Types of investment

Two key domestic processes in overseasinvestment are overseas investment notification and remittance of investmentfund but deciding types of investment is also important. Types of investmentare decided by factors including methods of business, the size of business, taxlaws and financial policies of investing countries.

Like an individual starts its business as asmall company with an intention to avoid risks and uncertainties in the firstplace, foreign investment could be made as a form of branch or liaison officeand grows into a corporation later. There are three kinds of types ofinvestment.

(1) Liaison office

Liaison office does not carry out businessesthat generate profit however it functions as a mediator between headquartersand local businesses and collects information of local markets and reports itto the headquarters. However when marketing activities are carried out by theliaison office and are regarded as behaviors for profits by the localgovernment it could be subject to heavy taxation. Therefore, liaison officeshould not be involved in sales activities.

(2) Overseas branch office

The differences between overseas branch officesand corporations are as it follow;

☞ A branch office does not haveto consist of the executives/ has no limits in terms of initial fund investmentamount

☞ Usually the early stages ofbusiness carry higher risks. However the loss from a branch office could beaggregated with that of the headquarters which could help the branch office toreduce tax amount.

☞ Where a corporation remitstheir dividends to the headquarters it has to pay withholding tax for dividendincome before making the remittance. However, branch offices do not have suchobligation. However some countries impose branch taxes on overseas branches intheir countries to secure tax equity with local corporations.

☞Branches, in most cases, are regarded as a fixed business place therefore they haveto file corporate tax return

☞ Royalty income and interestincome sent from the headquarters to its overseas branch are not regarded asloss of the branch however when a corporation sent them to their headquartersthey are more likely to be regarded as loss.

☞ Those who consider openingoverseas branch first and then expanding it into a corporation he or she shouldcheck whether they have to go through complicated procedures or bear heavytaxes due to the transition. In such cases, establishing a corporation in thefirst place could be a better choice than going through such transition

(3) Local corporation

Establishing a local corporation has its ownbenefits. Local corporations are regulated by the local tax laws and at thesame time they are eligible for the tax benefits offered by the country. Theyalso can get easier access to the local financial institutions. Some countriesoffer foreign investors various tax breaks. However being aware of differencesbetween branch and Local Corporation would help investors to make a wiserdecision.

☞A local corporation could be established as a joint venture company which mighthelp reduce risks but at the same time profits should be shared.

☞ A local corporation are givenmore flexibility in terms of methods and timing for sending money to itsoverseas headquarters. The profits from a branch office are aggregated withthose of headquarters but the profits generated from a local corporate areaggregated with those of the headquarters only when the profits are dividendwhich would give room to adjust profit and loss of the headquarters.

☞ Where a local corporation in a investing country divides profits thedividend amount should be sent to its overseas headquarters only after paying10 to 15 percent of withholding tax based on the international tax treaty. Theheadquarters are eligible for the tax deduction for the dividend amount fromits overseas corporation during corporate tax return filing period.

☞ Capital fund withdrawal is subject to capital gains tax. Collectedfunds during the process of local corporation liquidation are related toconstructive dividend issues.

☞ Tax authorities keep a closeeye on whether there is capital gains generated from transfer price betweenoverseas subsidiaries and the headquarters. Where the tax authorities seeprofit decreases of the headquarters as suspicious transactions between theheadquarters and overseas subsidiaries it is subject to transfer pricingtaxation.