Investing in the United States 2015

Investing in the United States 2015 Audit Tax Advisory

All lasting business is built on friendship. Alfred A. Montapert

TABLE OF CONTENTS 5 7 8 Introduction About Crowe Horwath International Investing in the United States

Investing in the United States with Crowe Horwath International

INTRODUCTION Welcome to the Crowe Horwath International Investing in the United States 2015 guidebook. This guide forms an extended part of the Investing in Asia Pacific 2015 series and provides a quick reference for those interested in investing in the United States. The US is one of the two largest outbound destinations from Asia Pacific, the other being the United Kingdom. While it is not exhaustive, this guide aims to answer some of the key questions that may arise. When specific issues arise in practice, it will often be necessary to consider the relevant laws and regulations and to obtain appropriate professional advice. The guidebook will cover five main topics as follows: Establishing the business entity Tax information IPO quick facts Human resource requirements Withdrawal procedures

Business is in itself a power. Garet Garrett

ABOUT CROWE HORWATH INTERNATIONAL The Crowe Horwath network consists of more than 200 independent accounting and advisory services firms and in over 120 countries around the world. Crowe Horwath International member firms are known for their local knowledge, expertise, and experience balanced by an international reputation for the highest quality in audit, tax, advisory and risk services. They are unified through a shared commitment for impeccable quality service, highly integrated service delivery processes and a common set of core values and management philosophies that guide their decisions daily. This unique combination of talent provides Crowe Horwath International the worldwide capabilities of a highly integrated network to deliver value to multinational clients doing business across borders.

United States Establishing the business entity Contact Nadine Pietrowski CHIEF EXECUTIVE OFFICER npietrowski@ ghphorwath.com Michael Filkoski INTERNATIONAL LIAISON PARTNER mfilkoski@ ghphorwath.com Gregory Buteyn DIRECTOR OF INTERNATIONAL TAX SERVICES gbuteyn@ ghphorwath.com Jim Ewing AUDIT SENIOR MANAGER jewing@ ghphorwath.com +1 303 831 5000 1. Formation and costs Company In the United States, state law governs the formation of business entities. There are no federal laws regulating business forms. A business will be organized under the law of a specific state, and a business is free to select the applicable state of incorporation. The main forms of business in the United States are Corporations, Limited Liability Companies (LLC s), Partnerships, Joint Ventures, Sole Proprietorships, or Branches. For general information on starting a business log on to: http://www.irs.gov/businesses/small-businesses-&-self-employed/starting-a-business Branch No specific legal registration requirements to establish a branch; however, tax and state/local business permits may be required. Representative Office Representative offices operate essentially as branches but with more limited activity. 2. Investment incentives Company The federal government usually does not provide special incentives for foreign investors; however credits or incentives may be available at the state and local government levels. Branch A branch of a foreign company may conduct the same activities under the same conditions as a United States subsidiary. 3. Foreign ownership restrictions Company Generally, there are no restrictions on foreign ownership of a company formed in the United States. However, special governmental approval may be required in matters of national security, export control, or anti-trust. The procedure for a foreign citizen to form a company in the United States is the same as for a United States resident. For additional information log on to: http://www.usa.gov/business/foreign_business.shtml Branch Same as for company. 4. Work permits and visas Company Work permits and visas are obtained through applications with the federal government. The application and issuance of work permits and visas can take several weeks or even months. It is highly advised to work with a qualified visa/immigration attorney. Branch Same as for company. 5. Accounting standards and audit requirements Company Generally accepted accounting principles for the United States of America (US GAAP) are the standards used for United States companies. For Foreign companies listed in the United States, which meet the criteria of a foreign private issuer, International Financial Reporting Standards IFRS may be used. Audits of public companies are conducted in accordance with standards of the Public Company Accounting Oversight Board (PCAOB). Audits of other organizations are conducted in accordance with Generally Accepted Auditing Standards of the United States (US GAAS). 08 The adoption of IFRS is being considered by the Securities and Exchange Commission. However, no formal timeline has yet been adopted.

