Pierced veils and alter egos – considerations for a US subsidiary
If you’re looking to expand your business in the US then setting up a subsidiary is a good idea in principle, because it creates a separate legal entity in the eyes of the courts. If you created a US branch by contrast, as the parent company you’d be exposed to both the risk of US litigation and US corporation taxes of 35%.
But setting up a subsidiary is not so simple when it comes to defining the relationship with the parent company. You have to be able to demonstrate that your subsidiary is genuinely a separate entity and not merely an ‘alter ego’ set up to shield you from US legal liability and tax.
US courts may require your subsidiary to take an alter ego test, which will address questions such as:
- Does your subsidiary have adequate capital? Does it have its own offices, employees, directors and bank accounts? Does it engage with customers and negotiate contracts on its own behalf?
- Does your parent company finance the subsidiary? Does it own the subsidiary’s stock? Does it pay salaries and other expenses for the subsidiary? And does it have control over subsidiary recruiting, hiring, and work assignments?
If you can’t convince the US courts that your subsidiary is truly a separate entity then your parent company can then be subject to US jurisdiction and potential lawsuits. This exposing of a subsidiary as merely a means of protecting the parent company is known in legal parlance as lifting or piercing the veil. In such situations you could face the risk of paying larger damages in any lawsuit against your subsidiary, because the assets of the parent company can be taken into account.
Avoiding peril: Intercompany Services Agreements
The US is a highly litigious country, and if forming a US subsidiary you need to make sure the relationship between subsidiary and parent is appropriate and entirely clear. Key to this is drafting an Intercompany Services Agreement – a document that defines the relationship and protects your parent company. It should cover details such as:
- scope of services and the financial relationship between the parent and US subsidiary
- who makes strategic decisions and how key documents are shared
- who will own IP rights
- how the subsidiary will hire and pay its own employees
- a statement that there’s no partnership or joint venture
Getting this document right can be difficult and time-consuming, but it will help protect your business from all kinds of murky legal and fiscal entanglements. One biotech company we know was initially quoted $100k in legal fees to plan and set up their US subsidiary. In the end, the total legal fees were more modest, in the $25-30k range.
We can help you easily establish a presence in the USA — without the need for a US legal entity. Contact us today