Critical Elements of Critical Elements of Doing Business in Doing Business in EuropeEurope

ContentsContents

● Size, Growth and Benefits of EU Market

● Drivers for EU Strategy

● Sales and Distribution Channels

● Country Selection for Operational Support in Europe

● Legal Entity: Subsidiary, Branch or 3rd Party Partners

● Advantages of VAT Management and “Arms Length Contracts”

● Conclusions

Why Europe is Changing to Your Why Europe is Changing to Your Benefit?Benefit?

● One Currency

● Flexible Regulatory Approach

● Fast Pre-Market Approval

● Lowering of Trade Barriers

● More Accessible Markets

● Increasingly Ageing Population

● High level of Healthcare Spending as a Proportion of GDP

● Diverse and Fragmented Medical Device Market

● Considerable Market Opportunities for SME’s With Novel Medical Devices

Staggering GrowthStaggering Growth

European Non Commodity Medical Device Market

2006 2007 2008 2009 2010 2011 CAGR

  US$ bn US$ bn US$ bn US$ bn US$ bn US$ bn  

Cardiovascular 4.76 6.57 8.1 9.8 11.8 13.9 19.20%

General Surgery 2.24 2.29 2.31 2.36 2.42 2.5 1.80%

Imaging 5.32 6.1 6.89 7.2 8 9.1 9.40%

IV Diagnostics 6.32 6.95 7.82 8.6 9.1 9.7 7.10%

Opthalmology 1.7 1.79 2.1 2.3 2.5 2.76 8.40%

Orthopaedics 5.32 6.4 7.8 8.2 9.1 9.7 10.50%

Respiratory 1.65 1.75 1.96 2.2 2.6 2.8 9.20%

Neurology 0.36 0.37 0.38 0.39 0.4 0.41 2.20%

Urology 0.33 0.55 0.62 0.71 0.88 0.95 19.30%

Total $ 28.00 $32.77 $ 37.98 $ 41.76 $ 46.80 $ 51.82 10.80%

Average growth of 10.8% expected across all segments. (Espicom Business Intelligence)

Major European Medical Device Major European Medical Device MarketsMarkets

● France, Germany, Italy , Spain, UK

● Market for Medical Devices in These Countries Estimated at $51bn

● Value of Non Commodity Products $28bn (55% share of total device market)

● Value of Commodity Products $23bn (45% device market share)

● All Have Robust Economies with a Rapidly Growing Homecare Medical Device Product Sector and Ageing Population

Key Drivers for European StrategyKey Drivers for European Strategy

● Stage of your Companies Development

● Complexity of your Product

● Financial Resources

● Experience of Management Team

● Reimbursement Potential

● Understanding of Local Distributor Markets

● Management of Sales Channels

Sales Channel and Sales Channel and Distribution OptionsDistribution Options

● Distributors

● Direct Sales

● Hybrid Combination

● Joint Ventures

● OEM Partners

Major Routes to Market

Pros and Cons of Distributor Pros and Cons of Distributor Relationships forRelationships forMedical CompaniesMedical Companies

● Time to Market

● Learn the Market

● Regular Invoicing

● Customer Base

● Control of Pricing

● Customer Relationships

● Inflexible Contracts

● High Distributor Mark Up

● Suits Less Complex Products

Benefits: Drawbacks:

Pros and Cons of Direct SalesPros and Cons of Direct Salesin Europe forin Europe forMedical CompaniesMedical Companies

● Control Customer Relationships

● Higher Revenues and Invoicing

● Higher Margins

● Control Pricing

● Brand Loyalty

● Expensive

● Management Time

● Market Knowledge

● Fiscal Knowledge

● Legal Challenges

Benefits: Drawbacks:

Hybrid Approach of Direct Sales Hybrid Approach of Direct Sales and Distributorsand Distributors

● Control Customer Relationships

● Higher Margins from Strategic Markets

● Access to more Remote Markets

● Diversified Customer Base

● Local Management of All Sales Channels

● Revenues from Distributors can aid Cash Flow for Your Direct Sales

● This Combination will Require a More Established Presence in EU

Optimal Strategy

What to Look for When Selecting a What to Look for When Selecting a Country to support EU OperationsCountry to support EU Operations

● Low Corporate Tax Rates

● VAT Deferment

● Geographic Location

● Economic Assistance

● Access to Major Airports and Seaports

Business Benefits

Which EU Countries best fit the Which EU Countries best fit the Criteria?Criteria?

● The Netherlands

● Belgium

What are the Options for a more What are the Options for a more Established Presence?Established Presence?

● Set up Identity: Subsidiary, or Branch

● Set up Offices and Logistic/Service Center

● 3rd Party Partner to run your Identity

● 3rd Party Partner for Back office Services

● 3rd Party Partner for Logistics

Why Set Up your own Legal Entity?Why Set Up your own Legal Entity?