Crowe Horwath International Investing in the United States 2015 There are no statutory audit requirements in the United States; however, audits are required for certain companies listed in the United States, employee benefit plans (meeting certain participant requirements) and nonfederal entities that expend $750,000 or more of federal grant awards in a fiscal year. However, many financial institutions and investors may require an audit as a condition of the loan or investment. Branch Same as for company. 6. Residential directors/ promoters requirements Company There is generally no legal requirement that any director or promoter must be a United States resident. Branch Same as for company. 7. Foreign ownership over tangible assets Company Generally no restrictions. Branch No restrictions. 8. Country quirks Branch Foreign company branches operating in the United States may subject the foreign company to all legal claims and liability for the acts and business of the branch. Tax information 1. Tax rates on corporate income Currently, federal income tax rates range from 15% to 35%. See specific information published by the United States IRS at http://www.irs.gov/businesses/small/article/0,,id=98240,00.html. State and local income tax rates vary by jurisdiction. Although a company or branch may be incorporated or registered in a particular state, it may still be subject to income tax in other states if it is deemed to be doing business in that other state. See http://en.wikipedia.org/wiki/state_income_tax for a non-authoritative summary. 2. Other taxes Good and Services Tax (GST) Value Added Tax (VAT) Other tax 1 Other tax 2 N/A N/A Sales and use taxes, are generally imposed by state and local jurisdictions. See http://en.wikipedia.org/wiki/sales_taxes_in_the_united_states for a non-authoritative summary. Payroll taxes required to be paid by employers and withheld from employee wages include Social Security (FICA) tax, Medicare tax, federal unemployment tax, and state unemployment tax. 3. Branch income In general, income earned by a branch operating in the United States is taxed in the year it is earned similar to how it would be taxed if the income were earned by a United States company. In addition, a branch-profits tax is imposed when funds are deemed to be repatriated to a parent corporation from a United States branch. The branch profits tax is a flat 30% tax on the parent corporation s dividend equivalent amount. This 30% rate can be reduced by applicable tax treaties. 4. Income determination If using a branch, foreign parents are generally taxed only on their United States-source income (effectively connected income). United States subsidiaries of foreign businesses are generally taxed on the subsidiary s worldwide income the same as other domestic companies, but have additional filing requirements. Closing inventory can be valued by using cost, lower of cost or market, or 09

