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Foreign Entity Sub and Foreign Payroll

Rick Bigelow's Profile

I am working with a startup based in the US. but the business model focuses on the hispanic market.  That said, they are looking to establish a sub in Chile, adding employees and local payroll.  The company currently handles payment via contractor basis and also handles all operations for foreign countires.  As foreign markets increase in visabilty we will look to move all functions to the local markets. Chile is first.

Does anyone have experience establishing foreign subs, foreign payroll and operations?

Thanks in advance for your input.

Rick

Answers

Topic Expert
John Kogan
Title: CEO/CFO
Company: Proformative, Inc.
(CEO/CFO, Proformative, Inc.) |

Hi Rick, I've done this a few times. There are a number of ways to go about this. First, you can get a referral in through your local or global service providers. For instance, a few years back when I created a sub in Hong Kong, I used a local (Silicon Valley) contact at Baker & McKenzie to connect me to his counterpart in HK for corporate matters. Then they connected me to 3 local accounting companies who I could then interview to have them handle local bookkeeping (it was a simple sales sub so we didn't need our own local Controller). The accounting firm I selected then referred me to a few payroll firms, and they offered to manage that themselves.

Now I don't know what you or the company's facility is with spanish, but I will tell you that my Cantonese is non-existent (I'm better with Mandarin :) ). So english language skills was a major vetting issue with all parties. And let me tell you, there is nothing more frustrating than not being able to communicate with perfectly intelligent folks on both ends of the line!

An alternative to look at is a company called Nair & Co. (http://www.nair-co.com/ , and full-disclosure, they are NOT a partner/customer of ours in case anyone was wondering). I have been introduced to their business model through a CFO friend of mine and it seems to be set up to do precisely what you are looking to do. That is, they help with the legal, accounting and HR nitty-gritty "in country" so that you don't have to.

If you have more specific questions about foreign subs, toss them out in this or as separate threads and I'll be happy to help out (I've done subs in HK, UK, France, and Germany)

(Agent, JKS Solutions, Inc.) |

I would try and run it's a division out of the us entity and have the chile staff on board as contractors until you have traction. You should also speak to your accountant to understand how easy it is to shut down the sub if it doesn't work, as well as the benefits of sub v direct out of USA via contractors.

Michael Ford
Title: VP & Controller
Company: in between
(VP & Controller, in between) |

I have done this several times. The first order of business is to discuss this with your outside counsel and external auditors. Hopefully they have an affiliate or associated unit in your target country. talk to the foreign associate and get a sense if they understand your goal and a sense of their pricing, for competitive reasons you may want to have more than one or maybe they can provide most of what you want " off the shelf", at no cost to you. You or a member of your staff will have to make a trip to the local country to interview the local lawyers and accountants/auditors. Be sure you have someone who is competent to run the local payroll to both pay the local staff and timely and accurately pay the local taxes including those of any expats assigned to this office. This person also needs to be familiar with the local customs as well as the formal procedures. I can not stress strongly enough that you get it right the first time rather than fixing it later. Hope this helps if you want to discuss further my e-mail is mfordat3windmills [dot] com

Dan Caserza
Title: Consultant
Company:
(Consultant, ) |

I have worked for several small U.S. technology companies that expanded overseas and I set up a number of international subsidiaries for them. Generally the international offices were small and used third party accounting services, rather than having their own internal accounting staff. The typical arrangement was to establish:
- a legal firm to handle incorporation as well as any labor law and contract matters (including drafting job offer letter templates to comply with local law).

- an accounting firm to pay the bills, process payroll, keep the books and handle tax matters.

- a bank account for accounts payable, payroll and collections.

Your U.S. law firm should be able to point you to in-country law firms that can handle the incorporation paperwork. Otherwise an accounting firm in the country can usually recommend a good local legal firm for that purpose. A local office of a Big 4 accounting firm can be a good choice for your accounting support, so long as they are not also auditing your company. Small local accounting firms can be problematic because they generally don't have the level of expertise required to support a company with a U.S. parent, don't know or appreciate U.S. GAAP, and may not speak English well. Another alternative is Nair & Co. (http://www.nair-co.com). I used them to handle our accounting and legal matters in 4 or 5 countries. They can cover a broad range of specialties (expertise in accounting, tax, legal, human resources and more) in dozens of countries, so you may not need separate accounting and legal firms. And Nair & Co. can support you in multiple countries, rather than you ending up with a different accounting firm for each country. I had a very good experience with them and recommend them.
Keep in mind too the cost associated with establishing and maintaining foreign subsidiaries, which obviously will vary depending on size, complexity and scope. You'll need to draft intercompany agreements for tax purposes and establish transfer pricing. You also need to decide if the international subsidiaries are going to be cost centers or profit centers. And if they are profit centers, you'll potentially face huge revenue recognition issues because they don't understand U.S. GAAP. They will have to report their sales contracts to you in such detail that you can restate their numbers into U.S. GAAP revenue. Ever try reading a purchase order written in Japanese? Or Swedish?
Good luck with your international expansion.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Rick,

