SETTING UP A BUSINESS IN THE US
Following on from the strong interest we had in our post on how to setup shop in China, we thought we’d tackle another popular destination for clients looking to grow their businesses – the United States.
There are a wide range of issues to consider before setting up shop in a foreign country – too many to tackle here adequately – so we’ll be primarily looking at the technical considerations you’ll need to look at before making the move.
Is it really necessary?
Might seem a bit obvious, but have you considered whether a physical move to the US is the best move to make for your business? Is it possible that you could run the operation online and perhaps making some flying visits to key clients/suppliers each year? This option could be much cheaper and allow you to test the waters before making the move.
Once you’ve decided to head over you’re going to need to have a structure (e.g. a company) through which to trade. You’ve got a few options, but the key consideration here is whether you’ll operate under your Australian company (i.e. a foreign branch) or setup a US-based entity to trade through (i.e. a foreign subsidiary). There are pros and cons to each and it can get complicated but the following is a basic summary.
A foreign branch is where you register your Australian company in the US so it has the right to carry on a business. This means it’ll have reporting requirements and will need to pay taxes in the US. From a legal viewpoint it’s the same company as is carrying on the business in Australia, but from a tax perspective it is considered separately from your Australian operations. Whether or not the profits from the branch are taxable here in Australia will depend on a few things – best get personalised advice here. These arrangements are typically easier to setup and manage than a separate company, however they will have limitations and may cause difficulties when it comes to trading with certain organisations and with employing locals on the ground.
A foreign company is where you setup an American company to carry on the business. This company will stand separately from your Australian company, however there may be overlap when it comes to tax matters. This structure will likely give you the strongest legal and commercial footing in your US adventure, but will be more costly to setup and manage.
We note that currently the tax rate that applies to profits under both structures is 30%.
(Some of the) Tax considerations
There are myriad rules when it comes to money crossing international borders and you’ll need to be aware of how they may impact upon your business before you get going.
First up is the concept of ‘permanent establishment’. The rules that govern how the Australian and US tax systems interact are contained within our Double Taxation Agreement (DTA). This agreement explains the circumstances in which a business operating in the US will be considered to have created a permanent establishment and once this is done it’ll need to start paying taxes in the US. This can come into effect even if you’re just over there doing deals without any kind of office, so it’s something to be wary of.
You’ll need to understand how profits can be repatriated from the US business back to the Australian business. The tax treatment will vary depending on the nature of the business, the structure you’ve got in place and various other factors.
The next big one is transfer pricing. Any transactions occuring between the US venture and your Australian business will need to occur on an independent and commercial footing. This is to stop companies from sending profits from a relatively high-tax jurisdiction (e.g. Australia) to a relatively low-tax one (e.g. Ireland). This means all transactions between the two countries need to be well documented and you’ll need to be able to demonstrate how and why the transaction was undertaken at market value (i.e. as if the dealings were between two companies operating at arm’s length). Keep all these records neat and tidy as your accountant will need them when it comes tax time.
State vs federal taxes – in the US there is the federal tax regime and then there are state tax regimes. Every state operates a little different when it comes to corporate taxes, sales taxes and other forms of taxation so it pays to do some research about which state would be best to setup the new venture.
As you can see there are loads of different things to consider when it comes to expanding your business into the US and that’s just from a compliance perspective. If you’re thinking about making the move we’d strongly recommend speaking with your accountant to make sure you’ve got not only the right advice from an Australian perspective, but also to get a referral to a US tax advisor to ensure you’ve got the right US advice as well. The two advisors should be able to work together to get the best possible solution in place for you and your business.
You might also be well advised to line up a business advisor with experience in advising clients expanding into the US as there are a million other things to think about outside of the technical/compliance issues.
If you’re thinking about expanding internationally and need a hand, why not get in touch? We’ve worked with plenty of clients over the years who have grown their businesses by expanding into international markets and we’d love to help.