Taking Your Business International When It’s Least Expected

In this article, Dunni Segun-Oki discusses the possibility of Nigerian companies establishing subsidiaries in foreign countries, as a solution to mitigating the negative impact of the Covid-19 Pandemic which has seen many businesses downsizing, while others have closed down. She explains some of the factors that must be considered before taking such a step, and the benefits which can accrue from having a subsidiary in a foreign country

Introduction

A s governments around the world struggle to rescue their economies from the negative economic impact of the Covid-19 pandemic, so too, private companies must find ways to navigate these new unchartered waters. Businesses have been forced to close down, and those that have survived thus far, must find out-of-the-box solutions to thrive.

A New Subsidiary

To mitigate the adverse effects of the pandemic, one obvious solution might be the expansion of your business and investments beyond Nigeria’s frontiers, by incorporating an affiliate or subsidiary in a foreign country. This new subsidiary would either act as a holding company for all your investments, or an entirely new entity that seeks to provide services to a new set of customers in an ever increasing global market. The benefits of such a strategy, would be dependent upon your organisational strategy or goals. Such strategies may include, increasing your brand’s presence globally or at a targeted market, access to new and emerging markets, taking advantage of tax incentives of a foreign country, or raising capital internationally. The option of a foreign subsidiary may be a necessary tool for your company’s growth, in these dire times.

Once you have identified your goal, the next step is to determine which foreign country best suits your needs. For a subsidiary company, certain factors must be seriously considered before incorporation. These factors include, but are not limited to; the legal and regulatory climate of your new host country and their taxation framework, especially as it relates to taxation treaties or agreements between Nigeria and the host country. Some host countries treat foreign companies as domestic entities, and apply the same obligations as their local companies. Other host countries provide foreign companies with tax incentives for establishing business in their territories, while others simply function as tax havens charging 0% in taxes.

So, what are these laws and regulations that must be considered before finalising the incorporation of the subsidiary?

a) International treaties and agreements that regulate and provide for the treatment and protection of foreign companies in the host country, regulate the tax regime, and the reporting structure between Nigeria and the host countries, protectionist laws that regulate the activities of businesses in their new host countries and the nationality of your new subsidiary. At the time of writing this article, Nigeria does not operate a global taxation policy, that is, tax paid on all income earned all over the world. This means that the main issues for consideration becomes the taxation regime of the new host country, and the tax treaties Nigeria may have entered into with the new host country. A combination of these and other factors, will determine your overall tax exposure.

b) Employment laws of the host country which regulate the rights and obligations of employees and employers, mandatory work hours, minimum wages, payroll taxes, insurance requirements etc. Most countries tend to have protectionist laws that safeguard the economic welfare of their citizens, for example, a cap on the number of foreign nationals a company may employ, the requirement to use only local service providers etc. A thorough understanding of these requirements, will provide guidance on the viability of establishing a subsidiary in your proposed host country.

c) Taxes: a thorough assessment of the potential tax exposure of the proposed subsidiary in the host country, is also a vital consideration in deciding to take your business overseas. Your subsidiary will be liable to the host country’s rates for corporate tax, payroll tax, value added tax and withholding tax. If your organisation is designed in such a way that ensures that the profits generated in the host country are repatriated back to Nigeria or elsewhere, the rates at which income tax and withholding tax are calculated become very relevant. Depending on the host country, local taxes, bank charges, transfer pricing rules and property taxes, may apply.

Once the decision has been made to incorporate a subsidiary, then the next step is to establish a team of professionals including Lawyers and Accountants who will be charged with the responsibility of forum shopping, that is, reviewing the laws and regulations of the countries of interest, and designing a tax efficient path to the incorporation of your subsidiary.

