This is the inaugural post in our series “U.S. Market Entry for Italian Enterprises” covering the simplest entry modality into the U.S. marketplace, the sales representative office or branch office. This series follows a sequential methodology arranged in accordance with the level of risk which each market entry modality presents to the Italian enterprise. Accordingly, each subsequent market entry modality will exhibit a higher level of risk as well as reward.
The Sales Representative Office. Many Italian enterprises will test the waters for entry into the U.S. marketplace in a manner which poses the lowest level of risk from an investment perspective, i.e., the sales representative office (“SRO”). The SRO is the simplest and most limited form of business establishment as it serves essentially as a beachhead to explore and access likely market acceptance of the Italian enterprise’s products or services. SRO’s usually are required to be registered with the local government and are limited in generating any consistent level of sales.
As such, SRO’s typically avoid US tax obligations except for any employee withholding and payroll taxes. The SRO may also be staffed by an expatriate from the home office. Typical activities conducted by an SRO are as follows:
- Market research and testing;
- Product or services promotion without doing direct business and profit generation; and
- Identifying potential customers and establishing business relations
The Branch Office. Many Italian enterprises will elect as its market entry point a branch office. Branch offices are temporary in nature, often lasting a year or two as once local bona fide business opportunities are identified, the Italian parent will then elect to form a U.S. subsidiary through which its local business is conducted.
A key defining feature of the branch office is its nonexistence as a separate legal entity from its parent company. In simple terms, it serves much like a foreign office for the Italian parent company. Thus, it has no formal structure such as corporate status, shareholders, board of directors, etc. Rather, it inherits the domicile for legal purposes of its Italian parent. Should it engage in sales in the U.S., federal and state income tax obligations will arise. Since it has no legal existence in the U.S., any obligations it incurs remain those of the Italian parent.
Next-up in our Series we will discuss establishment of direct and indirect sales channel establishment in the U.S.