Your post doesn't make clear the nature/size/scale of the company nor of the foreign activities. If you are warehousing or manufacturing goods offshore, your needs may be great enough to aim at running all administrative functions in-house. If you are setting up sales and support centers, it may be a while before you have sufficient mass to run your own administrative functions. In either case, your best bet is to use local, third-party talent to manage payroll, bookkeeping, statutory reporting, local taxes, etc.

The suggestions already offered are pretty much on target. When we set up all of our off-shore subs, we used an attorney associated with E&Y whose main function was to assist clients set up foreign entities. You'll likely have better luck asking a Big 4 partner for such a referral than if you went to your local attorney.

Before creating the off-shore entity, you'll want to make sure that you are operating under reasonable tax guidelines. You'll have to decide if you are going to engage in buy-sell transactions between parent and sub or will the sub act as a sales agent for the parent? If the former, you'll need to create all the legal agreements defining independence, transfer pricing and other terms and conditions. If the latter, you'll need consulting agreements to define what the sub is going to do for the parent; how will the sub get compensated? (We used cost-plus as our base since the volumes weren't high enough for the company to worry about a commission scheme or a buy-sell arrangement). In general, you'll want to pay local income tax to demonstrate that the subsidiary is a real economic entity. However, you don't want to overpay taxes. This can happen if the local tax authorities determine that the local subsidiary is not acting independently of the parent and that the sub's revenue is based on the parent's billings, subjecting all of gross margin - less local costs that are probably relatively minor - to local income tax.

So, it's important to have competent local counsel to help create the entity and the cross-border agreements. And, the international attorney should be able to give general guidance resulting in a base form that can be tweaked by local attorneys.

Of course, the accountants you use will be crucial. I would not use Big 4 for local bookkeeping and payroll: way too expensive for the value received. We picked one of the international affiliate organizations such as INPACT, Moore-Stephens, etc. You'll want a group that gives you coverage in most of the countries where you expect to set up subs.

The suggestion to use a group such as Nair & Co. or High Street Partners makes a lot of sense. These are companies set up to manage all the startup and administration issues associated with running foreign operations on a small scale. You can use them until any one country or region gets large enough (or strategic enough) to warrant in-house accounting. Possibly the best part about their model is you'll only have a single point of contact to deal with month end closes and year end audits. Any changes in accounting methods only need to be explained once, to someone whose first language is probably English.

Hope this helps.

Best regards,

Topic Expert
Tom Pai
Title: CFO consultant
Company: Sunstone Group
(CFO consultant, Sunstone Group) |

I met some folks at High Street Partners who offer service to simplify setting up international operations/subsidiaries. I believe they've set up a network of trusted providers in various countries to help with legal, accounting, payroll, etc. I've not worked with them myself, but I've heard very good things about them from several sources. Here's the link.

http://www.hsp.com/index.cfm

Topic Expert
Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

Rick:
I wanted to add my 2 cents to all of the useful advice above. Prior to establishing a legal presence, I'd make sure that's the best way to go. Many times there is not a need to establish a Chilean legal entity. Depending on the precise nature of the proposed operations, if a legal entity is necessary, you may want to consider creating a wholly-owned US LLC to "house" the Chilean operations. There are several benefits on both the tax and legal side. If you decide that a Chilean company is appropriate, I agree that there are several options outside the Big 4 and big law firms where you can get a high level of service, great attention to detail and a favorable price/value. We use a few different firms in Chile, and I'd be more than happy to discuss the issues further off-line.

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

The foregoing comments to house the employees out of a separate US sub (or any other company outside of the country with the employees) is essentially a branch office of the sub. Using a branch office is much easier to start and close, so it can be a great way to begin in a foreign country. Then, when the employee base grows (say beyond 2-5 employees) you have a better case/need to form a legal entity in that country. The branch office will likely need local accountants to administer payroll (payroll is funded by the parent wiring cash to a bank account owned/managed by the local accountants).

Note 1: The comments above relate more to employees verses consultants. Consultants "may be" compensated directly from the parent company without the need for local payroll.

Note 2: The branch office approach maybe in a grey area of the country you're operating in. Therefore, make sure you have the okay to utilize the branch office approach from your local accountants/lawyers.

Note 3: The branch office approach works well when services are involved such as sales/marketing services.

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