Expanding your business internationally

Whatever the reason for expanding overseas, successfully becoming an international operation requires careful planning and consideration.

While businesses will have differing priorities, they should be prepared to deal with local legal and regulatory requirements as well as other factors such as local tax and immigration requirements and dealing with different currencies.

Our recent Enterprise Series webinar, with a panel of international and tax experts, discussed the important considerations of international expansion, as well as the alternatives to expanding without setting up overseas.

Top tips to consider when expanding your business internationally

• Legal, regulatory, and cultural differences in overseas markets require time and effort to consider. Have a strategy and plan in place to ensure that you understand how your business will operate in another country. While businesses might look the same from the outside, different culture, laws, and market practices mean they operate differently.
• Understandably, many UK SMEs fear non-compliance with local laws, regulations and business practices. Having the right advisers and hiring experience locally will help. Advice may come from other businesses that have already expanded overseas and from local consultants. Rules in other countries are often similar in principle to the UK, just applied differently, in a different language. Since Brexit, this requires more thought and effort for trading with the EU.
• Alternatives to setting up overseas include using distributors, online sales platforms, franchising, joint ventures, strategic partnerships, investments or acquiring companies. These alternatives require robust legal agreements, keeping in mind the court of law that would deal with resolving any disputes. UK law differs from other countries and is the preferred option if it’s possible.
• Establish the appropriate business structure early on by considering whether to set up a subsidiary or a branch. A subsidiary provides a separate legal entity, offering limited liability but requiring a higher commitment, while a branch can be a less committed way to test the waters. Additionally, understand the implications of creating a permanent establishment (PE), as activities such as having a fixed place of business or employees negotiating and concluding contracts will affect the tax obligations of the UK company overseas.
• Be aware of dual tax residency risks. An overseas entity might be considered a UK tax resident if it is centrally managed and controlled by the UK, potentially leading to dual tax residency. To avoid being taxed twice and having to navigate double tax relief options, explore double tax treaties between the UK and the overseas country, as treaties often have tie-breaker provisions that can resolve dual residency issues.
• Optimise cross-border financing by carefully considering debt versus equity funding. Debt financing allows for interest payments, which might be tax-deductible but can incur withholding taxes. Equity financing avoids regular interest payments but dividends may also come with withholding tax, which is harder to mitigate given that dividend income is not subject to tax for a UK company. Use tax treaties where possible to reduce or eliminate withholding taxes and consider alternative sources of financing via tax incentives such as R&D tax relief and grant funding.
• Implement robust transfer pricing policies by ensuring that all intercompany transactions adhere to the arm’s length principle to avoid profit-shifting and ensure compliance with international tax standards. Maintain comprehensive transfer pricing documentation and use benchmarking to support the arm’s length nature of intercompany transactions. This documentation is crucial for defending transfer pricing policies to tax authorities and ensuring fair profit allocation within the group.
• Employment tax considerations in the UK and overseas location must be considered, even if only one UK employee is working overseas for a noticeably short period of time to test the market.
• If an employer of record, or a professional employer organisation is used to deal with payroll and legal compliance in the overseas location, you should perform due diligence on these third-party organisations to ensure they are doing what they say they are doing, e.g. deducting correct overseas tax and social security from employee salaries.
• Should a separate subsidiary be formed overseas, the UK entity must ensure compliance with HMRC in relation to overseas staff of the overseas subsidiary that visit the UK for short business trips (namely apply for, and report under a short-term business visitor agreement.

Contact us if you would like to discuss how to expand your business internationally.