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January 29, 2008 - Phil Hodgen

International Tax Planning 101 – (3) Avoid self-inflicted brain damage

We’re talking about how you — the CEO — think through the international tax planning advice you’re getting from your CFO, your outside accountants, and your corporate lawyers.

Part 1 – the introduction – gave an overview.

Part 2 – the first step of my procedure – told you to look for knockout punches in the form of government regulations that force you in one direction or another. If government regulations require you to do business in a particular type of entity, then your tax choices are limited by those regulations.

This is Part 3.

We now come to a fuzzy-wuzzy, mumbo-jumbo, touchy-feely question:

What’s the easiest way for you to do business day-to-day with your foreign investment or business operations? How can you keep paperwork, complexity, and headaches out of your life and the lives of your employees?

For day-to-day business operations, is it easier for you to operate in a foreign country if you look “local” because your entity is formed under that country’s law? How easy is it to open a bank account? Lease an office? Hire employees?

My overwhelming experience is that forming a local company will prevent self-inflicted brain damage. Put it another way:

Usually it is easier to fit in if you look like a local, not a tourist.

How do you figure this out? Again, go talk to your foreign lawyer or business consultant. Talk about the practicalities. See what they say. Go talk to the banker about opening bank accounts. In other words, do a dry run on some of the footwork you’ll have to do anyway.

You’ll clue in fast enough as to the effect of local customs, biases, and sophistication on your decision.

You can send someone to do this for you. You might consider sending an employee who isn’t exactly your star employee. If it is easy to navigate there for an average person, then your star employees will have no problem.

An example from my own personal experience. This is an “inbound” example, where the foreign country is the United States.

I handle a lot of large U. S. real estate transactions for nonresidents. When I appear as the lawyer for the buyer (or seller, it doesn’t matter) talking about Cayman Islands corporations, complicated trusts and other new–to the title company and escrow company and broker and lender–entities, we sometimes run into practical problems in getting transactions closed cleanly.

Knock on wood, my transactions have always closed, and they always close on time. But sometimes the costs of doing so are higher because the other side in the transaction has never seen a Cayman Islands corporation in real life. Or they don’t know the basic A-B-C’s of tax withholding on foreign sellers of U. S. real estate.

If, on the other hand, I come in and announce a structure where my client is hidden behind, for instance, a Delaware limited liability company, all brains go to sleep, the cats purr contentedly, and we close the transaction without a hitch, on auto-pilot. 🙂

If you can’t guess, I like using local companies for business operations

Next we’re FINALLY going to talk about tax. I can sense your excitement.

Tax and Trusts