Many could benefit from setting up their own overseas business. The reasons can be varied and may include:
- Manufacturing at lower costs
- Providing support services to customers
- Expanding sales into a new market
- Holding and exploiting intellectual property
- Legal, financial and tax efficiency
With any overseas business, whether an established operation or otherwise, tax will be a concern. There are lots of tax rules to consider including complicated anti-avoidance provisions. Most governments appear to prefer the profits and tax on those profits to remain in their pockets as opposed to that of an overseas tax authority. Anti-avoidance provisions include:
- ‘Transfer of assets abroad’ legislation which attributes income to the transferor where they have the power to enjoy the income. There is an exemption to the legislation when the rationale for the transfer is commercial and does not include a tax avoidance motive.
- ‘Controlled foreign companies’ legislation looks to attribute the profits of a company in a low tax jurisdiction to its parent company.
- ‘Base erosion and profit shifting’ and ‘transfer pricing’ provisions will also apply to large groups. Currently small to medium sized entities are outside the scope of the provisions although that may change in the future.
Despite a motive to prevent anti-avoidance, jurisdictions compete by offering certain tax incentives. For example, governments wanting to attract economic activity are offering research and development incentives. Those jurisdictions with favourable regimes appear to be competing to attract more activity. There are a lot of jurisdictions with favourable regimes – over forty. It might be that you want to expand sales in a jurisdiction that you can also benefit from developing new products!
When establishing a new operation, you will need to consider the type of legal structure. There are many options although the main ones include:
- Setting up a representative office: A representative office doesn’t contract nor negotiate agreements, it engages in limited activity. It is often a way of a business testing the market to expand into a jurisdiction.
- Establishing a company or subsidiary
- Creating a branch: this is where a company located in one jurisdiction undertakes activities with some business presence in another. The company will register locally and engage in core activities of the company. There is no legal ring fencing as with a separate legal entity and the taxation of a branches profits follow different rules from those applying to a company.
Going into a new jurisdiction requires a lot of due diligence and understanding of the way that jurisdiction works culturally and legally. This may be quite daunting and often businesses will look for local partners to begin a joint venture with. A joint venture may take the form of a partnership between entities or a joint venture company. Which method you choose will depend on the risks you are exposed to, legal responsibilities and tax.