● Establish an Infrastructure

● Employ Personnel other than sales staff

● Signing Authority of Personnel

● Buy or Lease office and Warehousing Facilities

● Risk Management

● Size of Global Operations

EU Operations

Branch Vs SubsidiaryBranch Vs Subsidiary

● Exposure to Liability

Subsidiary has Limited Liability

Share holder only Liable for Capital Contribution

A Branch is not a separate Legal Entity

Foreign Company that owns the Branch is fully liable for their EU Operation

Major Difference

Benefits and Drawbacks of Setting Benefits and Drawbacks of Setting Up a Legal EntityUp a Legal Entity

● Control of European Operations

● Establish a European Office

● Platform for Rapid Growth

● Protection of USA Parent

● Expensive set up

● Expensive Operating Costs

● Corporate Tax 25% + if you have a Functional Office Set Up

● Branch Taxed on Domestic Income

● Subsidiary Taxed on Global Income

Benefits Drawbacks

How do you Run Your European How do you Run Your European Entity?Entity?

● Set up Offices and Employ Local Staff

● Open up the Entity as a “Shell” and run from the USA

● Appoint a 3rd Party to Run Your Financial EU Operations

Options

Advantages of 3Advantages of 3rdrd Party Partner to Party Partner to Support your EU Operations Support your EU Operations

● Customer Service Support

● Sales Staff Support

● Management of all office and logistic operations

● US Manufacturer has No Set Up Costs or Employees other than Sales Staff

● Tap into their Existing Infrastructure

● Low Cost European Office

● Variable Cost with Short Term Contracts

● VAT Management

● “Arms Length Contract” Set Up

European Services

Critical Advantage One: Critical Advantage One: “VAT Management”“VAT Management”

● VAT Deferment Exists in Certain Instances in the Netherlands and Belgium

● Goods can Enter the Country Without VAT Being Due at Port of Entry

● VAT Does not Have to be Added to Invoices Within EU countries Except in the Country of Entry

● Your 3rd Party Partner can Bring Goods in on their VAT Number and Invoice your Customers on Your Behalf

● Reporting to Local Authorities is Handled by 3rd Party Fiscal Representative

● VAT is typically 19%- 21% of a Commercial Invoice

3rd Party Fiscal Representation

Working Example of VAT Working Example of VAT ManagementManagement

● Goods Shipped from USA to Europe by US Manufacturer

– EG: UK-Germany-France-Spain- Italy

● Value of Goods 100,000

● VAT 19% to 21% 19,000

● Amount Paid on Entry 19,000

● 6 Months to Claim Back the VAT

● Goods Shipped from USA to Europe through Fiscal Representative

– EG: UK-Germany-France-Spain- Italy

● Value of Goods 100,000

● VAT 19% to 21% 0,000

● Amount Paid on Entry 0,000

● VAT not Added to Invoice in Certain Instances for Outbound Invoices

3rd Party Fiscal RepresentativeUS Manufacturer

Critical Advantage Two: Critical Advantage Two: “Arms Length Contract”“Arms Length Contract”

● Business Transactions can be Set Up so that Revenues Generated in the EU can be Recognized in the USA, with no Tax Implications in the EU

● USA Companies must be Considered not to have a Permanent Office with Support Staff in the EU

● All Contracts must be Signed by officers of the Company who are Based in the USA

● Sales Representatives and Non Clerical Employees who Work From their Homes are Considered to be Order Takers and “Field Staff”

● Invoices can be Generated and Paid into a Non- Resident Bank Account and then Transferred back to the USA

● The EU business can be Set Up as a Cost Center not a Profit Center

Avoiding EU Corporate Taxes

Working Example “Arms Length Working Example “Arms Length Contract”Contract”

● Goods Sold by US Manufacturer in

– EG: UK-Germany-France-Spain- Italy

● Profit 1,000,000

● EU Corporate Tax 250,000

● Net Profit 750,000

Some tax incentives are available in certain cases

● Goods Sold by US Manufacturer in

– EG: UK-Germany-France-Spain- Italy

● Profit 1,000,000

● EU Corporate Tax 000,000

● Net Profit 1,000,000

● Revenues recognized in USA

● EU Business Set up as Cost Center

3rd Party Fiscal PartnerSubsidiary

ConsiderationsConsiderations

Drivers for an Increased European Presence

– Market Share and Profit Potential

– Long Term Strategy in Europe

– Product Type and Complexity

– Hybrid Sales and Distribution Approach

– Financial Resources

– Exit Strategy

Conclusions and RecommendationsConclusions and Recommendations

Is Your Company Suited for an Increased EU Presence?

● (Each Company and Situation is Different)

– Are you Planning Pan European Expansion with Multiple Regional Offices?

– Are you Planning to run your Entity with no Support Staff, or by a Third Party?

– If Yes, A Subsidiary or Branch Could be Appropriate

– In Most Other Cases Outsourcing to a 3rd Party Provider until you Grow to a Size that Warrants your Own Facilities is More Beneficial to Your Company:

– Huge Savings on Infrastructure Costs, EU Taxes, and VAT

HealthLink Europe HealthLink Europe Contact InformationContact Information

Contact our North American Office:

Rick Hughes PresidentHealthLink Europe

PHONE 800.781.8926EMAIL info@healthlinkeurope.com

Quoted Text: Effectively Selling Medical Devices & Equipment in Europe, Publisher; Espicom. Author; David Scott

Doing Business in the Netherlands 2007,

Author; Baker & Mckenzie