Choose a Country to Enter to Create a New Subsidiary.

Published: 2019-10-16 08:00:00
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The company will choose Hong Kong to set up its subsidiary. The country is an island located in Asias South East part. It has a population of almost 7 million people and as a global financial hub; it offers one of the most strategic and lucrative location for our Pfizers operations with the emerging economies in the world like India, China, Singapore, and the rest of the world (Chan, 2015). The country has a friendly business environment characterised by a stable and free economy, advanced infrastructure, minimal restrictions on inward and outward investment, harsh anti-corruption regimen, liberal immigration policy, and high quality of life.

Additionally, it has a sound banking system with greater convenience for internet banking system and no foreign exchange control (Zucman, 2014). To add, the its taxation system is very accommodating since it is much simplified, only income earned in Hong Kong is subjected to taxation and income earned offshore is not taxed. The taxation rates are low with taxation exemptions on sales, capital gains, as well as withholding income like interests, dividends, and social security benefits (Dyreng, 2015). Furthermore, the country has preferential tax rates since it has signed double taxation agreements with several countries in US, Europe as well as China. It provides legitimate taxation exempts on the withholding tax on all dividends. Since, the company will set-up real business operations the company will enjoy the preferential tax treatment (Chan, 2015).

Subsidiarys Capital Structure

For Pfizer Pharmaceutical, the decision regarding the design of its foreign subsidiary in Hong Kong is based on uniform concept. The total amount of borrowed capital and equity in addition to the maturity period will determine the capital structure (Fan, 2011). The Hong Kong subsidiary will supply international markets with the companys product especially the Asia market due to the rapid population increase and favourable economic conditions being witnessed. It provides a ready market for the companys product (Rampini, 2013).

The company will also seek to capitalize on Hong Kong market since its currency is appreciating progressively against the dollar (Robb, 2012). This will mean will charge its product higher in terms of the US dollars and the domestic market will access the companys products at more relatively same prices. Ultimately, the strategy will ensure that the company makes more profit and facilitate hedging (Feld, 2013).

Hong Kong as well as the larger Asia region, provides a wide open market for Pfizers products. Being a new company in HK, it will be hard for the company to get funding which is arranged from the public (Faccio, 2015). The parent company will inject the whole capital investment. The company will provide a long-term debt at very nominal interest rates. Later, the company can seek loans from the other financing sources like local banks when it makes in-roads or attains stability (Titman, 2011).

The main objective for the designing the capital structure will include profit maximization while minimizing overall costs. All other risk aspects will be considered to ensure profit maximization reaches a predetermined risk extent or auxiliary condition (DeAngelo, 2008). To survive in the market, the company must be solvent always; hence safeguarding liquidity is part of the auxiliary conditions as it will strive for profit maximization. The subsidiary will also work to maximize the companys owners value thus, this factor will also influence the capital structure design as well play a critical role with regards to discounted cash flow method which will be adopted as an assessment procedure (Faccio, 2015). Given the fact that, equity rates are higher as compared to borrowed funds due to shareholders expectations; the company will resort to borrowed capital to finance the subsidiary (Feld, 2013).

Additionally, external groups can exert influence on the companys decision with regards to the capital structure design. The company will strive to protect its freedom and independence of decision and disposition (DeAngelo, 2008). Borrowed capital usually limits the freedom of disposition. Conversely, granting shares in the form of equity capital to the public or third parties will lead them to have a greater influence since, as new shareholders they will have a right of co-decision. Other factors like credit rating, leverage effect, level of liability will determine the kind of capital structure design (Titman, 2011).

Ultimately, the company will rely on borrowed capital to finance its subsidiary. The funds will be sourced internally that is, from the parent company as opposed to foreign capital. Since the subsidiary is new in Hong Kong it will be hard for the third parties to commit their investments in the short run. Pfizer as the parent company of the HK subsidiary will grant the new company an internal loan or in legal terms it can be referred to as an external loan (Rampini, 2013).

Additionally, the company will consider such aspect as capital maturity since, liquidity of the company can be under threat if the funding really does not match its maturity. The concerns regarding maturity are identical both in the subsidiary and parent company (Fan, 2011). Another parameter in the design of the capital structure is participation, the company will attempt to restrict the exertion of influence by other third parties and reduce their participation rights through skilful selection of the financing instruments (Robb, 2012). Participation rights related to information rights, rights of co-determination, and veto rights. Since the company will want its ownership of the subsidiary to be undiluted, it will opt for the borrowed capital (Faccio, 2015).

