Scaling internationally is a huge milestone for any high-growth business. It opens up new markets, revenue streams, and opportunities for global success. It also opens you up to a whole new world of tax risk, compliance challenges and eagle-eyed investors.
Naturally, there are a few things to keep on your radar. CP’s Tech & High Growth team have summarised five of the key topics below, but in an area that can get so complex on a case by case basis, we’re really just scratching the surface.
So, if you have any questions about your own business, you know where to find us.
1. Trading In vs. Trading With – What’s the Difference?
Understanding the distinction between trading with a country and trading in a country is crucial.
- Trading with a country means you’re selling into that market without a physical presence. You have contracts in place, but no local employees, offices, or operations.
- Trading in a country means you’ve established some level of permanence – “boots on the ground”, a local team, or an office – which could create a taxable presence.
Many scale-ups expand without closely monitoring their international exposure, only to find they’ve inadvertently created taxable presences in multiple jurisdictions. This can then trigger indirect tax implications, such as unexpected VAT or sales tax obligations.
For example, if you’re trading with the US without a physical presence, you may still need to assess your sales tax obligations on a state-by-state basis. If you’re trading in the US, the tax risks are even greater.
2. Creating a Presence – What is a Permanent Establishment (PE)?
A Permanent Establishment (PE) means a company has a taxable presence in a foreign country. But what exactly triggers a PE?
- Fixed Place of Business – If you have an office, warehouse, or even a co-working space in another country, you could be creating a PE. Even home offices could count if they meet certain time thresholds.
- Agency PE – If you have an individual overseas who can negotiate, conclude, and sign contracts on your behalf, you may trigger a PE.
- Service PE – Some countries (e.g., the Philippines and Malaysia) have additional PE rules where providing services in-country for a certain period can trigger a taxable presence.
The OECD guidelines outline key PE principles, but local tax laws vary. If you’re expanding internationally, review your overseas team’s activities to assess PE risk.
Watch Out for Warehouses
If you’re storing goods in a US-based warehouse run by a third party, you’re unlikely to trigger PE. But if you lease a warehouse yourself, you might. It’s always worth checking the specifics.
3. Overseas Workers – Employees and Employer of Record (EOR) Models
If you want to hire in a new country without setting up a local entity, an Employer of Record (EOR) can help. Here’s how it works:
- You engage an EOR provider (e.g. Emerald Technology) that employs your worker on your behalf.
- You pay the EOR provider, and they handle local payroll, taxes and compliance.
EORs enable rapid expansion without worrying about entity setup or local employment law. But there are caveats:
- Cost – EORs can be expensive. If you have 3-5 employees in one country, setting up an entity may be more cost-effective.
- PE Risk – EORs typically help mitigate PE risk, but you still need to ensure the structure is compliant.
- Intellectual Property (IP) Ownership – If you’re hiring developers through an EOR, ensure your agreements clearly define where IP ownership sits.
If your overseas presence grows, you’ll eventually need to choose between setting up a branch (an extension of your UK business) or a subsidiary (a separate legal entity). A subsidiary often provides better legal protection but has different tax implications, and if you’re at this point, we’d highly recommend speaking to your adviser.
4. Tax Residence for Corporates – De-Risking for Diligence
Tax residence is often overlooked but can cause major issues later – especially when investors or acquirers start due diligence.
Sure, a UK business is tax resident in the UK, but what happens when you set up entities overseas?
Where are your board meetings held? Where is central management and control exercised?
If your US entity is incorporated in Delaware but your leadership is UK-based, which country has taxing rights?
Without careful planning and the answers to these sorts of questions, you could face double taxation – being taxed on the same profits in multiple jurisdictions. Reviewing tax residence early can prevent problems when exiting or securing investment.
5. Overseas Developers & Sales Teams – Tackling Transfer Pricing
Transfer pricing (TP) dictates how transactions between related entities are priced. It’s a big deal for scaling companies with overseas teams.
- Developers overseas – Are they providing R&D services for your UK company? If so, are you compensating them appropriately?
- Sales teams abroad – If they’re generating revenue, what’s the correct TP mechanism? A common approach is a return on sales (e.g., ensuring an arm’s length margin is retained based on revenue generated).
Many SMEs don’t think about TP because they’re below UK exemption thresholds. But applying TP principles early can streamline future due diligence and avoid compliance issues. Additionally, there are no comparable exemptions in other countries – these exemptions only tend to apply to documentation requirements, not whether transfer pricing rules apply.
STAY AHEAD OF TAX RISK
Scaling internationally is exciting, but tax risks can quickly turn into costly mistakes if you don’t manage them proactively. Examples include:
- Moving contracts from the UK overseas – This can trigger unexpected tax liabilities.
- Moving employees abroad – Their role, share options, and tax residency must be carefully assessed.
- IP location – Investors will scrutinise how and where IP is developed.
- Contract negotiations – The definition of “negotiating” and when it triggers PE risk has evolved, particularly for digital and software businesses.
The more you address these risks upfront, the smoother your international expansion will be. If you need any guidance, don’t hesitate to get in touch with Cooper Parry’s Tech & High Growth team. We’ve helped countless scale-ups navigate these challenges before.
