International Subsidiaries and
International Branches
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Taking the Company to a Foreign Country
by John Briggs, Worldwide Consulting

In the life of most growing businesses there comes a time when new expansion is most reasonably pursued by entering foreign markets. For some companies this is the result of reasoned business planning, directed by a researched game plan and timetable. For quite a number of "fast growth" organizations, this is too often the result of a top executive having located the "perfect person" in say Botswana, and the hire having to be made by Thursday of last week, or it will all be the Legal Department's fault.

In such trying times if no one else, the legal department must keep its feet firmly beneath it, ensuring that the actions taken by the company meet its short AND long term needs. Corners cut at the beginning can often result in painfully expensive and time-consuming unraveling later on.

The National Environments

"Doing business" in one form or another in a foreign country is rather completely a creature of the laws of that country, the current trend in the EU not withstanding. That is, a sovereign country is free to determine its own rules on who will do business, how that will be done, and the formal steps and procedures they require. While there are common patterns and practices among countries on the matter (referenced below), each country has its own unique twists and vagaries that must be observed. And while these can appear onerous, tribulating and even silly, they must be complied with. Foreign officials have little sense of humor on the matter, and frankly do not care how it is done in California, Massachusetts or anywhere in between.

Countries give the power to regulate business formation either to a national governmental agency, or to a regional governmental office (i.e. the state in the United States, the Province in Canada, the Canton in Switzerland) or to both (i.e. The federally chartered company or provincial company in Canada). So the first task is to determine what options of formation are available and what the advantages of each are.

Why Is The Entity Being Formed?

This question often drives (a) whether a company needs to be registered at all and (b) what form best needs the company needs. The practical matter becomes the goal(s) of the company in light of the particular requirements of the country. A few of the more common situations are as follows:

Just Flying in Once in a While

When the goal of the company is to (a) have an employee fly in for discussions or (b) sell products infrequently, it may not be necessary to establish a formal presence in the country. But do not automatically make this assumption, especially if the "selling" becomes routine and continuous.

Hiring A Person in a Foreign Country

The labor law of the country (as distinct from the companies law of the country) may require that an entity be formed in order to make a hire (without any consideration of doing business in any other way). Brazil is a best example of this. This then raises the question of how does one engage the person pending company formation. Certain countries are a bit benign in this regard; India for example favors engaging an individual as a consultant, and transferring to employment when the company is formed. In Brazil, this same procedure would be a "disguised employment", be illegal and subject the company to penalties.

Do not assume that an entity is required or not required to hire. For example in Japan a U.S. company may hire directly. In France a U.S. company may hire ONE employee who works from home and functions in sales; it may not hire a second employee. In Korea no hire may be made until the entity is formed.

Taking Care of the Foreign Employee

Even in instances in which the labor law of the country permits a direct hire by the U.S. company, other laws of the country may make normal and required actions on behalf of the employee difficult if not impossible. Purchasing employee benefits (i.e. Hong Kong, Norway) and making tax deductions and social contributions (i.e. Taiwan) may only be possible when done by a registered company.

Immigrating a Foreign Employee

A special case arises when the company wishes to bring a citizen of another country into a foreign country. (i.e. A U.S. or Australian national into Hong Kong or France.) In more cases than not, the immigration laws of the host country will require a company be established which then can sponsor the immigration petition.

Doing Business in the Country

As distinct from the purely labor law aspects of hiring an employee, countries are concerned to a greater or lesser degree in knowing and controlling who is doing business in that country, how it is being done, and how these business can be contacted if necessary. This concern ranges from an absolute requirement to form a local company to sell or manufacture (i.e. Peoples Republic of China) to needing a company number to rent office space (i.e. Singapore) to a more relaxed attitude to the whole thing (i.e. Australia). Very often the degree to which business is being done is the determining factor.

Protecting the Parent Company from Liability

Whether or not the company is required by labor or companies law to form a company, the company may wish to do so to avail itself of the legal protections of having a subsidiary. That is, many countries permit a litigant to sue a subsidiary in court, but to join the parent company in the suit only in certain circumstances. Since generally the parent has the "deep pockets" and the subsidiary does not, this can afford the parent some protection.

Note: A branch office of the parent has no legal existence other than that of the parent; in effect it is just the parent company registering to do business in the country, and therefore does not afford this protection.

The Entity Form

On balance there are three generic forms of company, more or less available in each country, which the company may form to meet its needs.

The Branch Office

This in essence is the alter ego of the parent company, and is simply a quasi entity of the parent, registered as existing to do business. In practice, it is "seen through" to the parent in times of trouble, but is generally quicker and easier to form. Some countries provide several types of these (i.e. Singapore with its branch office and representative office) which have more or less power to conduct business. Generally the Branch must use the same name as its parent company.

The Subsidiary: Limited Liability Company or Stock Company

The limited liability company has greater or lesser existence apart from the parent (as are variously named in the local country language (i.e. Limitada in Spanish speaking countries) and has the advantage of simplicity of establishment, function and maintenance. The stock company is a complete, robust company form, enjoying the full scope of "doing business" privileges (ex. the KK in Japan).

