Have you tested the market by completing a few overseas projects or selling through a distributor? Are you now contemplating setting up business abroad? Setting up abroad sounds relatively simple, but what do you need to know before you take the plunge?
Expanding business operations in certain countries can be achieved in less than 24 hours, while in other countries the process is timing-consuming and bureaucratic. For example, In the UK a new business can be incorporated in a matter of hours, therefore you might expect it’s the same elsewhere. A comparable process in either France, Germany or Spain is more probable to take weeks, requiring a significant amount of planning and administration. Further requirements vary dependent on the country. In Germany, foreign businesses looking to establish an operating company require a minimum share capital investment of 25,000 Euros. In France, a business plan is typically required to be prepared as part of the set-up process, and local solicitors must be assigned to administer.
Will activities constitute a corporate tax presence?
UK-based businesses seeking to operate in the EU for the first time need to establish whether their activities will constitute a corporate tax presence – a ‘permanent establishment’. In this instance, they must appoint to incorporate a company locally or operate as a branch, effectively an extension of the UK entity.
If the UK entity has a restricted presence and is merely making sales into another EU country, it could be that local registration requirements are minimal. However, caution needs to be exercised as the business model evolves to make certain it remains compliant.
It is critical for UK-based businesses to prepare an overseas expansion plan and seek consultation from local professional advisers based in the target country; to help inform their final decisions, prior to taking the plunge and setting up business operations overseas. A number of factors will be in effect- for example, company taxes can differentiate from country to country, so the business needs to recognise the impact this could have on profitability.
In the UK, the headline rate of Corporation Tax rose to 25% for larger companies earlier this month (April), which is predominantly in line with the majority of EU member states, where company tax rates typically vary from 24-30%.
What do you need to consider when setting up overseas?
Some key considerations to be considered when preparing a plan to set up overseas include:
Ensure you are Identifying your target markets:
Market research is essential to the success of any business plan. Prior to setting up operations overseas, it is important to know that there is demand for the business’ products or services and whether this is anticipated to grow over time. Based on your findings, it may not be feasible to initiate a business entity in all of your overseas target markets simultaneously.
Establish a robust business case:
Establishing new business operations overseas is not without risk and can include substantial upfront costs. It is crucial to plan by establishing a robust business case for the move. For example, this could involve taking into consideration how much value would be delivered by selling directly to a target market as opposed to using a distributor.
Adopt the correct company structure:
Subject to the location of where you want to establish operations, there could potentially be more than one option open to you. For example, initially if you are planning minimal activity, the Branch route might be the most straightforward. But if the overseas activities are projected to increase rapidly in the next two years; it may be more efficient to set up an overseas company from the outset. You should seek consultation on which option is befitting to your business plan.
Future plans- Establish an appropriate Group structure:
Establishing an effective Group structure for an overseas business at the outset can be advantageous. Part of this decision involves taking account of the repatriation of profits and ensuring that the elected model does not crystallise additional taxes. It is not surprising for a newly established overseas company to be set up under direct ownership of the existing UK trading company. Other models include introducing a UK holding company to supply additional flexibility, and in particular situations owners may desire for the overseas entity to primarily sit outside the Group.
Be attentive with cross-border payments:
In the UK, transfer pricing rules apply to mostly larger companies, so it is plausible that some SMEs may not have been exposed to them beforehand. Nonetheless, in certain EU countries, specifically Germany, there will be additional requirements for advanced registration of intercompany activities with the local tax authorities, such requirements can be onerous and non-compliance could produce penalties.
Reconsider your supply chain:
If you customarily import goods from outside the EU to the UK, it could be more advantageous to import goods directly to the EU mainland, evading the risk of “double duties”. For example, holding imported goods from China in a facility in the UK before transferring them to a production facility in Germany, could require the Group to pay VAT and customs duties twice. This can be mitigated by importing goods, expected for selling across Europe, directly to mainland EU. Alternatively, the use of UK-based ‘freeports’ is worth investigating.
Employing Staff:
Company owners need to understand the variances that may apply regarding employment rights and protections; when hiring people to work for an overseas entity, consultation should be sought from a people solutions specialist who is familiar with the rules that apply in each jurisdiction. For example, the provisions set out in France are more onerous than the UK. Global mobility can be complex, particularly if existing UK employees are seconded to the overseas entity. In this instance, it is vital that the local income tax and social security obligations are met, and the appropriate work permits are in place.