Establishing a Subsidiary in USA

Time:2014-09-24 Source: The Author:Jack Ding Browse: Print Font Size:T|T
A corporation offers limited liability protection, simplifies accounting, and makes tax compliance less costly. A corporation's profits would either be reinvested or sent back to the foreign parent as dividends. Dividends are subject to a 30% withholding tax.
In comparison to an L.L.C., a corporation's profits are not subject to medicare and social security taxes and can lower taxes through income shifting. However, a C Corporation are subject to double taxation: they are first taxed as a corporate entity, and then taxed again personally for the shareholders.

An S corporation is not subject to double taxation, but it is limited to only 100 shareholders, all of whom must be US citizens/residents, and it cannot be owned by another C Corp, S Corp, L.L.C., or partnership. As such, an S corporation is probably not an ideal option for foreign businesses.

 

       1.1.1           Foreign branch

 

Filing for authority to run a foreign corporation in New York requires an Application of Authority. A foreign corporation is subject to Branch Profits Tax and Branch Interest taxes, which requires complicated bookkeeping. It should be simpler to incorporate within the United States rather than to operate as a foreign corporation.

Establishing an L.L.C. avoids double taxation as a "pass-through" entity, similar to S corporations. An L.L.C. is not taxed as a corporate entity. However, an L.L.C. is instead taxed under self-employment taxes (currently 13.3%).
This makes it highly efficient as it also enjoys the limited liability protection and other such benefits of a corporation. L.L.C.'s also have the ability to deduct operational losses against their income, while C Corporations do not.
Like C Corps, an L.L.C. has no shareholder restrictions.
 

Are you a manager, executive, or "specialized knowledge" employed by a foreign business entity?
Have you been working abroad for at least one continuous year for the past three years?
Is your company abroad related to the U.S. business you will establish? Will the foreign entity continue to do business?
Will you be coming to the United States to open a new office location for your company?
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U.S. Citizen and Immigration Services: L-1 Visa

 

If you've answered yes to most of the above questions, you should qualify for an L-1 Visa. If you answered no to most, then you may not be eligible for an L-1 Visa.

The employer must file a Form 1-129, with fee, on behalf of the employee. Spouses and unmarried children under 21 of an L-1 employee may apply for an L-2 visa.

 

    2.1           Requirement 1: The petitioning U.S. entity should have a qualified relationship with your entity abroad.

 

The new U.S. office must have a corporate relationship with your foreign entity abroad where you have been employed as a manager, executive, or worker with specialized knowledge. This means that the new U.S. office must be a parent, affiliate, subsidiary or branch of the foreign entity, and that both the U.S. office and the foreign entity must continue to share common ownership and control.

 

2.1.1           Evidence

 

Evidence that can be submitted to show that the U.S. business has the requisite relationship includes but is not limited to:[1]
· Articles of incorporation showing common ownership of the U.S. and foreign entities
· Business licenses or other documents showing common ownership
· Annual reports describing the corporate structure
· Contracts or other documents detailing the affiliate relationship
· Corporate filings in the United States or abroad describing the corporate relationship

· Any other evidence demonstrating ownership and control over the U.S. and foreign entities (i.e., stock purchase agreements, voting rights agreements, capitalization table, term sheet)

 

If you are filing as a subsidiary, provide a detailed list of the owners of the foreign and U.S. companies, including then percentage of ownership, along with supporting documentation.

A subsidiary is an entity of which a parent owns, directly or indirectly, half or more of the entity and controls the entity. This includes 50-50 joint ventures that have equal control and veto power, as well as parent companies that own less than half the entity but in fact controls the entity.

 

To prove that you have worked the required amount of time abroad, USCIS suggests submitting evidence such as pay stubs, payroll records, tax returns that show employment, and evidence of work product. This is not an exclusive list.

To show that your overseas employment was in a qualifying capacity, USCIS suggests submitting evidence such as organization charts showing your position, patents or other evidence that the company's products are based on your work, performance reviews, loans/financing on behalf of the company, organizational job descriptions, and a resume describing your job accomplishments. This is not an exclusive list.

 

If you re filing for a new office, provide a copy of a business plan or executive summary that shows the size of the U.S. investment and your ability to commence doing business in the United States.

 

       2.2.1           Evidence

 

Evidence that can be submitted includes: signed lease agreement, mortgages or other proof of real estate purchase, business plans or other material connecting the activity of the business to the space required.
If you are filing for a new office, provide a copy of a business plan or executive summary that shows the size of the U.S. investment and your ability to commence doing business in the United States.

In addition to evidence showing you have secured a physical premise, explain how this location is sufficient for your business.

 

The L-1 visa is meant to facilitate a “ramp up” period for a new U.S. office of a foreign entity. This period is limited to one year. After that time, an extension of the L-1 visa is available if the new office meets this requirement.

What makes an office active and operating will differ depending on the nature of the business. Typically it will involve factors such as hiring additional employees, fulfillment of contract orders, having a revenue stream, or holding inventory, if applicable.

 

While a new office may be opened on an L-1 visa by someone working within your organization in a managerial, executive or specialized-knowledge capacity, after one year the office must be sufficiently active to support a manager or executive.

After one year, the manager or executive is expected to be functioning as a manager or executive. If the manager or executive is still in a position where they are required to handle "hands-on" matters themselves, this requirement is probably not met. The manager or executive should be focusing on their managerial and executive tasks.

 

USCIS recommends the following as examples of evidence to show that the new office is fully functioning:
· Purchase orders, contracts or other evidence of commercial activity
· Payroll records for employees hired
· Bank statements
· Financial reporting documents showing monthly income
· Continued venture capital or other third party investment contribution based on achieved milestones
· Media coverage of the business

Position descriptions providing the roles and responsibilities of all current employees, or other evidence which clearly demonstrates how the manager or executive is relieved of non-qualifying duties

 

Jack Ding, a senior counsel at King & Capital Law Firm.  His practice area includes capital market, M&A, overseas investment and high - net worth individuals’ wealth management and immigration, focusing on real estate, movie and entertainment, IT industries. Jack had previously worked with some top international law firms including Lovells LLP, Linklaters LLP, and Stoel Rives LLP, with working experiences in China, US and South Korea. His working language is Chinese and English and he can speak Korean. Jack is a voting member of Engagement Committee of University of Washington Law School Leadership Council and a member of Executive Leadership Committee University of Washington Alumni Association Beijing Chapter.