Stuart Weekes, Partner at national audit, tax, advisory and risk firm, Crowe in Reading looks at step for expanding into overseas markets
You are crossing a road but hesitate. On your left, hurtling towards you, is a juggernaut called Brexit and worries about potential recession. On your right is a freight train representing concerns about the threat of reduced customer orders and the costs of employing your people. What do you do? Do you cross that road?
Businesses face these decisions regularly. This is particularly true of those that are deciding whether to expand their operations and start to trade overseas. There will be pressures from all angles as a result of political decisions, trends in the economy or sometimes simply ‘wrong place, wrong time’. It is therefore important to plan, work out your unique selling point, persevere, and to act wisely taking regular counsel from those who have experience.
The Thames Valley is a vibrant community rife with growing businesses that have invested overseas as well as companies from outside of the UK that have invested in the Thames Valley. There are many reasons why such expansion is a smart decision; an increase in market penetration, increased brand awareness, access to foreign investors, reduce operating costs. But planning is key.
Clearly it will be important to understand any cultural differences, language barriers and political stability in the overseas country. However there are also a number of key practical areas that can be overlooked but should also be considered.
- What activities will the overseas business perform and does that activity create a taxable presence? If there is a taxable presence, should a subsidiary or branch be created and is there a joint venture to consider?
- How can intellectual property be protected at home and/or abroad and are there any trading or other licences that need to be obtained?
- What is the best ownership structure? Are there any minimum requirements for shares or capital investment? How long will it take to set up the chosen structure?
- If using an overseas company, should the shares be owned by the UK company, or by individual shareholders? What are the pros and cons from a tax perspective?
Management and control
- Who will manage the overseas operation and if this is a company, who will be the directors? Does the company have sufficient commercial substance?
- Where are the directors based and does this trigger unhelpful questions about where the company is tax resident? Do the local rules require there to be a local director?
- How will the overseas business be funded? Shares, loan, third party? Are there currency controls or foreign exchange restrictions? Is any help available from local government in the form of grants or similar?
- Should profits be transferred back to the UK and if so how? Loan, dividend, royalties, management charges? Are there local restrictions on how much can be transferred?
Tax rate and withholding taxes
- What is the local tax rate that would be applied to profits made in that country?
What taxes are withheld locally on interest, dividends and royalties; is there a tax treaty that provides relief?
- Are there local rules that direct you to ensure the prices for transactions with related parties are conducted at arm’s length?
- What rules apply to the documentation required to support these prices? Should they be translated into the local language?
Employee transfers and mobility
- If you have employees abroad what payroll and social security obligations apply? Do you need locally compliant employee contracts? What visas and work permits are required?
- How can you help employees avoid being taxed twice on the same income? What mandatory insurances are required?
VAT and duty
- What are the VAT and duty rules for importing goods into the overseas location? Who will bear the cost of these taxes? What local compliance requirements are there and do you need a local fiscal representative?
- How long does it take to get registered for VAT and obtain a VAT number?
- What are the local country statutory accounts filing requirements and deadlines? What are the key tax reporting requirements and what exposure to taxation does the business and its employees have from operating in that overseas location.
- What impact will Brexit have on the business? The loss of EU directives will mean that the business would need to rely on double tax treaties with other territories (as well as domestic legislation) for matters of taxation. This may result in a higher tax burden.
This is not an exhaustive list and such matters can be complex. It is important that business decisions are primarily driven by commercial factors rather than being led by tax objectives. However by taking the time to plan ahead, thinking through the issues involved, listening to your mentors and taking external professional advice, this should reduce the incidence of the juggernauts or at least help you to map out the crossing to reach the other side.
For more information or to discuss please contact Stuart Weekes email@example.com
Crowe U.K LLP
49-51 Blagrave Street
Reading, RG1 1PL, UK