Funding Overseas Operations: Vyoma Nair, Co-Founder of Nair & Co., Discusses the Challenges and Risks

Vyoma Nair, Co-founder of Nair & Co., a leading global integrated solutions provider helping companies expand internationally, shares knowledge about funding overseas operations — the challenges, and the risks.

SUNNYVALE, Calif. (Business Wire EON) November 11, 2008 -- Remitting funds to a foreign subsidiary might appear to be a simple money transfer. But while in some nations it is a straight-forward recording of funds as loans in the subsidiary's books, in others the mechanics are far from effortless. Top executives face key questions like if the foreign operation should be funded through capital, or through loans, and in what proportions?

Vyoma discusses just some of the country-specific challenges U.S. companies face, and what company executives need to watch out for.

China's Challenges

In China, if you send funds in and book them as a loan, the subsidiary may not necessarily be able to repatriate funds to repay the loan. For the loan to be repatriable, it must be formally registered in time with the Foreign Exchange Bureau. It is also strongly advisable that proper loan documentation is maintained between the parties as additional support to repatriate funds.

Barriers in Denmark

Denmark is a much easier location than China. But when you loan funds to your Danish subsidiary, as in most jurisdictions, thin capitalization rules 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 certainly help the situation.

Navigating Argentina's Drawbacks

What happens if your subsidiary makes losses in Argentina?

The local 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 prevent the funds from being allocated to your company.

When a cash contribution comes from abroad, a 30% withholding is 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 deposit again 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

In Brazil, capital contributions must be registered in the Central Bank of Brazil (Bacen). Foreign loans must also be registered at Bacen, which monitors 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.

If you need more information on the challenges and opportunities your company can face when expanding internationally, please visit our website at www.nair-co.com or email info@nair-co.com or call 239.948.9820 (EST-South) / 781.239.8135 (EST-North) / 919.996.9859 (EST-East)/ 408.515.6887 (PST) for more information.

About Nair & Co.

Nair & Co. provides businesses an integrated solution geared to making your company's thrust to expanding business overseas less risky, stress free and more strategic in the finance, tax, HR, compliance and legal arenas. Specialized in working with the unique challenges of U.S.-based technology companies, Nair & Co. has headquarters in the U.K. and offices in India, China, U.S.A. and Japan and acts for nearly 700 foreign operations in over 40 countries. Nair & Co. employs highly qualified international specialists as your one point of contact client service directors to support your international registration, tax, accounting, compliance, HR and payroll needs. Our unrivalled knowledge base, attention to detail and superior work ethics protect your company's operations more effectively and save you time and money. For more information, including awards won, visit our web site at www.nair-co.com.