Environmental Conditions Impacting the Capital Structure

Diverse environment constellations usually affect to the foreign subsidiary for instance, economic, political, and currency variations differ in the individual countries. It will be subjected to different taxation regimes and laws in the host country (HK). Also, government grants, other groups influences, and special interest are factored when coming up with the capital structure (DeAngelo, 2008). The country-related risks to be considered entail all possible dangers of losses due to political, economic, macro-economic situations. Political risks to be monitored include the disposition risks, fiscal risk, transfer and conversion risk, security, and risk of condemnation (Fan, 2011).

The economic risks that can determine the capital structure include the dangers related to total and partial insolvency of a country. Currency risk can include the likely loss due to changes experienced in the exchange rate (Feld, 2012). Additionally, tax laws in Hong Kong are favourable and the related tax burden can be reduced through the choice of a feasible capital structure. The company will assess the tax burden to ensure it supports cost minimization (Rampini, 2013). HK has entered into double taxation agreements nonetheless, it is critical to note that a long-term borrowed capital meant to finance a subsidiary can lead to additional trade tax so as to approximate the order of almost 50% of the total debt interest (Faccio, 2015).

HK laws are favourable since they provide unlimited flexibility as well as the freedom of the decisions which are made by the companies. There are limited customs barriers as well as non-regulation of local content (Feld, 2013). The duties levied on imports and exports are favourable in economic sense. The monetary regulations facilitate capital flow in the companies and there are several subsidies to attract investors. The company needs to assess the interests and influence of the stakeholders and how they can influence organizational policy (Titman, 2011).

Therefore, countrys political risks are very low hence internal loan can be viable. The company is also averse of the business risks since it determines the optimal debt ratio (Robb, 2012). Additionally, Pfizers tax exposure can affect the capital structure especially if the debt payments are potentially tax deductible. The aspect of tax deductibility can protect some of its income from the taxes. Also, financial flexibility determines the subsidiarys capital structure; when the company performs it will have no issue raising the capital and ensuring financial flexibility (Robb, 2012).

IV. Repatriations of Funds

Investment in Hong Kong can be decided on an impulse. The countrys cash trap is favorable with regards to repatriation of profits. Once the subsidiary makes profit, the company can adopt such strategies as loans, service fees, royalties, off-shore lending, and dividends to repatriate profits annually (Zucman, 2014).

Hong Kongs taxes, regulations, laws, and lenient administration control allow for easy repatriation of profits generated in the country. The profits made within a year can be distributed directly (Dyreng, 2015). The company also needs to be audited yearly and the profit which has been subjected to auditing can then be repatriated to the parent company. What is paid to the parent company is determined by the current years profits. The dividends also are paid directly with respect to the accumulated profit (Chan, 2015). After paying the corporate income tax, almost 25% of its total worthy it is not required to submit any amount to a reserve fund. The amount left is referred to as the Maximum Distributable Dividends which are not subjected to any withholding tax since Hong Kong has entered into agreement with US for preferential tax treatment (vant Riet, 2015).

The subsidiary can also choose to diminish its profits in Hong Kong by transferring money to its parent company as:

Service Fees

The service fees have a huge advantage of being tax deductible for capital income purposes especially when they are directly related to the companys business and are charged at normal market rates (Zucman, 2014). In HK, they are subjected to Value-Added Tax (VAT), Business Tax (BT), Capital Income Tax, among other taxes. After all calculations are done, between 80% and 95% of all payments are repatriated to the parent company (Dyreng, 2015). HKs authorities thoroughly check to ensure service invoicing is done lawfully as well as not over-priced. Service fees can be considered as royalties which are connected to the introduction of a certain technology or technical know-how. In HK management fees are usually not deductible (vant Riet, 2015)


The subsidiary can also use royalties to repatriate. The royalties are deductible for purposes of capital income tax when they directly connected to the companys business and are mostly charged using the normal market rates (Chan, 2015). The royalties are subjected to several taxes like Capital Income Tax, VAT, urban development taxes and education taxes. The taxes on the companys royalties are usually taken at the source of income. In most cases, it is almost 85% of the value that can be repatriated out of HK. Pfizer as the parent company will need to register with HK trademark bureau to be acknowledged as the Beneficial Owner so as to receive the royalties (Zucman, 2014).


The company can also use loans to repatriate profit to the parent company. This can be realized through contracting with the parent company and make interest payment or through lending funds to the parent company (Chan, 2015).

Repayment of Shareholder Loan

The HK subsidiary repays back the funds which were previously lent by its parent company during its inception in Hong Kong. The interests paid by the HK Subsidiary are not subjected to withholding tax requirements on the interests because of the mutual do...


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