This article was previously published in the August 15, 2025, issue of California Apparel News.

In today’s increasingly global marketplace, apparel companies face challenges when expanding their operations internationally. Beyond marketing and logistics, understanding the tax implications of cross-border product movement is essential to comply with regulatory environments, preserve shareholder value, and safeguard company directors—particularly in countries where individual liability for tax underpayment remains a risk.

This article explores critical considerations for apparel companies operating overseas, focusing on entity formation, tax risk management, and operational strategies to achieve international growth while reducing tax exposure.

Determining Whether to Establish a Local Legal Entity

One of the first questions companies face is whether to form a subsidiary in the target country, maintain a third-party logistics (3PL) location, or engage contractors. Establishing a local legal entity can be time-consuming and costly—from initial formation and registration to ongoing compliance requirements and liquidation. Since the liquidation process may take years, it’s essential to fully understand the long-term commitment before proceeding.

Key considerations include:

• Do customers or partners require a local legal presence to conduct business?
• Will the company hire employees or contractors locally?
• Will the company own physical assets in the country?
• Are there supply chain advantages or indirect tax benefits to forming a local entity?

Unique Considerations by Business Model

For e-commerce operations without other international activities, consider factors such as the location of 3PL or manufacturing facilities, applicability of US tax treaties, presence of local sales personnel, including traveling sales or executive team members, and localized websites for ordering. These considerations also apply to distributor models, with additional attention to timing of title transfer and contractual language.

For brick-and-mortar stores or offices abroad, forming a local legal entity is typically advisable. The timing of entity formation and the number of entities required often depend on the scope of activities within the country.

Managing Tax Risk When Forming a Local Entity

Establishing a local legal entity raises several tax considerations, including selecting the appropriate legal entity type, determining the US tax classification, ownership structure, and planning initial funding of the entity.

The US tax system allows certain foreign corporate entities to be treated as flow-through entities, such as partnerships or disregarded entities, for US tax purposes. The US tax classification chosen can significantly impact the US taxation of foreign earnings, depending on the US ownership structure. Therefore, it’s crucial to collaborate with US tax advisors early to determine the optimal entity type and ownership structure, considering both US and local tax and operational factors.

Entity funding typically involves equity contributions or debt financing and must also be carefully considered and structured. Managing intercompany transactions related to movement of cash, products, and services is key for both the IRS and local tax authorities. Many jurisdictions require specific intercompany transaction reporting and transfer pricing documentation to support local tax filings and financial statements. Additionally, some intercompany payments may be subject to withholding taxes, which may or may not be creditable against US tax liabilities.

US Tax Implications

US taxation of foreign earnings varies widely, with rates ranging from 10.5% to 37%, depending on the tax classification of both the US owner and the foreign entity. Certain structures allow credits for foreign taxes paid, while others do not, potentially resulting in double taxation.

Moreover, US companies selling to foreign customers may benefit from a reduced US tax rate—currently 13.125%, increasing to 14% next year—under specific incentives. Evaluating and modeling the supply chain is essential for tax efficiency.

It’s also important to note that the US parent company may still be deemed to maintain a taxable presence or permanent establishment in the foreign country, depending on its relationship with the local entity and the activities of traveling US personnel.

Indirect Tax Considerations

In addition to income taxation, international sales and shipments of product also give rise to indirect taxes such as VAT, GST, and tariffs. For e-commerce businesses, these taxes and subsequent registration requirements can arise with very little activity. It’s important to understand these requirements for each country prior to opening up your sales portal to shipping to the country.

Checklist for Setting Up a Non-US Legal Entity

Before establishing a foreign legal entity, consider the following:

• What’s my current level of international sales and projected growth?
• Are sales direct to consumers, through distributors/wholesalers, or via physical locations abroad?
• Is a local legal entity necessary for operational reasons, such as payroll, customer requirements, licensing, public perception?
• Is a local entity advisable for tax reasons?

If forming a local entity, evaluate:

• Entity type
• US tax classification election
• Ownership structure
• Initial funding
• Transfer pricing and intercompany flows
• Withholding taxes

For international product shipments, assess:

• Indirect tax and entity registrations
• Customs registration and import terms
• Legal agreements with distributors/wholesalers
• Countries available on sales platforms such as Shopify
• Customs and tariff implications and liabilities
• Terms of 3PL agreements

While expanding internationally offers significant growth opportunities for apparel companies, careful evaluation of business models, local legal requirements, and tax implications is essential before establishing a presence abroad. By proactively addressing entity formation, ownership structures, and transfer pricing, companies can safeguard shareholder value and mitigate risks. Collaborating closely with experienced US and local tax advisors can help align business objectives and tax and compliance obligations—paving the way for sustainable global success.

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Additional Resources

• Apparel Practice
• International Tax Services