According to the Department for International Trade, the global construction market is forecast to grow by 70% between 2015 and 2025, offering huge opportunities for UK companies to export their services abroad.
For the property sector this includes opportunities both for construction work itself but also the associated wider services such as architects, surveyors and other professional advisors.
The risks and costs associated with entering an overseas market can be managed through careful planning and an understanding of the potential tax implications should be a key part of any feasibility study. An overview of the main tax considerations is detailed below.
Operating overseas – Corporation tax considerations
Many companies who make the decision to operate overseas prefer to carry out contracts from the UK, before creating an overseas entity. In these circumstances, profits will be taxable in the UK in the normal way and it may not be necessary to file a corporation tax return in the foreign country.
Most Double Tax Treaties (DTT) provide that the profits of overseas activities will only be taxable in the overseas country if a Permanent Establishment (“PE”) is created there. Local rules may vary but generally a PE is regarded as a fixed place of business such as an office, but a building site or installation project could cause a PE to be created (usually if it lasts longer than 12 months). A PE can also be created by having an employee on site.
Therefore, assuming the aim would be to avoid the profits of a particular project being subject to overseas corporation tax, a review of the particular local rules and where relevant the DTT is advised.
In some cases it may not be possible to avoid profits being subject to foreign corporation tax, but it may be possible to mitigate some or all of the overseas liability by making a claim for double tax relief in the UK corporation tax return.
Operating overseas – Withholding taxes
Many countries require customers to withhold certain taxes at source when making payments to UK suppliers. In some cases the level of tax can be significant and can result in the UK company receiving significantly less than the amount invoiced. Under some DTTs it may be possible for these taxes to be reduced or even eliminated, but this often requires an application to the overseas tax authorities, which can take time. Knowing the rate of withholding tax in advance is essential, because if there is no way eliminating this, the cost will need to be factored into the pricing of sales contracts to avoid losses.
Operating overseas – VAT considerations
Undertaking projects in an overseas country may require local VAT registration and in some cases may be recommended in order to facilitate overseas input VAT recovery. Local advice should always be sought.
Operating overseas – Payroll taxes
Whether sending employees from the UK, or employing staff locally to work on a particular project, it is likely that there will be overseas payroll tax requirements. Seeking local advice will be necessary to ensure compliance.
Without proper tax planning any venture into overseas markets could be costly so ensure you seek both UK and local advice in all circumstances.
International Advisory Services
Menzies is part of a network of HLB member firms in over 150 countries globally and can work with you to plan the export of your business.
For more information on the impact of operating overseas on your property business, contact Business Tax Partner Rebecca Wilkinson.