When operating abroad, when do local laws and regulations apply?
Q: What issues should be considered by an association before expanding international operations?
A: Federal and state tax and corporate and other laws do not restrict international activity by exempt organizations. Unless an association's governing documents limit it to domestic activities, an association may conduct international activities.
Before initiating international operations, it is important to review the nature of the intended operations, as well as local laws and regulations. Counsel in the country where the association intends to establish activities should be consulted for specific advice regarding local laws. The following issues should be considered in establishing international activities:
Corporate form. An association may structure its international operations in one of several manners:
- Through the organization itself;
- Through a new entity created to operate as a subsidiary;
- Through an entity already existing in the other country.
The association may open a branch office without establishing a separate legal entity, or the association's own corporate entity may establish an office in the country using employees of the association itself. Such an office must register with local authorities, file and pay taxes, and comply with local laws. However, with this approach, assets of the association are exposed to potential liability in the international location.
If an association intends to conduct significant operations in another country, it may be advisable to set up a subsidiary in that country under local law, which would insulate the parent association from liability. In some international jurisdictions, nonprofit status applies only to activities covered by specific and limited definitions, is very difficult to obtain, or is subject to strict limitations. In these instances, the association may establish a limited-liability company or, alternatively, a for-profit entity as an international subsidiary.
If there is no need for a physical presence, an organization may engage a local agent or consultant to manage operations in the local country or engage a management company to essentially act as an office of the organization. In both instances, contractual arrangements detailing tasks and deliverables should be carefully negotiated and drafted.
Affiliation agreement. If forming an international subsidiary, the association should enter an affiliation agreement with the subsidiary. The agreement should further establish the corporate separateness of the entities, thus helping protect the association from incurring liability on behalf of the subsidiary. The agreement should delegate authority to the subsidiary to conduct association activities; address personnel matters, revenue, and expenses; and provide a license of the association's intellectual property.
Intellectual property. In most countries, copyright-ownership rights arise upon creation, not registration. Copyright piracy is a widespread problem in many countries, and often even proper registrations cannot prevent infringement. It is generally not necessary to obtain copyright registrations in each country in which an association sells or distributes its publications. However, the association should place the copyright notice in a conspicuous location on each of the association's works and file an application for registration with the U.S. Copyright Office.
While trademark rights generally arise in the United States based on use of a mark in commerce, in many other countries, trademark rights generally arise from registration, not from use. Accordingly, as soon as an association determines that it will use its trademarks in another country, it should file applications to register those marks to solidify its rights and protect itself from infringement and misuse.
Tax. International activity will not jeopardize an association's exempt status. The geographic origin of funds will not matter nor will the location of the conduct; the nature of the activity is controlling. However, restrictions or limitations imposed under U.S. law will also govern international activities.
Some countries may exempt associations from income or profits tax, but most countries do not have formal tax-exemption statutes, or regulations similar to the U.S. tax policies may be subject to the discretion of government officials. Withholding taxes may be imposed by the host country on transfers or payments from a branch office or subsidiary organization to the parent association, such as withholding of dividends, royalties, and interest. Generally for a foreign country to impose tax on an entity, there must be a "permanent establishment," such as an office with employees and a formal carrying on of business in that country, that provides jurisdiction for tax purposes. Local country laws should be carefully analyzed and revenue flows properly characterized to ensure accurate accounting and tax compliance and to reduce adverse tax exposure and consequences.
Audra Heagney is an associate in the nonprofit organizations practice at Pillsbury Winthrop Shaw Pittman in Washington, DC. Email: [email protected]