance and/or liability protection for officers & directors.
Intellectual Property: Assess the need for copyright or trademark registration, patent filings or anything else to protect intellectual property.
Product: If you are selling a product then you will need to develop a US import strategy and initiate a products review to ensure that you can legally sell the product in the US. As part of this review, you will consider labelling requirements, any quotas or duties and review of any US trademark or patent right held by third parties. You will also need to review the terms and conditions of sale/purchase and ‘Americanize’ any commercial agreements. Finally, you may need to review the product warranties for compliance with US rules.
Real Property: If you will be setting up a physical office then you will need to do your due diligence with respect to potential locations and negotiate appropriate leases. Also, lots of additional things to consider if you’re looking to purchase real property.
Conclusion:
There are certainly lots of opportunities to explore internationally. However, making the decision to expand into a new country requires a careful evaluation of a maze of rules and regulations. It can be a daunting process at the best of times so these days it can be even more challenging!
The number one takeaway – make sure that you plan ahead of time to avoid costly errors down the road. If you’re willing to invest the required time and resources upfront, then you’ll avoid surprises down the road! Set your expectations and become aware of the complexity and the bureaucracy that you’ll face so that you can easily overcome obstacles when they arise.
For more information, please visit Westmark Tax at www.westmarktax.com.
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This article is for information purposes only and does not provide tax or legal advice. Due to the complexity of the tax rules for cross-border situations, it is imperative that you obtain professional advice from a qualified tax or legal advisor specializing in cross-border planning before you act on any of the information provided.