Contractors' Questions: How to give my PSC three offices overseas?

Contractor’s Question: I’m working towards transforming from a UK-based personal service company offering project IT skills to offering a full set of managed IT services abroad. I have prospective customers overseas waiting for me to define exactly what I offer in order to know if I can add value to their organisations.

How should I structure my business so that it’s going to have a UK HQ and braches in three other locations - Africa, North America and Canada? I will aim to set up these three offices from available funds in my UK PSC, but what’s the best way from an accounting and compliance standpoint to establish up and run the overseas offices, given that they are all going to be in different tax jurisdictions?

Expert’s Answer: It can certainly be an intimidating prospect for a business venturing into an overseas market for the first time. 

The first point to address is whether your “full set of managed IT services” gives rise to a taxable presence (the so-called ‘Permanent Establishment’) in the selected overseas country, as defined by the relevant tax treaty. If not, it is unlikely you will have to register with the local tax authority for income tax. However, there may be a requirement for local VAT or sales tax registration. 

If you do need to register overseas, your business would either be carried out through either a trading subsidiary (a separate company) or a branch (a division of your UK company). The differences between both structures can have differing tax consequences. This could result in a higher tax cost if the overseas business is structured incorrectly.

An overseas subsidiary is often the preferred business structure, both for tax and commercial reasons. Although the subsidiary can often be 100% owned from the UK, this may not always be possible due to local restrictions. It is common to establish a UK holding company which sits above the UK and foreign subsidiary companies. This can help from a financial and risk management perspective. Each overseas subsidiary’s tax residency will need to be carefully considered. Management and control from the UK will likely mean that the company is deemed tax resident in the UK. You would have to review the ‘tie-breaker’ clause in the relevant tax treaty to decide the company’s actual tax residency. 

There are plenty of areas for further discussion and review – especially employee movements, transfer pricing arrangements, withholding taxes and anti-avoidance legislation.  

But I suggest that the prime target for your expansion overseas should be to realise profits and successfully repatriate them back to the UK. There are various ways open to you including dividends, royalties, interest, inter-company service charges or trading transactions. Your chosen routes will certainly be influenced by local regulations.

As you can see, there is never a ‘one-size fits all’ way to expand outside the UK, as every company has different issues. You should therefore definitely seek specialist advice at an early stage from a qualified accountant to help ensure your post-tax profits are not reduced by unnecessary tax complications.

The expert was Mike Philips, a director of its international, a consultancy specialising in UK contractors’ tax and financial affairs when overseas.