1 Host Country Regulation: Corporate Law, Taxation and Currency Risk Chapter 18 © 2005 Thomson/West Legal Studies In Business

2 Types of Investments Minority: passive, active Majority

3 Minority: Passive Investments Debt: loan Equity: American Depository Receipts certificates held by U.S. trust institution representing stock held by bank in foreign country Legal issues: insider trading (different definitions), national legislation

4 Minority: Active Investments Joint venture –foreign corporation –foreign partnership –U.S. corporation with foreign branch –U.S. partnership with foreign parties national restrictions may exist on foreign participation example: U.S. restriction on foreign nationals involved in defense contractors

5 Majority position Foreign Branch Subsidiary

6 What Is the Difference Between a Subsidiary and a Branch? Control Tax Liability When might you consider a branch first?

7 Some Countries Have Restriction on Foreign Control NAFTA changed restrictions Laws have changed in the former Soviet Union and China

8 Tax Issues Foreign tax credits - in the U.S. you get credit on U.S. income tax on foreign taxes paid Transfer pricing - to prevent tax evasion require intercompany transactions at arms length prices (Compaq v. Commissioner) Foreign sales corporation - legal mechanism to reduce taxes

9 Taxation of E-Commerce Hot international topic Great variation U.S. has moratorium on any new taxes What about other countries?

10 Currency Risk Fluctuation Inconvertibility: make agreement with government regarding currency exchange results & import substitution rights Counter trade solution Inconvertibility insurance

11 Currency Risk Lump sum hard currency payment Profit margin reservation Consortia or parallel exchange Bank of America v. U.S: What was the significance of the ruling?