Posted on 19th April 2023
You’ve tested the market by doing a few overseas projects or selling through a distributor, and now you’re ready to take the plunge and set up business abroad. It sounds easy enough, but what do you need to know?
Setting up new business operations in some countries can be achieved in less than 24 hours, while in other countries the process is bureaucratic and time-consuming. In the UK for example, a new business can be incorporated in a matter of hours, therefore you might assume it’s the same elsewhere. A similar process in either France, Germany or Spain is more likely to take weeks, requiring a significant amount of administration and planning. Additional requirements vary from country to country. In Germany, foreign businesses seeking to set up an operating company require a minimum share capital investment 25,000 Euros. In France, a business plan is usually required to be prepared as part of the set-up process, and local solicitors must be appointed to administer.
UK-based businesses looking to operate in the EU for the first time need to determine whether their activities will constitute a corporate tax presence – a ‘permanent establishment’. Where this is the case, they must elect to incorporate a company locally or operate as a branch, effectively an extension of the UK entity.
If the UK entity has limited presence and is merely making sales into another EU country, it may be that local registration requirements are minimal. However, care needs to be taken as the business model evolves to ensure it remains compliant.
Before taking the plunge and setting up business operations overseas, it is important for UK-based businesses to formulate an overseas expansion plan, and seek advice from local professional advisers based in the target country to help guide their final decisions. A number of factors will be at play- for example, company taxes can vary from country to country, so the business needs to understand 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 broadly in line with most EU member states, where company tax rates typically range from 24-30%.
Some key considerations to bear in mind when formulating a plan to set up overseas include:
- Identify your target markets – Market research is critical to the success of any business plan. Before setting up operations overseas, it is important to know that there is demand for the business’ products or services and whether this is expected to increase over time. Based on what you find, it may not be viable to set up a business entity in all of your overseas target markets at once.
- Establish a robust business case – Setting up new business operations overseas is not without risk and can involve significant upfront costs. It is important to plan by establishing a robust business case for the move. For example, this could involve considering how much value would be delivered by selling directly to a target market versus using a distributor.
- Choose the right company structure – Depending on where you want to establish operations, there could be more than one option open to you. For example, initially if you are planning minimal activity, the Branch route may be simplest. However, if the overseas activities are expected to grow quickly in the next two years it may be more efficient to set up an overseas company from the outset. You should seek advice about which option is best suited to your business plan.
- Establish an appropriate Group structure for your future plans – Establishing an effective Group structure for an overseas business at the outset can bring benefits. Part of this decision includes considering the repatriation of profits and ensuring that the elected model does not crystallise additional taxes. It is not uncommon for a new overseas company to be set up under direct ownership of the existing UK trading company. Other models include introducing a UK holding company to provide additional flexibility, and in certain situations owners may wish for the overseas entity to initially sit outside the Group.
- Take care with cross-border payments – In the UK, transfer pricing rules apply to mainly larger companies, so it is possible that some small and medium-sized organisations may not have been exposed to them previously. However, in certain EU countries, notably 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 result in penalties.
- Rethink your supply chain – If you traditionally import goods from outside the EU to the UK, it could be more effective to import goods directly to the EU mainland, avoiding 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, due for selling across Europe, directly to mainland EU. Alternatively, the use of UK-based ‘freeports’ is worth exploring.
- Hiring people – When hiring people to work for an overseas entity, business owners need to understand the differences that may apply regarding employment rights and protections. Advice should be sought from a people solutions specialist who knows 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 situation, it is important that the appropriate work permits are in place and local income tax and social security obligations are met.
Andrew Mosby is a partner advising businesses on their overseas strategies at accountancy firm, Menzies LLP. The firm has a global reach through its membership of the HLB network.