by Jonathan Bench, Attorney at Harris Bricken
We work with international cannabis companies that operate in the U.S., and we regularly field inquiries from others who want to enter the U.S. market. Some are already selling into the U.S. market through an intermediary like a broker or a sales agent. In the United States, there are four main ways to enter the market to do business, all of which have different pros and cons.
U.S. immigration issues for international cannabis companies
First, I need to flag the issue of U.S. immigration for non-U.S. citizens who are somehow involved or thinking about getting involved in a U.S. cannabis (marijuana) business. This includes international cannabis companies involving non- U.S. citizens, whether they are only involved in their home country or while in the U.S. This includes owners and employees of international cannabis companies that have no operations in the U.S. It also includes cannabis consultants.
My colleague Akshat Divatia wrote a cautionary blog post discussing how involvement in a cannabis company could cause foreign individuals to have significant problems with USCIS (U.S. Citizenship and Immigration Services) and USCBP (U.S. Customs and Border Protection). He wrote:
“Even a foreign national who has never consumed marijuana could be declared inadmissible under the INA [Immigration and Nationality Act] based on his or her involvement in a legal cannabis [marijuana] business, either as ‘a knowing aider, abettor, assister, conspirator, or colluder with others’ or ‘an illicit trafficker’ of a controlled substance.”
In short, if you are a non-U.S. citizen and think you want to get involved in any way in a U.S. state-legal marijuana business and plan on entering the U.S., you should consult with an immigration attorney before you come to the U.S.
If after considering the immigration implications for non-U.S. citizens you determine that you want your international cannabis company to enter the U.S. market, these are the primary methods to do so:
International cannabis companies can sell products or services from abroad
If your company is not prepared to enter the U.S. market with an established presence, but wants to test the market appetite for their products, you can sell from abroad through a broker, agent, distributor, website, or online marketplace. None of these activities should require you to establish a U.S. business entity, though you will still need to deal with many other aspects of doing business in the U.S.
These other issues include the logistics of getting your product through U.S. customs to your customers, receiving payments, paying some U.S. taxes, and paying your intermediaries. You must also ensure you have robust contracts to protect your business interests and that you are both compliant with U.S. cannabis laws and regulations, which vary extremely from state to state.
This method of doing business in the U.S. presents the least amount of market risk for international cannabis companies.
International cannabis companies can register a branch office in the U.S.
If you intend to have some kind of U.S. presence but you are not prepared to set up a U.S. entity, then you can start by registering your existing foreign company in a U.S. state. Most U.S. states provide you with this option, which is generally referred to as establishing a “branch office.” In U.S. legal terms, you will qualify your foreign company to do business in one or more U.S. states.
Initial registration fees for foreign qualification vary state-by-state (usually less than USD 500), and all states require you to designate a registered agent in their state and pay an annual fee (usually less than USD 400) to remain in good standing. Along with this annual fee, you will need to submit additional company information, which varies from state to state. Some states, like Delaware and Wyoming, only require minimal information, such as your registered agent’s name and address. Other states, like Washington and Utah, require disclosure of at least some of a company’s owners, directors, and officers, which Washington refers to as “governing persons.”
It is uncommon for a U.S. state to require disclosure of the underlying owners of a business. Preserving general anonymity is often important for early market entrants. The IRS (Internal Revenue Service) collects this information when it issues your company a U.S. TIN (tax identification number) but does not routinely share the information regarding owners with U.S. states or any other third parties. If you do not need a U.S. bank account and do not need to register with any state taxing authority, then you generally will not need to obtain a TIN.
International cannabis company type: form a U.S. passthrough entity (LLC)
If you have determined that you need or want to form a U.S. company rather than only qualify your international cannabis company to do business in the U.S., then you need to decide what type of tax nexus you want to have with the U.S. In other words, how much you want to expose your U.S. company’s foreign owners to IRS scrutiny?
With some exceptions, you can decide how your foreign company is taxed at the U.S. federal level. If you form a U.S. company and check the box on the IRS form to be taxed as a pass-through entity, then the foreign parent owner(s) will be responsible for all of the tax obligations resulting from the U.S. company. These forms include a wholly-owned subsidiary for a single owner or a partnership for an entity owned by a partnership (two or more owners) or LLC (limited liability company)).
As discussed above, in registering your international cannabis company in the U.S., if you form a U.S. company you still need to decide which U.S. state(s) to register in. You will choose a single U.S. state as your primary registration location and then qualify your U.S. company to do business in other U.S. states as needed based upon your business model.
International cannabis company type: form a U.S. entity taxed as a C corporation
International cannabis companies that do not want to expose their owners to U.S. tax obligations will want to form a U.S. entity (partnership, corporation, or LLC) and choose to have it taxed as a C corporation, even though the U.S. entity will be subject to double taxation.
Most non-U.S. companies we work with would rather deal with a C corporation’s double taxation (first on corporate profits; second on shareholder dividends) than expose their owners to IRS scrutiny. This is especially true in the cannabis industry where the IRS is more likely to audit even law-abiding hemp companies that have no involvement in marijuana, which remains illegal as a controlled substance under U.S. federal law.
We expect significant changes in the way U.S. and non-U.S. cannabis businesses are treated by the federal government, though those conversations and rallying cries always seem to emerge the strongest in election years and then recede without significant developments. Regardless, we will work to keep international cannabis companies informed to ensure you can enter the U.S. market on your own terms.
Re-published with the permission of Harris Bricken and The Canna Law Blog
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