Five Questions With: David Woronov

Partner at Posternak Blankstein & Lund talks about the logistics of opening offices abroad. More

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financial services

Five Questions With: David Woronov

"All firms must be aware of the tax issues and regulatory compliance matters when considering making an entry into any foreign market."
Posted 2/12/13

David Woronov is a partner at Posternak Blankstein & Lund and specializes in domestic and international business law, corporate and project finance and private equity. He assists clients with business planning, structuring, development and management.

A former resident of the United Kingdom, he has represented U.S. and foreign clients in transactions around the world, with particular focus in European and Asian markets.

Woronov has been an adjunct professor at Providence College in leadership studies, business law, public policy and the humanities.

PBN: How can firms secure funding for opening new offices abroad?

WORONOV: This often depends on what arrangements the U.S. firm has with its domestic bank or funding sources. If the firm works with an international bank that has a presence where the firm is considering opening a new office, it may be helpful in obtaining specific financing for the new location. If the firm already has assets or a track record in the overseas location, that could be helpful, if they wish to establish a new banking relationship, including a borrowing relationship. But for large firms that wish to quickly and simply branch out internationally, the easiest way to achieve an international presence is often through a merger, acquisition or strategic venture with an overseas entity or with a domestic entity that already has such overseas interests.

PBN: How do tax laws and payroll concerns differ in Europe? Asia? How does that impact a company with headquarters in the U.S., but operations abroad, or vice versa?

WORONOV: Tax laws, human resources and payroll concerns all differ widely, on a country-by-country basis, throughout Europe and Asia. This is essential for any business to take into account when planning, and before operating internationally. Countries may have VAT and other tax schemes, different tax rates for income vs. capital gains, different rates for foreign vs. domestically-owned businesses or for different industries or businesses in different domestic locations. Similarly, each country will have its own employment, environmental, and safety laws and regulations.

PBN: What are the main considerations firms have to focus on when going international, whether that is entering the US from overseas or going abroad from the U.S.?

WORONOV: All firms must be aware of the tax issues and regulatory compliance matters when considering making an entry into any foreign market, or from a foreign market into U.S. markets. Generally, tax concerns will restrict attempts to form Subchapter S corporations by non-U.S. individuals or entities in America. Additionally, if a foreign entity forms a limited liability company (LLC), if it elects to be taxed as a “disregarded entity” or partnership, it is likely that it will still be subject to special withholding provisions that will effectively deem the LLC to be a branch of the foreign entity for tax purposes. This might seem unfair to foreign entities, but the basis is pretty logical. Unlike domestically-owned U.S. LLCs, wherein the owners all file annual personal tax reports with federal and state authorities, the foreign owners of U.S. LLCs do not file such annual personal tax reports, and so the U.S. tax authorities are otherwise deprived of that information and potential revenues.

Conversely, a U.S. business interested in creating a foreign office has to analyze legal, business, political and cultural considerations. A number of foreign countries may require foreign-owned entities that organize in their countries to first prove they have invested, and hold, mandatory levels of capital in their new foreign entities. Foreign regulations may also impose currency restrictions on a foreign-owned business or require a foreign-owned firm to have established office leases in the foreign country prior to organizing the actual offices, which can pose a tricky Catch-22 if lessors there refuse to lease to entities that do not yet lawfully exist. One should even check the reliability of government statistics, as some governments may have questionable standards for reporting inflation or for monitoring compliance with government regulations by foreign-owned versus domestic entities. Some countries also may consider clandestine payments of cash or valuable presents to officials standard business practice. However, there are U.S. laws that severely regulate and penalize any such behavior in foreign countries, including those under the Foreign Corrupt Practices Act (FCPA).

What are the major financial considerations for international firms opening up offices in Rhode Island or New England in general? How easy or difficult is it for companies to come here?

WORONOV: The process for a foreign entity to come to Rhode Island or another New England state, in general, is really quite easy. Once they decide on a proper structure, they can actually create an entity here in a matter of days, if not hours, with up to a few additional days for follow-up on obtaining an employment identification number, creating and signing all necessary resolutions and establishing a minute book.

Rhode Island and other New England states have established agencies to assist foreign businesses with moving into their states, in order to make these transitions as smooth and friendly as possible. However, after formation, the states will require that the local office, branch or entity must be – and remain – in regulatory compliance. These entities may also possibly outsource some of the necessary functions, including enlisting local companies to follow local payroll and human resources regulations, as well as accounting firms to meet tax and accounting requirements.

Do you think the tax changes and regulation environment in the U.S. has made it more likely for firms to open offices abroad in countries with less regulation? Are foreign firms less likely to open up shop here?

WORONOV: There has always been a tendency for certain industries and types of businesses to move to less regulated locations. This was a primary reason for the loss of much of the textile and metal plating businesses that once formed the backbone of New England industry. Many of those businesses first developed here, and then relocated to states in the south seeking cheaper real estate, labor and energy costs. They later moved to Central and South America for even lower overhead costs and less environmental and other regulation, and finally to Asia. It is unlikely any tax or regulatory changes in the U.S. will bring those types of manufacturing businesses back to New England. And foreign manufacturers, especially those who want large and cheap work forces and facilities, are less likely to move here, other than to help sell or distribute already-manufactured products.

But New England still possesses attributes attractive to overseas businesses, from its geographic location to its reputation as a worldwide leader in education, medicine, life sciences, technology, finance and innovation. Although California has leaped ahead in terms of computer, software and related global technology development, New England remains the second hub for venture capital investment in technology in the United States. Other niche industries remain, such as fire safety, food and hospitality, certain financial services, and industries that tend to “feed” off the educational, health and engineering resources located here.

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