Regulation of
International Business
A legal and tax perspective
Entrepreneurship Institute
July 22, 2010
Prof. Gonzalo Freixes
The Case of the
Bollywood Film Distributors
Bollywood Distributions (BD) wants to set up film
distribution operations in the United States.
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Foreign Investment in the U.S.
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Typical Options for Foreign Co.
US Co.
BD
US
BD
Reseller
BD
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BD
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Typical Options for Foreign Co.

Form U. S. Domestic Business Entity

Contracting with U. S. Re-seller/Agent

Operating a Branch Office in U. S.
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Business Form Considerations
Formalities required
 Liability of owners
 Management structure
 Transferability (ability to sell)
 Taxation (separate vs. flow through)

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Entity Taxation Example:
$ 10 M
$5M
Owners
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Taxes Paid by Corporation
Entity pays $ 3.5 M ($ 10M x .35)
Owners pay $ 750K ($ 5M x .15) 2010
$ 2M ($5M x .40) 2011
TOTAL PAID IRS: $ 4.25 M 2010
$ 5.5 M 2011
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Taxes Paid by “Flow Through”
Entity pays $ 0
Owners pay $ 3.5 M*
(Individual Taxes on $ 10 M)
TOTAL PAID IRS: $ 3.5 M*
*3.96M in 2011
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Business Form Options
General Partnership/Joint Venture
 Limited Partnership
 “C” Corporation
 “S” Corporation
 Limited Liability Company

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State Regulation

Corporate Regulation is left to the States

California vs. Delaware
VS
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Contract with U. S. Re-Seller
 Governed by CISG (Convention for the
International Sale of Goods) not INDIA
 Place of sale – title & risk of loss
 Negotiate jurisdiction & conflict of laws
 Financing & currency issues
 Confidentiality & Non-Competition
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Operating a U. S. Branch
• Immigration Issues employees/owners
• Must comply with local business
regulations (e.g. Business License)
• Taxation: Subject to U.S. Income Tax +
Branch Profits Tax (TBD) + (perhaps)
home country taxation
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Focus on U. S. Taxation

Foreign Company invests in U.S.
BD

U. S. Company invests abroad
US Co.
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INBOUND
TRANSACTIONS
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Typical Options for Foreign Co.
Forming a U.S. Business Entity
 Contracting with U. S. Re-seller/Agent
 Operating a Branch Office in U. S.

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U. S. Taxation (Inbound Business)

Passive Investments
 Interest, Dividends, Rents, Royalties

Active Business Profits
 Selling goods & services in the U.S.
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Tax on Passive Investments

Called Tax on “Fixed or Determinable
Income” or “Withholding Tax”

Flat 30%

No deductions allowed
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Tax on Business Profits

Called Income “effectively connected
with a U. S. trade or business”

Includes: Services, sale of inventory,
rental real estate, manufacturing, etc.

Taxed at Corporate Rates (15% to 35%)
or Individual Rates (10% to 35%)*
*39.6% in 2011
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Tax Issues – Related Companies
•
•
•
•
IndiaCo creates US Subco
IndiaCo sells products to US Subco
Subco sells to U.S. customers
Tax consequences?
IndiaCo
U.S. SubCo
1. Will India tax the profits of each?
2. Will US tax the profits of each?
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Source of Income Rules

Income = where service or sale took place.

Shift income to foreign nation by
transferring Title & Risk of Loss

IRS allows Parent/Sub to allocate income
50/50 (US & foreign nation).
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New Tax Issue – Sub v. Branch
•
IndiaCo creates US SubCo (Subsidiary)
•
TAX 1: US SubCo pays taxes on US profits
•
US SubCo pays dividends to IndiaCo
•
TAX 2: IndiaCo pays dividend tax
•
IndiaCo operates BRANCH instead
•
Does this avoid “double taxation?”
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Branch Profits Tax

Foreign Company’s U. S. Branch will
pay income tax on U. S. income
+
Branch Profits Tax of 30% on income
withdrawn
(Called “dividend equivalent amount”)

