Critical Elements of Doing Business in Europe

Contents ● 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 3 rd Party Partners ● Advantages of VAT Management and “Arms Length Contracts” ● Conclusions

Why Europe is Changing to Your 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 Growth European Non Commodity Medical Device Market CAGR US$ bn Cardiovascular % General Surgery % Imaging % IV Diagnostics % Opthalmology % Orthopaedics % Respiratory % Neurology % Urology % Total $ 28.00$32.77 $ $ $ $ % Average growth of 10.8% expected across all segments. (Espicom Business Intelligence)

Major European Medical Device Markets ● 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 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 Distribution Options ● Distributors ● Direct Sales ● Hybrid Combination ● Joint Ventures ● OEM Partners Major Routes to Market

Pros and Cons of Distributor Relationships for Medical 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 Sales in Europe for Medical 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 and 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 Country 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 Criteria? ● The Netherlands ● Belgium

What are the Options for a more Established Presence? ● Set up Identity: Subsidiary, or Branch ● Set up Offices and Logistic/Service Center ● 3 rd Party Partner to run your Identity ● 3 rd Party Partner for Back office Services ● 3 rd Party Partner for Logistics

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 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 Up 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 Entity? ● Set up Offices and Employ Local Staff ● Open up the Entity as a “Shell” and run from the USA ● Appoint a 3 rd Party to Run Your Financial EU Operations Options

Advantages of 3 rd Party Partner to 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: “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 3 rd Party Partner can Bring Goods in on their VAT Number and Invoice your Customers on Your Behalf ● Reporting to Local Authorities is Handled by 3 rd Party Fiscal Representative ● VAT is typically 19%- 21% of a Commercial Invoice 3 rd Party Fiscal Representation

Working Example of VAT Management ● 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 3 rd Party Fiscal Representative US Manufacturer

Critical Advantage Two: “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 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 3 rd Party Fiscal Partner Subsidiary

Considerations Considerations 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 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 3 rd 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 Contact Information Contact our North American Office: Rick Hughes President HealthLink Europe PHONE Quoted Text : Effectively Selling Medical Devices & Equipment in Europe, Publisher; Espicom. Author; David Scott Doing Business in the Netherlands 2007, Author; Baker & Mckenzie