So, what are the benefits of establishing a foreign subsidiary?

a) Ability to attract international financing; one of the requirements potential investors consider, is the nationality of the entity they seek to invest in. That country’s track record with regard to protection of investor rights, strong and efficient legal system, strong and clear financing and banking regulations, corruption index and whether that country can guarantee a return on investment. In other words, whether their investments will be expropriated by the government of the country the subsidiary is incorporated. Unfortunately Nigeria does not meet most of these requirements; accordingly, Nigerian companies are not able to attract international financing. Those who have done so, usually incorporate a subsidiary in a country that gives the investors comfort.

b) Entry into the global market place on a level playing field. Companies from developing countries usually struggle to compete on the global stage, because of some of the economic policies their home countries implement. For example, monetary policies that restrict access to foreign currency thereby making trading difficult, or burdensome bureaucratic processes that regulate the exportation of goods and services.
c) Depending on the host country chosen, there is the secondary benefit of the founder or CEO obtaining a second passport. However, this is entirely dependent on the requirements of the host country.

Fictional Case Study

Wazobia Limited is a leading company, in the Nigerian textile industry. As one of the few local manufacturers of dyes in Nigeria, Wazobia Limited has developed a reputation for providing quality products at reasonable prices. The strategic plan of Wazobia Limited, has been to provide quality dyes to the global textile manufacturers at reasonable prices from its factory in Lagos. Its mission statement is to be the number one supplier of dyes, to all textile manufacturers globally. Mr. Usman Alani Uzoma is the CEO of Wazobia Limited, and under his leadership the market share of Wazobia Limted has risen from 1% to 20% in 10 years.

The raw materials used in the manufacturing of the dyes are imported from various global suppliers, necessitating dollar denominated payments. As such, a volatile foreign exchange market is detrimental to his business. Before the pandemic and despite the difficulties in sourcing dollars to pay their suppliers, Wazobia Ltd had an annual turnover of N100 million. However, the post-pandemic global economic slump and a volatile local currency exchange market have seen Wazobia’s costs rise by 100%. Facing an uncertain future and wishing to keep the business running, the Board of Directors of Wazobia Limited have chosen to downsize both their production capacity and their employees, all while trying to meet the minimum obligations of their existing customers. The Board of Directors have considered applying for a dollar denominated commercial loan, but the repayment sum cannot be fixed due to the volatile currency exchange market. Their customer base is rapidly shrinking, as few can afford to pay for the new prices for the products.

Desperate, Mr Uzoma consults with his team and external Lawyers, about a viable solution to their many problems. One of the solutions that comes up is the incorporation of a subsidiary of the company in a foreign country, as a form of diversification of his existing business interest. Immediately, the team is concerned about the costs of operation of the subsidiary, and what that would entail. Upon further enquiry, the team discovers that certain countries do not require the physical presence of the subsidiary in their borders. They can be virtual companies that allow for operations, and the opening of bank accounts within their borders and beyond. Additionally, some countries will offer residency permits to the employees of said companies, paving the way for citizenship. The team also considers that the formula used in producing their dyes has been patented, and is owned by Wazobia Limited.

The team is then charged with the responsibility of determining how business will be conducted, by the subsidiary. The options on the table include but are not limited to; outsourcing certain functions to trusted international companies, downsizing or relocating their factories to the host country or elsewhere, franchising their patented formula or method of production to others, looking for countries that will give tax incentives for the establishment of a smaller factory within their borders, exploring new markets for their dyes etc.

To take full advantage of the opportunities available, it is advisable for Mr Uzoma and his team to sit with experienced Lawyers and tax practitioners, to determine the most efficient way forward.
• Note that, this fictional case study illustrates the difficulties faced by some companies in the manufacturing sector. However, the same solution is applicable to all companies in different sectors of the Nigerian economy.

Conclusion

This article has highlighted one way that a Nigerian company can survive in the post-pandemic era.
However, the use of foreign companies is not limited to the foregoing. Foreign companies can be used as tools for wealth preservation, asset protection and estate planning. We will discuss these matters in future articles. I’m happy to respond to questions readers may have.

Dunni Segun-Oki LLM with Specialty in International and Commercial Law; M.A. Islamic Societies and Cultures (S.O.A.S), Legal Practitioner, Lagos. Email: dunniso@live.com