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Effect of Tax Treaties

Reduces “double taxation” by U. S.
and foreign nation

Example: U.S. and India Dividends & Interest taxed at 15-20%
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New Tax Issue
•
•
•
•
•
IndiaCo manufactures at $ 1 per unit
Assume India has 25% tax rate
India sells to US SubCo at $ 1.95 per unit
US SubCo sells in U.S. for $ 2 per unit
US has 35% tax rate
IndiaCo
U.S. SubCo
5¢
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95¢
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Transfer Pricing

IRS may re-allocate income
between related companies

Will look at “comparable unrelated
sales”
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Tax on U. S. Subsidiary

U.S. Income subject to U. S.
Corporate Tax (35%)

Dividends paid to foreign parent
subject to 30% flat tax.

Treaties lower rates (India = 15%)

Watch out for Transfer Pricing
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Tax on U. S. Partnership/LLC

Foreign companies taxed on “flow through”
basis but subject to Branch Profits Tax!!

Flow through income = “effectively
connected with U. S. trade or business”.

Owners will pay at corporate or individual
rates on “flow through” income
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Tax on U. S. Re-Seller or Agent

Income taxed where “sale” took place

May be U. S. or foreign nation

Focus on contract language
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OUTBOUND
TRANSACTIONS
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Outbound Taxation - Basics

U.S. Taxpayers (including corporations)
pay U.S. taxes on all worldwide income.

Foreign Subsidiaries of U.S. Companies
do not (unless profits “repatriated”).
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Outbound Taxation - Problems

For U.S. Taxpayer:
Double Taxation

For IRS:
Offshore Companies
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Outbound Taxation - Solutions

For U.S. Taxpayer:
 Foreign Tax Credit
 $ 91,500 Exclusion
 Tax Treaties
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Outbound Taxation - Solutions

For IRS:
 Subpart F Income
 Controlled Foreign Corporation
(> 50% control or stock value)
 Foreign Base Income
(no indigenous economic connection)
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Tax Rates: India v. U.S.
TYPE OF TAX
U.S. TAX RATE
India TAX RATE
Corporate Income
35%
35% (domestic)
40% (foreign)
Individual Income
10 – 35% (2010)
15 – 39.6% (2011)
0 – 30%
(+10% levy on rich)
Capital Gains
(Long Term rates)
15% (2010)
20% (2011)
20%
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Intellectual Property in U.S.

First Use Doctrine (TM & Copyrights)

Copyrights (Federal Regist.) – 95 yrs.

Trademarks (Federal or State Level)

Patents (Federal Regist.) – 17 years
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International IP Registration
Paris Convention: National Treatment
 Patent Cooperation Treaty: 30 mos. To file
 Madrid Protocol: Central filing for TM’s
 Berne Convention: National Treatment +
Minimum Standards for Copyrights
 ICANN: Domain Names
 TRIPS: WTO enforcement of Paris & Berne

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Labor & Employment Issues

Employee v. Independent Contractor

At will employment

Discrimination Laws: U.S. & State

Hours, overtime, minimum wage

Payroll Taxes: FICA

Workers Compensation
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Securities Regulation

Federal: Securities Act of 1933
Covers sale of any investment to the public
Requires registration unless issuance exempt

States: “Blue Sky” Laws
 Requires registration in each state
 California: Requires permit unless exempt
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Tax Rates: China v. U.S.
TYPE OF TAX
U.S. TAX RATE
CHINA TAX RATE
Corporate Income
35%
25%
16.5% (HK)
Individual Income
10 – 35% (2010)
15 – 39.6% (2011)
5 – 45%
2 – 17% (HK)
Capital Gains
15% (2010)
20% (2011)
20%
0% (HK)
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Choosing Business Entity
China, Hong Kong & U.S.
U.S.
CHINA
HONG KONG
Partnership
Cooperative JV
Partnership
Limited Partnership
None
Limited Partnership
L.L.C.
Equity JV
L.L.C.
Corporation
Company Limited
by Shares
or Equity JV
Private Limited Company
Public Limited Company
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