With UK businesses being encouraged to drive export-led growth and new markets more accessible to small businesses than ever, Rajesh Sharma looks at some of the practical tax and legal matters to think about when setting up overseas.

In our increasingly global economy, even the smallest businesses can scale their operations to an international level. For many companies overseas growth is driven by the ability to access expertise or markets that they might be unable to source domestically. Operations can be structured in a number of ways, all of which come with their own unique challenges. But whichever option is chosen, clarity of purpose and aligning different cultures to create a cohesive and effective team will be critical.

If the business requires a permanent overseas presence, this can be created via a branch of a UK company, incorporating a subsidiary of the UK company or by entering into partnership with a local joint venture. To find the best option it's important to consider the local rules for the establishment, registration and taxation of the profits of these operations. It's also worth thinking about whether a physical presence is really necessary or whether sales can be made online or by outsourcing to service providers. Many businesses take the initial step of setting up a representative office that provides preliminary information about the business's products, services and prices.

Tax residence

If you want to avoid your overseas business being subject to UK tax, it's important that it's established and remains resident overseas. For a UK headquartered business, it's normally necessary to appoint non-UK residents to the board of directors of each overseas company, rather than risk the possibility of creating UK tax residence by involving UK resident directors. If the company becomes dual resident its profits will be subject to tax in both territories. Relief from taxation of the same income by both countries may be available via a double tax treaty. For UK tax resident companies with an overseas permanent establishment (PE), it may be possible to exempt the overseas profits from UK tax, although this requires careful consideration of the group tax position.

If the organisation doesn't intend to establish a physical presence outside the UK when expanding globally, it should take steps to mitigate the possibility of creating an overseas PE. For example, final contracts should be negotiated and signed in the UK or through independent agents.

Treatment of profits

If the business is tax resident overseas, the tax-adjusted profits will be taxable at the relevant corporate income tax rate in the territory of residence. UK parent companies with overseas subsidiaries need to watch out for the controlled foreign company rules to work out whether the subsidiaries' profits will be subject to UK tax.

Some issues to watch out for:

  • Repatriation of profits to a UK parent company by an EU subsidiary should benefit from the EU Parent Subsidiary Directive eliminating withholding taxes.
  • Repatriation of profits from overseas companies outside the EU may be subject to withholding taxes, but the rates may be reduced under a relevant double tax treaty.
  • Dividends received by the UK parent company should benefit from the dividend exemption, although different rules apply for small and large companies.

Transfer pricing

Transfer pricing is a bit of a minefield when it comes to cross-border transactions as the taxable consideration and deduction in each territory is likely to be determined at 'arm's length' prices for tax purposes. Tax authorities usually require documentation as evidence that transfer pricing has been taken into account and investigations on the taxation of cross-border activities are becoming more and more common.

Other taxes

In addition to direct taxes, don't forget there may be local payroll, property and indirect taxes for a business run from a local entity or from the UK. To ensure proper registration and filing of the relevant returns and payment of taxes and duties on time, get local advice.

The key to taking a business global

The idea of internationalising a business can be daunting but, with a clear vision, a well-researched understanding of the target market and careful consideration of the choice of structure, a business can be successfully expanded into new markets.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code 14/1018 exp: 31/03/15