Overcoming the Challenges of Funding a Foreign Operation

Overcoming the Challenges of Funding a Foreign Operation

According to trading economics, the real GDP growth rate of the US expanded 2.8% in the 4th quarter of 2010, over the previous quarter. Needless to say, there exists a strong case to pursue opportunities in these markets. However, as foreign entrepreneurs and investors based outside of these emerging markets look to participate in the rapid expansion, they are faced with the challenging task of pursuing entrepreneurial investments in an unfamiliar environment. The entrepreneur and investor now have the additional complexity of ensuring business models are successfully executed in a completely new context.

Funding foreign operations are never simple. When you set up a corporation, you begin funding operations through paid-up capital. Thereafter, many parent companies fund foreign operations by remitting funds as required. These are recorded as loans in the subsidiary's books. In a company international expansion, as large investments are involved, good management skills and favorable economic conditions are required to make the endeavor a successful one. It isn't a problem in most countries but let's look at some of the different regulations around the globe to give you a sample of the challenges you may face.

China's Challenges

In China, the subsidiary will not be able to repatriate funds to repay the loan, if u send funds and book them as a loan. The loan needs to be formally registered in time with the Foreign Exchange Bureau, for it to be repatriable. Proper loan documentation between the parties is also strongly advisable as additional support to repatriate funds.

Barriers in Denmark

Denmark is a much easier location than China. However, when you loan funds to your Danish subsidiary, as in most jurisdictions, thin capitalization rules will restrict the deduction of interest charges on loans from foreign group companies. What is special about Denmark is that thin capitalization rules also apply to a branch. Thin capitalization is deemed to exist if the debt-to-equity ratio exceeds 4:1. Thin capitalization rules do not apply if arm's length terms are substantiated. A properly constructed intercompany agreement and a benchmarking exercise would certainly help the situation.

Navigating Argentina's Drawbacks

What happens if your subsidiary makes losses? The law requires shareholders to make a further capital contribution, frequently covering the entire loss and a proportion of the original share capital. If the funds are not correctly transmitted, Argentine Central Bank regulations will prevent the funds being allocated to your company. When a cash contribution comes from abroad, a 30% withholding will be made until the relevant local regulator (IGJ) approves the Capital change and registers it. If you fail to complete the formalities with IGJ within a certain timeframe, you must again deposit the amount that they had withheld. In addition, funds sent by a foreign parent to the Argentine Subsidiary without complying with the arm's length standard, are treated as capital contributions.

Difficulties in Brazil

Capital contributions must be registered in the Central Bank of Brazil (Bacen). Foreign loans must also be registered at Bacen who monitor interest payments. Failure to register the loan would result in Bacen prohibiting repayment in foreign currency and could also trigger issues relating to compliance with Brazilian transfer pricing control rules.

An integrated solution is the only real security, if you are looking at an international expansion. With the professional expertise of a reliable partner, your company can be funded through capital or through loans in the right proportions. Expanding abroad would give your business access to a much bigger, global market. If you want to make your international business expansion a reality, there's no better way to do it with the company of experts .You can minimize the risks and maximize your chances of success this way!

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