Crowe Horwath International Investing in the United States 2015 another reasonable method. Depending on the size of the company and other factors, certain indirect costs may be required to be capitalized into closing inventory. For corporations, capital gains are taxed at ordinary income rates and capital losses can only be used to the extent they are offset by capital gains. Intercompany dividends between domestic entities can qualify for a special dividends-received deduction. Stock dividends are generally not considered to be current income. 5. Deductions In general, ordinary and necessary business expenses, including depreciation and depletion, are allowable for United States income tax purposes. Depreciation is generally computed on a double-declining basis over a useful life determined by tables authored by the United States taxing authorities. Additional first-year depreciation expenses are usually available depending on the amount of assets placed in service and current law. In general, net operating losses can be carried back two (2) years and forward 20 years. Accrued expenses due to foreign affiliates may be required to be deferred until actually paid. Interest to unrelated third parties is generally deductible. There are several limitations on interest paid to foreign affiliates which can limit the interest deduction to a corporation or result in a tax on deemed excess interest to a branch. State and local taxes are deductible, and a credit is available for foreign taxes paid by a United States corporation. 6. Group taxation policies Groups of affiliated United States corporations with a common United States parent may elect to file a consolidated return. Related groups of United States companies not filing a consolidated return are required to share certain tax incentives such as the election to expense fixed asset purchases and the alternative minimum tax exemption. 7. Tax incentives From time to time the United States federal government offers payroll tax credits for hiring workers in the United States. If you contact various states or localities that you are interested in doing business in they may have incentives for creating jobs in their state, county or city. It is always best to contact the local jurisdictions before making a final decision on where to locate so that you have more flexibility in negotiating terms. Incentives can range from property tax abatements to state sponsored employee training. 8. Withholding tax Dividends 30% Interest 30% Royalties 30% Technical fee 0% Branch profit 30% same as corporation. *All withholding amounts may be subject to treaty reduction or relief. 9. Tax administration Most federal returns must be filed electronically and payments are required to be made by electronic funds transfer. Many states also require or allow electronic filing and payment by electronic funds transfer. Also many states require registration to do business in the state so a tax advisor should be consulted. 10. Taxable incomes for non-residential companies and individuals Taxable Incomes for non-resident companies and individuals is highly variable depending on whether the company is deemed to be doing business in the United States, if it has U.S. source income, and if any treaties apply. Generally, these companies are subject to the branch profits tax. Individuals who are not considered United States residents for income tax purposes will be taxed on their income from United States sources. Certain deductions and exemptions are allowed. Individuals who are considered United States residents (based on the number of days present in the United States during the current taxable year and the prior two years) are taxed on their worldwide income the same as United States citizens, but are also entitled to the same deductions and tax credits as United States citizens. 10 11. Other pertinent information Additional reporting may be required for a United States corporation with at least 25% foreign ownership or if the United States company owns greater than 10% of a company organized outside of the United States. Also, a United States company that owns or has signature authority over a bank account located outside the United States must file an additional report annually. Foreign investors in the U.S. should be aware that states generally do not recognize U.S. income tax treaties and therefore may subject foreign companies to state income or franchise tax where U.S federal tax may not apply.

IPO quick facts Crowe Horwath International Investing in the United States 2015 1. Bourses in the country a. New York Stock Exchange (NYSE) b. The NASDAQ c. Chicago Stock Exchange (CHX) d. Over the Counter Bulletin Board (OTCBB) 2. Admission requirements New York Stock Exchange a. Company size NYSE Requirements (Section 103) http://nysemanual.nyse.com/lcmtools/platformviewer.asp?searched=1&selectednode= chp_1_2_2&cirestriction=102&manual=/lcm/sections/lcm-sections/ b. Trading record Five (5) Years Prior. c. Public shareholding requirement US$ 2.5 million. d. Qualitative requirements See NYSE Requirements Link Above. e. Others NYSE Requirements (Section 104). http://nysemanual.nyse.com/lcmtools/platformviewer.asp?searched=1&selectednode= chp_1_2_2&cirestriction=102&manual=/lcm/sections/lcm-sections/ The NASDAQ a. Company size NASDAQ Requirements. https://listingcenter.nasdaq.com/home.aspx b. Trading record One (1) Year Prior. c. Public shareholding requirement US$ 1.25 million. d. Qualitative requirements See NASDAQ Requirements Link Above. e.others See NASDAQ Requirements Link Above. Chicago Stock Exchange (CHX) a Company size CHX Requirements. https://www.chx.com/listing-program/standards/ b. Trading record See CHX requirements link above. c. Public shareholding requirement US$ 250,000 to US$ 1 million. d. Qualitative requirements Two independent directors; audit committee depositary eligibility; management of good character, etc. e. Others Other CHX Requirements. https://www.chx.com/listing-program/governance-standards/ Over the Counter Bulletin Board (OTCBB) a. Company size OTCBB Requirements. http://www.finra.org/industry/compliance/markettransparency/otcbb/ 11

