One option when expanding to new countries is to set up a foreign subsidiary. This option provides numerous advantages, including being able to take advantage of local opportunities and participate in more business activities. However, there are also significant disadvantages entailed by setting up a foreign subsidiary.
Understanding the pros and cons of setting up a foreign subsidiary is important so that you can make an informed decision about whether to establish it or to use an alternative, such as a Professional Employer Organization or ‘PEO‘.
Advantages of Setting Up a Foreign Subsidiary
Some of the major advantages of setting up a foreign subsidiary include:
Access to New Markets for Your Products and Services
Setting up a foreign subsidiary establishes a legal entity in another country. Legal entities can market their products and services to the local population. They can also import and export goods.
Additionally, companies with a local presence can expand their brand recognition to new markets so that they can potentially increase their profits.
Foreign countries present enormous opportunities for growth, and even some of the lesser known have viable economies that represent strong markets that can help a business grow.
More Affordable Options for Manufacturing
In certain markets, setting up a foreign subsidiary can give you access to lower costs for goods and labor.
Many also have a highly developed manufacturing infrastructure that enables not only lower materials costs but lower costs to produce goods in bulk, which of course can help you minimize overall production costs.
Access to Technical Skills
Many foreign countries – increasingly in Asia – provide great access to advanced technology and new ways of thinking about technical issues. For example, Japan offers a high level of technical knowledge that continues to attract foreign investment.
Access to Local Knowledge
By establishing a legal entity in a foreign country, a business can make new business relationships with local partners and set up joint ventures that take advantage of localized knowledge.
Increased Expansion Opportunities
In some situations, entering a new country can provide greater expansion and increased revenue that would not have been possible in the home country, especially when the domestic market is flooded with competition.
Streamlined Processes and Incentives
Some countries openly welcome foreign investment and make the process to incorporate a company simple. They may even provide incentives to encourage foreign investment, such as:
- Tax incentives
- No minimum capital requirement
- Special economic zones
- Free trade zones
- Faster incorporation processes
- No or few restrictions on foreign ownership of companies
Disadvantages of Setting Up a Foreign Subsidiary
Some of the most notable disadvantages of setting up a foreign subsidiary include:
Increased Cost and Time
Setting up a foreign subsidiary can often take significant time and money, which often bars many foreign companies from making this investment.
The paid-up capital requirement varies by country and industry, but sometimes it is quite substantial. For example, in Singapore, the paid-up capital requirement for an insurance intermediary firm is $300,000, and the same is $100,000 for travel agencies.
Prohibitions on Foreign Ownership
Some countries regulate certain industries and prohibit foreign ownership. In some situations, no foreign ownership is permitted while in others, ownership must primarily be local but a foreigner can invest a certain percentage into the business.
Some countries have been historically reluctant for companies to be wholly foreign-owned. For example, the United Arab Emirates required a foreign investor to have a local partner with at least 51% ownership stake before setting up a foreign subsidiary until the law was changed in 2019.
There are still certain industries in the UAE that limit the presence of foreign workers.
Complicated Immigration Requirements
Working in a foreign country often results in complicated immigration requirements. It may be difficult to obtain a work visa or permit for you or your staff. It may take several weeks for approval.
Visas may only provide for short stays, and often there are limited on what business activities can be undertaken.
Complex Compliance Requirements
One of the biggest challenges to setting up a foreign subsidiary is doing so in a compliant manner. There are often very complex rules related to hiring staff, managing payroll, complying with tax requirements, and declaring the activities of your business.
Should You Set Up a Foreign Subsidiary?
Setting up a foreign subsidiary entails many advantages and disadvantages. Businesses that plan to have a long-term presence in the country often opt to set up a foreign subsidiary because the benefits often outweigh the risks.
In these situations, the time and expense of setting up a foreign subsidiary can often be justified by the greater flexibility that having a separate legal entity provides.
However, in other situations, alternatives to setting up a separate legal entity are a better fit for the company. Using a PEO is often a better alternative to companies that:
- Want to test the market before investing heavily in the country
- Do not want to invest large paid-up capital into a foreign country
- Want to take advantage of opportunities right now
- Do not want to wait for the competition of the lengthy incorporation process
- Want the flexibility to hire and terminate staff as their business needs dictate
PEOs already have the necessary legal structure in place to handle all employment, payroll, and immigration matters.
It also has the expertise – often in-house – to ensure full compliance with all foreign laws and regulations. For many companies, a PEO is a cost-effective, fast, and reliable alternative to setting up a foreign subsidiary.
Working with New Horizons
New Horizons is your global partner who can help you realize your global expansion objectives. Our staff consists of tax, legal, HR, and employment experts who are experienced in various industries.
We can provide you with compliant legal contracts, set up your payroll process, and assist you with compliance matters. With our PEO and Employer of Record Services, you transfer the risks of employer liability to us while you benefit from staff who are quickly deployed to your chosen country.
If you decide to incorporate your company, we can help you carry out this process, thus providing you with short- and long-term legal and employment solutions for your new country of operations.
Contact us today to get started on your global expansion.