Analysts investigating complex corporate networks are likely to eventually encounter foreign-registered entities: legal entities incorporated in one jurisdiction and operating in another.
This post examines the three main types of foreign entity registration practices around the world:
- Registration as a foreign entity
- Registration of a foreign office
- Registration of a joint venture or subsidiary
Registration as a foreign entity
Explanation — Registration as a foreign entity is the simplest and most common of the options included in this post. In this model, the legal entity registers to operate as a foreign entity in another jurisdiction where it wishes to do business. No new entity is created.
Example — Companies in the United States are incorporated under the laws of a state, and are by default granted the authority to operate only in that state. If a company wants to operate in a neighboring state, it must register as a foreign entity in that neighboring state. This applies equally to companies from outside theUnited States; New York treats a UAE company the same way it treats a New Jersey company (see Fig. 1).
Fig. 1: Foreign entities registered in New York
Exceptions — Geographical inconsistencies between organizations can cause issues under this model. In the territorial United States, for instance, companies can sometimes be registered as foreign entities within the state in which they were created due to the existence of Native American tribe reservations. In these cases, the tribe would consider a company created within reservation borders to be a domestic entity, but the state in which the tribe is located would consider it to be a foreign entity.
This type of registration also raises the question of what happens when a foreign entity closes in its home jurisdiction. North Carolina has no way of knowing, for instance, that a trust domiciled in the Marshall Islands closed in 2014, and it therefore remains registered as an active foreign entity in North Carolina. Legally speaking, the foreign entity would lose the legal ability to do business, but this is difficult to enforce in practice.
Similarly, it isn’t always clear whether related parties reported as being linked to the foreign entity in the course of its operations abroad match their respective roles and current activity statuses in the home jurisdiction. Of the nearly 240,000 foreign entities currently registered in New York State, only 48,000 report a chief executive officer (CEO). Disclosure of CEO details by foreign entities applying for authority (permission to operate) is not required under New York law, so it appears possible that some entities are voluntarily or inadvertently reporting this information, potentially without regularly updating it.
This creates a gap between the information disclosed about the foreign entity and its registration abroad, despite the fact that the two are legally identical.
Registration of a foreign office
Explanation — In this legal model, the foreign entity creates a new local entity in order to operate in a foreign jurisdiction, but the entity created remains functionally (albeit not legally) interchangeable with the foreign entity itself. The new entity is typically referred to as a “branch office” or “representative office.”
Example — Any foreign entity seeking to operate in China must do so by establishing a local representative office (代表处; Fig. 2).
Fig. 2: The Chinese corporate registry entry for the Shanghai representative office of Islamic Republic of Iran Shipping Lines
Exceptions — The newly created local entity may have an unusual or unclear legal status, depending on the jurisdiction. In China, for instance, the representative offices of foreign companies, despite having a corporate ID number and registry entry, are still not considered to be Chinese legal entities, strictly speaking, but rather an extension of the foreign legal entity.
Registration of a joint venture or subsidiary
Explanation — This legal model applies to cases in which a foreign entity creates a new local entity in order to operate in a foreign jurisdiction, but the entity created is neither functionally nor legally interchangeable with the foreign entity. This includes wholly- or partly-owned subsidiaries and joint ventures.
Example — Brazilian joint ventures (consorcios) can be owned by foreign companies. Figure 3 shows a consorcio owned in part by Southern Westerngeco, a Uruguayan company. The joint venture is owned by both this company and the venture’s Brazilian co-shareholder, but is not legally interchangeable with either of the two. The same logic would apply to subsidiary companies, even those that are 100 percent owned by a parent entity.
Fig. 3: A Brazilian joint venture partly owned by a Uruguayan company as shown by a Brazilian corporate registry entry