Trading internationally can be a new and exciting venture for a company but embarking on overseas trading needs to be considered carefully to ensure the business does not fall foul of local company and tax requirements.
One area that creates the most issues is identifying whether a permanent establishment exists in the overseas country and what this means for a company’s compliance obligations.
If a permanent establishment exists in an overseas country, then the UK company becomes subject to local taxes and compliance requirements under that country’s legislation. Determining whether a permanent establishment does exist can be tricky.
Simply having customers overseas does not in itself create a permanent establishment, however, how these customers were acquired and how they are serviced may well do. In general, it is quite simple to recognise that a permanent establishment exists, specifically if a company operates from an office or has a warehouse in another country. However even if there is no tangible presence overseas a company may, inadvertently, create a permanent establishment by engaging an agent to negotiate contracts for a company or sending an employee to that country to act as a salesperson. Things become further complicated when a company trades in the virtual marketplace.
It would be easy to assume that a permanent establishment didn’t exist in relation to the provision of virtual services because the UK company has no actual physical presence overseas. This is not the case however, whether a virtual permanent establishment exists is largely dependent on the length of time a service is provided to a client in an overseas country.
So, once it has been concluded that an overseas permanent establishment does exist a company then needs to consider the following:
- The compliance regulations in the overseas country, this includes financial reporting as well as taxes.
- The need for foreign advisors to be engaged to ensure that the company is compliant. Clearly this creates an additional cost which will need to be factored into the company’s accounts.
- How the profits derived from overseas activities are going to accounted for and whether any UK costs are attributed to these profits. This creates the need to consider transfer pricing regulations which can add further compliance burdens.
A business should not shy away from trading internationally but should make sure the potential implications are given full consideration to ensure the transaction is a success.
If you require more information on this subject, speak to one of our tax team or call 01772 821021