Expanding Overseas? The Tax Questions UK Businesses Should Answer Before Entering a New Market

Expanding a business overseas and entering a new market can open up many opportunities, from introducing new customers and revenue streams to options for growth. However, before expanding globally, tax responsibilities are an important consideration from the early stages of the planning process.

Getting the structure right from the start can help businesses avoid unexpected liabilities, compliance issues and any unexpected cost changes further down the line.

So, what tax questions should UK businesses ask before expanding overseas? In this guide, we explore the key areas to consider before business expansion.

How Will Your Business Operate in The New Market?

First of all, it’s important to think about how your business plans to operate in the new market. The way you enter and establish your business can have a significant impact on your long-term growth and success.

There are several questions to ask yourself, including:

• Will you sell directly from the UK?
• Will you use a local distributor or agent?
• Will you establish a branch or subsidiary?
• Will you employ staff locally?

Understanding these implications before entering a new market can help businesses choose an appropriate structure and avoid unexpected tax liabilities later on.

Could Your Overseas Activity Create A Permanent Establishment?        

One of the key tax responsibilities to consider when expanding overseas is whether your activities could create a permanent establishment (PE) in the new market.

A UK company can create a permanent establishment abroad where its activities in another country amount to a sufficient taxable business presence.

This is important because creating a permanent establishment can mean that some of your business profits become taxable in the country where the PE is located. It can also bring additional registration, reporting and compliance requirements.

The rules can vary between countries, and international tax treaties may affect how a permanent establishment is determined too.

So, it’s important to recognise the nature of your overseas activities, where they are carried out and how your business is structured before entering a new market.

Where Will The Business’ Profits Be Taxed?

Expanding overseas does not necessarily mean that your profits will only be taxed in the country you are entering. Depending on how your business is structured and where it carries out its activities, you may have tax obligations in both the UK and the new country.

For example, if a UK company creates a permanent establishment in another country, some of its profits may be taxable there. If the business establishes a separate overseas company or subsidiary, that company will generally have its own local tax obligations.

Do You Need To Consider Transfer Pricing?

If your UK business sets up an overseas subsidiary or starts trading with a connected company in another country, transfer pricing may need to be considered.

Transfer pricing is the process of setting prices for goods, services, or intellectual property transferred between companies that are part of the same group. The aim is generally to ensure that these transactions are priced appropriately and that profits are allocated between countries in a way that reflects the activities carried out in each location.

Getting transfer pricing right from the start can help businesses stay on top of their tax obligations and avoid unexpected tax bills or compliance issues as they expand overseas.

What Indirect Taxes Could Apply?

An indirect tax is a tax passed off by the government on goods and services. Depending on what you sell, where your customers are based and how your goods or services are supplied, you may need to consider VAT, sales tax or GST, as well as customs duties and import taxes on goods.

The rules can vary between countries, so understanding which taxes apply before you start trading can help you budget for additional costs and meet the relevant registration and reporting requirements.

What Happens If You Employ People Overseas?

Employing people overseas can create additional tax and payroll responsibilities for UK businesses. Depending on where the employee is based and how long they spend working there, they may become subject to local income tax and social security requirements.

The business may also need to consider whether it has local payroll obligations or needs to make employer social security contributions.

It’s also worth considering whether the employee could create a taxable presence for the business in that country. Double taxation agreements may help determine where an employee’s income is taxed and prevent the same income from being taxed twice, but the rules can vary between countries.

What About Intellectual Property & Cross-Border Payments?

If your business transfers intellectual property (IP), such as trademarks, patents or software, between the UK and an overseas operation, there may be tax implications to consider.

Cross-border payments, such as royalties, interest and management fees, can also be subject to different tax rules, including withholding tax in some countries. Where payments are made between connected companies, transfer pricing rules may also need to be considered.

Expanding overseas can create exciting opportunities, but understanding your tax obligations should be part of the planning process from the outset. Putting the right structure and advice in place early can help your business avoid unexpected tax liabilities and make a smoother transition into a new market.