Crowe Horwath International Investing in the United States 2015 b. Trading record Maintain current filings with the SEC. 3. Specific requirements for specific Industries Specific requirements for all industries are noted in the requirement links noted above. In addition to the above, the Jumpstart Our Business Startup (JOBS) Act has encouraged the funding of emerging growth companies through easing various security regulations and allowing individuals to become investors. See additional information at: http://www.gpo.gov/fdsys/pkg/bills-112hr3606enr/pdf/bills-112hr3606enr.pdf and http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm 4. Typical issuance size a. New York Stock Exchange (NYSE): Noted in the requirement links noted above. b. The NASDAQ: Noted in the requirement links noted above. c. Chicago Stock Exchange (CHX): Noted in the requirement links noted above. d. Over the Counter Bulletin Board (OTCBB): Noted in the requirement links noted above. 5 Moratorium imposed Following the filing of the IPO registration statement will be a brief waiting period as the SEC and other regulators review the various filings made. 6. Securities quoted allowed in foreign currency No. 7. Requirements for the appointment of a resident / local director and board composition NYSE/NASDAQ: Majority of board must be independent; CHX: Each issuer shall maintain a board of directors consisting of a majority of independent directors; however, each small business issuer shall be required only to maintain a board of directors consisting of at least 50% independent directors. OTCBB: No requirements. 8. Restrictions for foreigners Foreign private issuers conducting an IPO in the United States must generally register the offering on Form F-1 under the Securities Act. 9. Methods of offer and restrictions There are generally four (4) ways for a company to sell its shares: 1. the initial public offering (IPO) 2. the direct public offering (DPO) 3. the reverse merger and 4. restricted offerings under Rule 144 of the SEC. 10. Timeline Timeline of a company going public through an IPO is typically as follows: pre-ipo compliance with certain Sarbanes-Oxley requirements, due diligence preparation, selection of managing underwriter, conducting the offering, filing of the registration statement with the SEC, waiting period and the post-effective period. This process can take several months, to over a year to complete. Timeline of a company going public through a reverse merger is as follows: shareholders of the private company purchase control of the public shell company and then merge it with the private company. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. This transaction can often be completed within weeks. A Form 8-K is filed with the SEC immediately following the reverse merger. 11. Approving authorities Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA). 12. Estimated cost involved See chapter F of RR Donnelley s 2014 Publication The Public Company Primer A Practical Guide to Going Public, Raising Capital and Life as a Public Company, for an example of estimated company expenses for an IPO: http://www.rrdonnelley.com/industry-solutions/financial-services/resources-tools/library/public_comp any_primer.aspx 12 Additional initial costs for the different Bourses are as follows: NYSE: maximum of US$ 250,000; NASDAQ: Based on aggregate number of shares to be listed, plus a US$ 25,000 non-refundable application fee with a maximum of US$ 225,000; CHX: The initial listing fee is US$ 15,000 for each issue of common stock and US$ 2,500 for each issue of preferred stock or Rights of Purchase Plans regardless of the number of shares covered by the application. An annual maintenance fee of

