Any Pakistan IT export company shall register and own foreign subsidiaries but keep its headquarter in Pakistan.
A Pakistan IT company shall register and own foreign subsidiaries for various reasons, including:
- Access to new markets: Owning a subsidiary in any foreign country can help the company expand into new markets and tap into new customer segments.
- Local expertise: Having a subsidiary in a foreign market allows the company to leverage local expertise and knowledge to better understand and serve customers.
- Improved access to resources: Owning a subsidiary can provide the company with access to new sources of financing, technology, and other resources that can help it grow faster.
- Diversification: Diversifying operations across multiple markets can help mitigate business risk. By establishing a subsidiary in a foreign market, an IT company in Pakistan can spread its operations across multiple geographies, which can reduce its exposure to risks in any one market.
- Exchange Rate Fluctuations: Owning a subsidiary in a foreign market can help mitigate the risks associated with currency exchange rate fluctuations. For example, if the subsidiary generates revenue in the local currency, the parent company will not be as exposed to changes in exchange rates as it would be if it was conducting business directly in that market.
- Political Instability: By establishing a subsidiary in a foreign market, a company can minimize its exposure to political instability and other geopolitical risks. For example, if the parent company is in Pakistan and the subsidiary is in a more stable market like in the US or the UAE, it may be less vulnerable to changes in government policies or other political risks.
- Changes in Local Regulations: Local regulations in foreign markets can change frequently and unexpectedly, and these changes can have a significant impact on a company's operations. By owning a subsidiary in a foreign market, the parent company in Pakistan can better monitor and respond to changes in local regulations, which can help it better manage its risk.
All in All, having the headquarter of an IT export company in Pakistan with subsidiaries all over the world is the perfect model and the most profitable model in the current taxation laws.
It is important to understand that each company's motivations for owning a foreign subsidiary can be unique and will depend on a variety of factors, including its specific business goals, the local market conditions, and the resources available to the company.
It is more important for IT companies, especially those exporting software services, to open their subsidiaries in the markets where they sell the services. This gives them the right platform to engage the sales team, have knowledge of the local market, develop better customer relationships, increase credibility, and develop the business by creating the right mix of offshore and onshore resources. This also gives comfort to the customers to deal with local companies rather than engaging directly with foreign companies.
Many of our entrepreneurs keep their foreign companies as independent companies, which is also fine but that way they cannot share resources or contribute to the value of the main company in Pakistan. This is because the financial results of the foreign companies are not consolidated into the financial statements of the main company. If an entrepreneur has plans to list their company on the stock exchange, it is important to increase the value of the company. This can be done by consolidating the financial results of all the companies under their ownership, including foreign companies. By consolidating the financial results, the entrepreneur can demonstrate the full financial performance of their business and potentially increase the value of the company. Therefore, it's important for entrepreneurs to carefully consider whether it is more beneficial to keep their foreign companies as independent entities or to consolidate their financial results into the main company, depending on their goals and plans.
Why is it important to keep the head quarter in Pakistan?
At times our entrepreneurs and CFOs get frustrated by dealing with the local regulators and think of moving the headquarters to any other country. In my opinion, in the current taxation laws keeping the headquarters of IT export companies in Pakistan is far better than keeping it in any other country. Here in Pakistan, the tax on the export of IT services is nearly nothing. So, we can optimize the tax through smart transfer pricing between parent and subsidiary.
Therefore, keeping the parent company in Pakistan and having its subsidiaries all over the world is a perfect model.
We need to understand that we are going to have the main resource center in Pakistan anyways, so another country and administration will only add the cost and will have no benefit unless we have to raise funding and have some sort of requirement.
Registering and managing the subsidiary in the US:
Since most of the development work is happening in the US, it is important for everyone to register and run a subsidiary in the US.
It is very easy to register and run the company in the US. Most of the entrepreneurs register in Delaware but the software services business is all over the US. To start with It is easy and wise to register an LLC company, preferably a single-owner LLC, and opt for a corporate tax filing.
LLC can easily be transformed into a corporation if one decides to go for an IPO in the US.
The parent company must inject some capital into the subsidiary to consolidate its financials with the parent. As per IFRS, you cannot consolidate the financials without having capital in the subsidiary.
You need to get the investment approved by the State Bank of Pakistan before you plan to register and send out the seed money to the subsidiary. If the parent company is already an IT export company and the required seed money is less than $100,000, the commercial bank can approve it without involving the State Bank of Pakistan.
Registering and managing the subsidiary in Dubai:
Like the US, registering and running a company in Dubai is also very easy. You can easily select any free zone to register your company in Dubai considering the type of business and area you want to do business in.
The process here in Pakistan remains the same.
All in All, having the headquarter of an IT export company in Pakistan with subsidiaries all over the world is the perfect model and the most profitable model in the current taxation laws.
The entire management administration and engaging the resources here in Pakistan is the most profitable. The onsite staff at subsidiaries must be minimal to fulfill the basic requirements.
Please feel free to reach me for further details in this regard.
Qamar Abbas Sipra
Founder, FINACC Consultants