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  June 10th, 2015 | Written by

Settling In Europe

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  • Should you open a bank account in any European country where you want to build a strong presence?
  • Inconveniences typically keep American companies from opening a European bank account unless empoyees work there

Your product is selling like gangbusters in the U.S.—and you’re certain it’ll be a sleeper in Europe. Should you open a bank account in any European country where you want to build a strong presence?

That question may seem like a no brainer, but not so fast. The laws governing European bank accounts can be tricky to navigate. “Opening a bank account in Europe is not easy unless you are a European,” says Filiberto Amati, a Warsaw-based consultant at Amati & Associates, which advises clients from around the world on growth. While it makes perfect sense to open a bank account in Europe in some cases, in others that’s not the best option. Here are some key questions to ask to help you decide if you need a European bank account.

We won’t sugarcoat it. Opening a business bank account in Europe can require a lot of time-consuming paperwork—as well as costly help from professionals, such as an attorney and accountant. Make sure you actually need to invest the time and money before you attempt it.

Let’s say you make a domestic beer you want to sell in Europe. You might decide to open a service center in a European country—such as a small office that works with foreign distributors of your beer—or a small representative office that promotes the beer overseas. These must be registered with the country where you set them up, which, in turn, will help you meet one of the requirements for opening a bank account there, says Amati. “In most EU countries, you can’t open a bank account unless you have a local legal entity in that country,” he advises.

If you plan to set up a legal entity in a European country and hire employees there through that entity, you may find it convenient to have a foreign bank account to cut payroll checks and pay taxes, says Amati. However, if you hire employees from that country, you will then have to comply with the labor laws of that nation, which may be more costly to follow than in the U.S. To follow local labor and accounting law, you will need to hire an attorney who knows the local language, Amati notes.

Also consider the logistics. While some countries will let your tax accountant and attorney open a bank account on your behalf, in others you will have to travel there at least once.

Because of the inconveniences, American companies typically won’t open a European bank account unless they have people working overseas. “Otherwise they don’t need one,” Amati says. Letters of credit and insurance on receivables, often used in exporting, can be managed without having a European bank account, he says.

For many businesses that do need to bank in Europe but don’t know where to begin with a European bank, working with a large American bank, such as JP Morgan Chase or Citi, or a bank with a presence in both the Europe and the U.S., such as CreditSuisse, Deutsche Bank or Santander, is a good option, say Amati and other experts.

“They can find very good banks in the U.S. that have branches and outlets in other countries,” says Derrick Ragland, executive vice president and national head of U.S. Middle Market Corporate Banking at HSBC, which does commercial banking in about 60 countries and territories.

Such a bank might, for example, have the capability to set up overseas accounts for customers via correspondent banks or move payroll overseas for short periods, without requiring the customer to have a bank account in a foreign country, Ragland continues.

HSBC’s large international presence allows exporters to open an account without using correspondent banks, he says. “HSBC can provide global cash-management solutions that can simplify working capital needs and eliminate the need for different banking relationships in each country.”

For your banking needs in Europe, there are a couple of major reasons it may make sense to work with a bank that has branches in the U.S. First, it will be easier to build a rapport with your banker. “If you’re just walking into a bank in a new country, you don’t have a relationship there,” Ragland says.

A strong relationship can come in handy if you will need to borrow to finance your European operations. Let’s say you are running a subsidiary in Europe and a local banker, who rarely has a chance to learn about your firm, does not know your business well. “You may not get full credit for the size of your company, because the loan might only be based on the financial strength of your overseas subsidiary,” Ragland cautions.

A bank with a strong presence in the U.S. might also be able to come up with innovative lending solutions you may not have expected. “If you bank with HSBC, we could give you a loan in the U.S. to fund your overseas operations or, if it fits your capital structure better, we might provide a loan in Europe at the same time,” Ragland says. “A lot of banks don’t have that capability.”

Tax laws governing foreign bank accounts can be a minefield, and the costs of accidentally breaking them are steep, so make sure to get expert advice if you are banking overseas.

One law you need to know about is the Bank Secrecy Act. If you are a U.S. taxpayer with a financial interest or signature authority over foreign financial accounts with a combined value of $10,000 or more at any point during the calendar year, you have to file a Report of Foreign Banks and Financial Accounts (FBAR) form. The form is due June 30, and the cost of falling behind is steep. The penalties for not filing it are $10,000 per year, says Carlos A. Somoza, J.D., LL.M, international tax principal with Kaufman Rossin, a CPA and advisory firm headquartered in Miami, Fla., that advises domestic and international businesses.

“The IRS is placing very heavy compliance on these types of forms,” says Somoza.

Another important law is the Foreign Account Tax Compliance Act (FATCA), a law that was devised to keep Americans from evading taxes through offshore bank accounts. If you set up a foreign bank account as an exporter, you may have certain tax reporting requirements, depending on the size of the account.

In addition, most European countries have entered into agreements with the U.S. in which they will report to the U.S. on the accounts that U.S. taxpayers have opened in their local financial institutions, notes Somoza. The institutions have agreed to report the information to their governments, so they don’t have to do the filings with the U.S. government on their own. “There’s more of a level of comfort for those types of institutions with sharing information with their own government,” Somoza says.

Nonetheless, the foreign banks still face paperwork burdens from doing this. While some don’t want to walk away from U.S. customers’ business, others may not want to open accounts for U.S. taxpayers. “It’s possible some banks have decided to make that business decision,” says Somoza.

Navigating these laws may sound like a headache—and it is. Then again, it doesn’t have to be a DIY project, and really shouldn’t be. “It’s always prudent to seek the advice of a professional—an accountant or attorney—who deals directly with international tax matters,” says Somoza. By investing in the help you need to set things up the right way, you can do your banking overseas with peace of mind.