Specialty Companies

In certain limited cases it is of advantage to use a special company form. For example in Mexico, if employees are employed by a Limitada, after one year of company operation, the Limitada must share 10% of the profit with employees. If the company makes US$ 1MM profit with three employees, it shares US$ 100,000 with them. If they are employed by a Civil Society company form, this share is 10% of profit to a maximum of one month of salary.

Common Steps in Forming a Branch Office

The process is essentially a two-step process. First, the appointment of an agent in fact (usually the local law firm) empowered to act on the company's behalf. Second, the filing of certain documents for formal registration.

Documents required for filing include the following:

• A certified true copy of the certificate of incorporation or registration of the parent company in its place of incorporation or origin.
  
  
• A certified true copy of the Memorandum and Articles of Association of the parent company.
  
  
• A list of directors (or alternatively the Managing Director) containing the following particulars:

(a) Name
(b) Residential address
(c) Country ID number/Passport Number
(d) Nationality
(e) Occupation

• A Memorandum of Appointment or Power of Attorney under the seal of the Company appointing one or more natural persons resident in the country authorized to accept on its behalf service of process and any notices required to be served on the Company.
  
  
• Notice of location of its registered office.
  
  
• A Statutory Declaration By Agent of Foreign Company executed by the agents of the Company;
  
  
• Fees for the registration of each of the documents.

Common Steps in Forming a Limited or Stock Company

Often the registration involves a three-step process. First, the appointment of an agent in fact (usually the local law firm) empowered to act on the company's behalf. Secondly, the application of approval of the Registrar of Companies (or similar department) for the reservation of the name of the foreign company. Finally, the filing of certain documents for formal registration.

Approval and Reservation of Name

The first step for the registration of the foreign company is to obtain the approval for the reservation of its name. The proposed company name or names must:

(a) not lead to confusion with another existing corporate name or be deceptively misleading, and

(b) be, in certain cases, pre-approved by that jurisdiction's examiners; and

(c) include words indicating the limited responsibility of the corporation.

It is often a good idea to submit several names in order of preference to save time if the first choice is not available.

Names must often conform to certain guidelines laid down in the Companies Act or similar country rules and the proposed name must be approved by the appropriate department before the application to register can proceed.

Filing of Documents for Registration

Once the name is approved, the following types of documents need to be submitted for registration:

• A certified true copy of the Certificate of Incorporation or Registration of the Company in its place of incorporation or origin.
  
  
• A certified copy of the Articles of the parent company.
  
  
• A certified copy of the parent board of directors authorizing formation.
  
  
• A copy of the Memorandum and Articles of Association of the proposed company.
  
  
• A list of proposed directors of the foreign company (with copy of passport) containing the following particulars:

(a) Name;
(b) Address;
(c) Country ID number/Passport Number;
(d) Nationality; and
(e) Occupation.

• A Memorandum of Appointment or Power of Attorney under the seal of the company appointing one or more natural persons resident in the country authorized to accept on its behalf service of process and any notices required to be served on the company.
  
  
• An Affidavit verifying the execution of the Memorandum of Appointment. The execution of the Memorandum of Appointment must be verified by an Affidavit of a director or the secretary of the company, verifying that he was present and did see the seal of the company duly affixed to the Memorandum of Appointment. The execution of the Affidavit should be witnessed by a notary public.
  
  
• Notice of location of proposed Registered Office in the country.
  
  
• A Statutory Declaration By Agent of Foreign Company executed by the agents of the foreign company.
  
  
• Fees for the registration of each of the documents plus fee for the registration of the company based on the authorized capital of the Company.

Special Notes to the Process

Document Language

In many cases draft documents are prepared and reviewed in English, but must be executed in the language of the country. These should be translated and provided by the local law firm in the foreign country.

Document Execution

Depending on the particular laws of the country, documents must be executed in original (often in multiple copies) and

a) Notarized in the state of residence of the parent company, and perhaps

b) Sealed by the U.S. Consulate of the country, or perhaps

c) Executed with Apostille.

In 1961 many nations joined together to create a simplified method of "legalizing" documents for universal recognition. Members of the conference, referred to as the Hague Convention, adopted a document referred to as an apostille that would be recognized by all member nations.

Documents sent to member nations, completed with an apostille at the state level, may be submitted directly to the member nation without further action.

The secretary of state where the documents have been executed provides authentication of public official signatures on documents to be used outside the United States. These documents must be current certified copies or must have been notarized by a notary public of that state.

About John Briggs: With over twenty years of corporate and consulting experience, John Briggs assists a wide range of domestic and multinational companies in the areas of US and worldwide executive and staff base, deferred and incentive compensation programs, international qualified and executive retirement and capital accumulation plan design, multinational labor law and compliance, expatriate programs, employee benefits programs, and human resource issues and policies processes in Europe, The Americas, and the Far East.

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