When expanding into new markets, one of the critical issues startups need to navigate is tax — for example, tax on profits (corporation tax), sales taxes and income tax. What are the tax implications of operating across borders and how do you comply with local taxation laws?
Sarah Lane provides tax advice to European tech companies and VC firms. She spent 15 years as a partner at KPMG dealing with international tax across a broad range of sectors from tech to capital markets, before recently joining law firm Wilson Sonsini’s London office as a partner. Here, she shares her top tips with us.
Figure out your model
Are you going to distance sell, ie. will you market and sell your product from a country where the business is already established, but ship or provide services to customers in the new country? Or are you going to set up an operation in the new country?
Distance selling: The most immediate tax issues will be sales or turnover taxes, for example VAT (value-added tax) or GST (goods and services tax) — you need to figure out what to charge your customers. Pay attention to any duties or special taxes that are applicable to your type of product. If the activity you carry out in a country doesn't involve any actual sales — say it's support work or for marketing purposes — it normally doesn't make you subject to local tax. If you have a team physically present in the new market, your existing company could acquire a “taxable presence”.
Setting up a new operation: It can be helpful to have a local subsidiary from the outset — for example, it can help build trust with customers and suppliers; it makes it easier to get a local bank account set up and access things like loans; and it’s easier to comply with local employment laws. It’s also easier to cut losses if things go downhill in the new country — you can close down just that bit of the business and, often, the losses can be relieved against the profits of the main entity in its home country. In this case, a company will be subjected to local taxes like corporation and income tax.
Find the right support
There's a lot of information available online — start there. Check local requirements carefully — even if you’ve grown into new markets before, don’t assume the rules will be the same in all countries. Local tax authorities often have helplines. There are also service providers who will deal with all the paperwork for you — this can be a good option when you:
- Are entering a new market and lack local expertise;
- Know language barriers could be a challenge;
- Are expanding into several markets at once and can’t manage all of the admin internally.
Consider tax incentives
Many countries offer tax incentives to attract new businesses — but don’t enter a new market solely because of them. Takew time to research:
- Any other cash incentives or grant support available;
- The availability and cost of premises;
- Access to talent;
- Size of the target market and expected customer demand for your product;
- Barriers to entry such as regulatory issues or extra conditions for businesses which aren't locally owned.
Don’t forget about the founder
Normally, founders will have a personal liability for their personal taxes as directors, employees or local residents. If a founder moves to a new market to lead the company’s expansion, be mindful that the founder might acquire tax residence — take professional advice on the implications. If an individual is a resident of two countries at once, they may be liable to pay tax in both if there isn’t an agreement between the jurisdictions.
Figure out how to compensate employees
Special incentives — particularly options, shares, employee incentive trusts or longer-term cash bonus plans — face considerable local variation across Europe when it comes to tax treatment of both the company offering them and the employees receiving them. For example, in some countries startups can offer options at a strike price (the amount an employee must pay to buy each share) which is lower than the company’s last round valuation without adverse tax treatment. In other countries, this is not the case. Get local legal and tax support as there may be a need to modify compensation in different markets to give employees across the board roughly equivalent benefits.
Protect remote employees
Nomadic or remote lifestyles can create tax and immigration law complications. It’s essential to keep a record of where employees are and for how long — if you have a tax inquiry based on movements four years ago, you want to be able to provide reliable evidence.
On the subject of... Tax
0️⃣ How to pay zero tax. New(ish) consulting services are helping digital nomads avoid the taxman.
🦄 How will Europe grow the next tech giants? The EU needs to establish a tax credit incentive for European corporates wanting to invest in European startups and a favourable expat tax regime to attract new talent, according to Scale-Up Europe, a European community of more than 170 founders and VCs, as well as researchers, corporate CEOs and policymakers.
🤔 You need to be ruthless. Should startups pay tax? Or should European countries offer tax exemptions to encourage people to build new businesses? For example, Ireland grants startups a 100% tax exemption for the first three years they’re in business.
🌎 Which European countries offer the best tax incentives? Here’s a list of the top tax relief options offered to startups (and investors) in Europe.
💵 What are retained earnings? And how do you make sure you have enough cash to pay tax?
Miriam Partington is Sifted’s DACH correspondent. She also covers future of work, coauthors Sifted’s Startup Life newsletter and tweets from @mparts_
