CORPORATE TRANSACTIONS & COMPLIANCE BLOG

More Privately Held Companies Affected by International Reporting Requirements

By: Teri Mayor, COGENCY GLOBAL INC. on Mon, Apr 16, 2012

international-formation-qualification.jpegDue to increasing globalization of businesses in the U.S. and around the world, more privately held U.S. businesses are expanding internationally. In a press release dated 9/13/2011, PricewaterhouseCoopers, LLP reported that “the majority (51%) of U.S.private companies surveyed for PwC US’ Private Company Trendsetter Barometer plan to do business abroad in the next one to two years, and 48% already have an international presence.” As companies doing business abroad seek to register or form subsidiaries in other countries, they should factor ongoing corporate compliance requirements into their decisions. Once outside the U.S., a company often needs to provide a great deal more information on annual reports filed with the company registrar than is required in the U.S., resulting in a lot more information becoming part of the public record. This is especially true for companies that are not publicly traded and have no SEC reporting requirements. Ensuring a good understanding of the annual compliance requirements is a necessary first step when deciding to form an entity or register it to do business outside the U.S.

Countries with Minimal Annual Report Requirements

There are some countries where annual compliance is essentially a matter of paying an annual fee. In countries like the British Virgin Islands and the Bahamas, while the registered agent must maintain information on the shareholders, members, officers and directors of the company, there are no financial reporting requirements and, for the most part, this information is not public record. (In the Bahamas, a “register of directors” does get filed with the Registrar General.)

Canada: Annual Report Requirements Similar to the U.S.

Other jurisdictions, such as Canada, require the same basic information as is required in many U.S. States – changes made to the officers and directors, address, company location, etc. In some provinces, such as Alberta, Manitoba, Saskatchewan and Quebec, shareholder information must also be reported and becomes public record. If a company is interested in forming a Canadian subsidiary, rather than registering as an extra-provincial, i.e. foreign entity, it should keep in mind that in many provinces, the company books and records, such as share register, board minutes, resolutions and financial statements, along with other documents, must be kept at its “records office,” which must be located in the province.

U.S. Territories: Annual Report Requirements Often More Stringent

Although one might expect there to be more similarity to U.S.requirements, reporting requirements are often more stringent in the U.S.territories. Guam is the exception to this rule, requiring basic information, although like Canada, names and addresses of the shareholders must be provided. In the U.S. Virgin Islands, the annual report must be accompanied by a balance sheet and profit and loss statement prepared by an independent accountant. Puerto Rico is the most stringent of the three; companies whose volume of business is over three million dollars must provide a report audited by a Puerto Rican CPA. Companies whose volume is under three million dollars, still must provide a balance sheet, but it needs only to be prepared in accordance with GAAP (Generally Accepted Accounting Principles) by a person with general accounting knowledge. This latter requirement has actually been revised this year to be more flexible than what was previously required. Earlier, corporations whose volume was under three million dollars needed to provide a balance sheet with an opinion letter drafted by a Puerto Rican CPA attached.

Annual Financial Statements Required in the European Union and Elsewhere

There are also a large number of jurisdictions where financial statements must be filed annually with the registrar and become part of the public record for the company. Most countries in the European Union, including the U.K., Ireland, France, the Netherlands, as well as other popular jurisdictions like Hong Kong, Singapore and Australia, require financial statements to be filed annually. These become part of the public record for the company and are often available online.

For a small or mid-size privately held company, these financial reporting requirements can be burdensomely expensive (especially when audited accounts are required) and cumbersome. If forming a subsidiary entity, it is important to evaluate whether parent companies will be required to file group accounts in the jurisdiction. U.S. companies also have to worry about the differences in accepted accounting principles. Although some countries, like the U.K., allow financial reports to be prepared in accordance with local accounting standards, others require the use of International Financial Reporting Standards (IFRS). While publicly held companies may be aware of and already planning to change from GAAP to IFRS in anticipation of the upcoming decision of the SEC, that is less likely to be true for a privately held company.

Corporate Annual Reports: A Small Part of Overall Compliance

Of course, annual reporting requirements are just one part of compliance when you form or register a company to do business outside of the U.S. Tax obligations, hiring requirements, business licensing and many other factors must be considered and planned for. When a company decides that the time is right to expand outside of the U.S., it should ensure it has competent legal counsel, who is well versed in all legal, tax and other compliance and maintenance obligations of a company registered or formed in the target jurisdiction.


This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: International Corporate Services