Opening a Sales Office Overseas: 4 Questions to Consider
May 11, 2017
If you conduct a significant amount of international business — or plan to do so in the near future — it may be time to consider opening a sales office abroad. After all, if you have boots on the ground, you can expand your market share and put yourself in a better position to provide your overseas clients with quality, personalized service.
Opening up a new sales office is an expensive and complicated undertaking — especially when that office is located internationally. Before moving forward with this initiative, you and your team need to devote the necessary time and resources to see that your new office succeeds, which includes making sure you’re structuring the business appropriately to mitigate international taxes and boost financial success.
If you’re unsure whether your business is ready to take this step, try asking yourself the following four questions.
1. Will the New Location Pose Significant (and New) Advantages?
Before considering whether to open a sales office overseas, you need to assess the potential demand for your products or services in those locations. If there is a need, establish whether your prices are comparable to market expectations, and conduct comprehensive research on any competing firms in the area. Also, consider the impact on your market share and any potential competitive advantages a move presents. Reach out to the international customers you currently serve. Talk to them directly about how your business can best meet their needs and those of others in this market, and how the proximity of your potential new office might impact them.
A number of regions around the world may offer potential new markets for your products and services, but some areas will house a client base that more accurately fits your target demographic. To further narrow down your options, answer the following: Where do you and your partners travel frequently to conduct business transactions? Have you built up a solid reputation there? Is there a language barrier issue? Have you raised enough capital for unexpected costs, inflation and currency fluctuations?
Talk to professional advisors who work with international clients to pinpoint your prime opportunities overseas. Locations on the short list will be those where your business has a high number of potential clients and a strong employment pool. In addition, don’t forget that the ease with which you can travel to each location will contribute to the success of an international office.
2. How Would International Taxes Affect Your Bottom Line?
The entity structure you choose when you set up a foreign office will have long-term ramifications on the company’s tax liability, so it’s crucial to have a clear structure in place from the beginning. For instance, to minimize U.S. taxes on your foreign operation, there are certain tax elections you can make; however, only certain entity types are eligible for certain elections. For that reason, you need to set up operations in a way that will make you eligible for those tax breaks, which can generate significant tax benefits in certain cases and can minimize worldwide tax liability.
Each country has its own nexus standards, or requirements regarding whether a company doing business in the country must collect and pay taxes on sales made there. For instance, one country’s nexus standards may have a low threshold, requiring a company to pay taxes even if only a single employee works in that country, while others have more liberal standards. Some types of tax structures will insulate your U.S. company from permanent establishment status and local tax in the new location. To take advantage of such tax benefits, you need to understand any applicable treaties between the United States and the country where you are considering expanding, and what activities may cause your U.S.-based company to have a taxable local presence.
You also should research whether there is a sales tax or value-added tax (VAT) filing requirement for companies doing business in the region. In some cases, your company might only be allowed to claim refunds if it is properly registered. An advisor with experience in international operations can help you understand the tax ramifications of various business structures and select the right one for your potential new office, as well as get your business properly registered to take advantage of tax deductions.
3. Can Local Vendors and Specialists Meet Your Needs?
Before you open any new office, you need to develop relationships with a solid set of partners and service providers in the local area. So, if and when you open an office abroad, start by growing your network to include local investors, contractors and distributors to the point that you feel confident in this undertaking. Building relationships with other business leaders in similar fields also doesn’t hurt, as you may be able to work together in a mutually beneficial partnership.
In addition, you may want to align with a tax advisor to help you understand employment and tax law in the new territory, ensuring you are in compliance and also eligible for deductions and refunds. You may also want to refer to a legal professional to obtain a better understanding of non-tax laws in the region.
While these types of professionals can help you navigate tricky new legal territory, other experts may be able to help you adapt to the culture of the area. A local marketing specialist, for example, can help determine whether you need to rebrand your business. In some cases, your current business or product name may have a different meaning in the new location, and a local specialist will know how to adjust your services and messaging accordingly.
4. How Would You Staff the Office?
To launch an international office, you would either need to relocate some of your current employees or hire a local team from the new area. The avenue you choose should depend on the needs of your firm and your customers, as well as local labor laws. Many countries have extremely exacting labor laws and could require mandatory profit sharing, or make it very difficult to fire someone, for example. It’s critical to understand the employment law in the country where you’re considering setting up an office.
Find out as much as you possibly can about the local employment pool — and talk to your current employees about whether they would be willing to make the move. While some would likely rather stay where they are, you may find that some of your current sales team members would be excited to embark on a new adventure. If you have some employees willing to relocate, this could help ease the transition. On the other hand, a local team will likely be more clued in to the intricacies of the regional market.
When making this decision, it’s also important to remember that there are professional employer organizations (PEOs) outside of the U.S. that can handle the hiring of employees on behalf of your company. You may want to leverage these professionals during the hiring process. Overall, these factors should play a large role in your overall decision-making, as a new office’s success will in many ways depend on the team you put into place.
Opening up an international sales office can be a powerful way to broaden your market share and reach new customers. This move should not be taken lightly, however, and timing should be a key factor in your decision-making process. Spend some time in the regions you’re considering and consult with international advisors to weigh your options. That way, you’ll make the right decision — for you and your business.