Crowe Horwath International Investing in the United States 2015 US$ 1 per 20,000 shares is thereafter charged to maintain the listing. The minimum annual maintenance fee is US$ 1,250 per issue, with an annual maximum maintenance fee of US$ 3,000; OTCBB: US$ 6 per security per month. 13. Restriction on secondary listing or dual listing A stock can be listed on any exchange as long as it meets the requirements for that exchange. A company can list its shares on more than one exchange and this is referred to as dual listing. A security cannot be traded on the NASDAQ and the OTCBB at the same time because the OTCBB is a quotation service for securities which are not traded or listed on the NASDAQ or a national securities exchange. Securities can be dual listed on the OTCBB and foreign exchanges. 14. Language required for: a. Prospectus: English b. Annual reports: English c. Audit report: English 15. Audit opinion required for a. IPO Unqualified, generally two (2) to three (3) years, can be retroactive.. b. After IPO Two (2) - three (3) years depending on whether the filer meets the definition of an accelerated filer or large accelerated filer, as defined in SEC Regulation 12B. 16. Requirements of accounting auditors to be appointed The auditor must comply with independence provisions set forth in Title II of the Sarbanes Oxley Act of 2002 (SOX), SEC regulations related to independence, registration and good standing, and must be registered with the Public Company Accounting Oversight Board (PCAOB). Foreign auditors are generally allowed to sign on audit reports as long as they meet the above requirements as well as meet SEC requirements related to the firm s practice, quality control procedures; and knowledge of US GAAP, US audit standards, PCAOB standards and SEC rules and regulations. The SEC may also require a foreign firm to obtain a review by a qualified United States firm. 17. Delisting standards from bourses NYSE Requirements (Section 804), NASDAQ Requirements (5800 Series) http://www.nasdaq.com/about/requirements.stm/t_blank, CHX: In accordance with SEC rules regarding the delisting of securities on any exchange, as required by the Securities Exchange Act Rule 12d2-2 (c) (3) the CHX provides the following information. OTCBB: Issuers must remain current in their filings with the SEC or applicable regulatory authority. If not remained current, issuers will be delisted from the OTCBB. Human resource requirements 1. Special labour standards to take heed of The Fair Labor Standards Act is a federal statute of the United States and established a minimum wage, guaranteed time and a half for overtime in certain jobs, and prohibited most employment of minors. See additional information at: http://www.dol.gov/compliance/laws/comp-flsa.htm Equal employment opportunity commission is an independent law enforcement agency that enforces laws against workplace discrimination. See additional information at: http://www.eeoc.gov/ 2. Social welfare: insurance, pension, etc Federal, state and local withholding taxes are required in those jurisdictions imposing an income tax. Employers having contact with the jurisdiction must withhold the tax from wages paid to their employees in these jurisdictions. This is referred to as income tax withholding, see http://en.wikipedia.org/wiki/tax_withholding_in_the_united_states for a non-authoritative summary. Social Security and Medicare are social insurance programs that are primarily funded through dedicated payroll taxes called Federal Insurance Contributions Act tax (FICA). See additional information at http://ssa.gov/ Occupational Safety and Health Act is the primary federal law which governs occupational health and safety in the private sector, see additional information at: http://www.osha.gov/. The Affordable Care Act is the health insurance reform legislation signed into law on March 23, 2011, see additional information at: http://www.dol.gov/ebsa/healthreform/ 13

Crowe Horwath International Investing in the United States 2015 3. Requirements for retirement benefits Employment Retirement Income Security Act (ERISA) is a federal statute of the United States and establishes minimum standards for pension plans. See additional information at: http://www.dol.gov/compliance/laws/comp-erisa.htm 4. Legal annual leave and public holidays Family and Medical Leave Act of 1933 (FMLA) requires employers to provide unpaid leave for qualified medical and family reasons to their employees. See additional information at: http://www.dol.gov/whd/fmla/ For information regarding public holidays: https://www.sec.gov/info/edgar/fedholiday.htm 5. Brief information on labour unions Labor unions in the United States are legally recognized as representatives of workers in many industries. The majority of activity by labor unions in the United States focuses on collective bargaining over wages, benefits, and working conditions for their membership and on representing their members if management attempts to violate contract provisions. Private sector union members are regulated by the National Labor Relations Act (NLRA). For more information see https://www.nlrb.gov/national-labor-relations-act. The law is overseen by the National Labor Relations Board. Withdrawal procedures 1. Company: legal procedures required for liquidation A liquidator is appointed, either by the company shareholders passing a resolution (voluntary liquidation) or by the Court making an order (compulsory liquidation). The liquidator collects the assets of the company (including uncalled capital; that is, amounts unpaid on shares) and pays the creditors in order of priority. The liquidator distributes any surplus funds to the shareholders. The company is then formally dissolved. 2. Company: tax requirements Liquidating corporations must complete and submit a Form 966 to the IRS and submit a final U.S. tax return. Each state also has legal filing requirements for withdrawal, dissolution, and tax clearances. (www.irs.gov/pub/irs-pdf/f966.pdf) 14

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