Funding a Foreign Operation:
Simple or Challenging?
By Vyoma Nair
If only it were as simple as sending money.
navigating argentina's DrawBaCks
What happens if your subsidiary makes losses? The
When you set up a corporation, you begin funding
law requires shareholders to make a further capital
operations through paid-up capital. Thereafter, many
contribution, frequently covering the entire loss and a
parent companies fund foreign operations by remitting
proportion of the original share capital.
funds as required. These are recorded as loans in the
subsidiary's books. This is not a problem in most coun-
If the funds are not correctly transmitted, Argentine
tries but let's look at some of the different regulations
Central Bank regulations will prevent the funds being
around the globe to give you a sample of the challenges
allocated to your company. When a cash contribution
you may face.
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
In China, if you send funds in and book them as a loan,
the formalities with IGJ within a certain timeframe, you
the subsidiary will not necessarily be able to repatri-
must deposit again the amount that they had withheld.
ate funds to repay the loan. This is because the loan,
to be repatriable, must be formally registered in
In addition, funds sent by a foreign parent to the Argen-
time with the Foreign Exchange Bureau. Proper loan
tine subsidiary without complying with the arm's length
documentation between the parties is also strongly
standard, are treated as capital contributions.
advisable as additional support to repatriate funds.
DiffiCulties in Brazil
Barriers in Denmark
Capital contributions must be registered in the Central
Denmark is a much easier location than China. How-
Bank of Brazil (Bacen). Foreign loans must also be reg-
ever, when you loan funds to your Danish subsidiary,
istered at Bacen who monitor interest payments.
as in most jurisdictions, thin capitalization rules will
restrict the deduction of interest charges on loans from
Failure to register the loan would result in Bacen pro-
foreign group companies.
hibiting repayment in foreign currency and could also
trigger issues relating to compliance with Brazilian
What is special about Denmark is that thin capitaliza-
transfer pricing control rules.
tion rules also apply to a branch. Thin capitalization is
deemed to exist if the debt-to-equity ratio exceeds 4:1.
So should your company be funded through capital
or through loans and in what proportions? For proac-
Thin capitalization rules do not apply if arm's length
tive solutions to international expansion issues, visit
terms are substantiated. A properly constructed inter-
company agreement and a benchmarking exercise
would certainly help the situation.
Nair & Co (c) 2008
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