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International Expansion: 3 Key Considerations

Deloitte Private Emerging Growth

Willo Renehan

What should high-growth tech companies have on their radar, particularly if expanding internationally and/or heading towards an exit?

Below, we look at three key trends and changes to look out for.

1- International workforce

We know fast-growing VC-backed businesses care deeply about their culture and people, and flexible working can help increase employee engagement, as well as attract and retain top talent. Share schemes are another valuable incentive, and you may be looking to introduce plans more widely across your team. If these are part of your growth strategy, there are a few things to keep in mind.

a) Geographically mobile employees

Having a geographically mobile workforce can incentivise employees and help build global brand awareness and an international client base. However, there are corporate tax risks and payroll obligations when people work cross-border.

For example, inadvertently establishing an overseas branch or putting undue pressure on tax residence status can lead to more operational and administrative complexity, compliance costs, tax risks and in extreme cases, litigation.

There are safeguards, such as introducing a remote working policy to restrict the duration and types of activities performed overseas. But the level of protection this affords can depend on the work involved, the relevant tax authority, and any double tax treaty that may be available. We recommend businesses understand the risks, recognise the uncertainties and adopt a case-by-case approach.

b) Incentives for overseas employees

Care is needed when awarding share incentives to employees in new jurisdictions, and it’s worth seeking tax and legal advice at the earliest opportunity to make sure local requirements are met. Often overseas tax rules can be very different to your local jurisdiction, and approaching the grant of (even unapproved) options to overseas employees can result in a myriad of issues, which can be highlighted upon any due diligence.

For example, unless options granted to US based employees are appropriately structured, this can result in annual, and additional tax charges for the US employees, as well as complications for the employer. These issues can include the need to grant at certain market value, obtain valuation reports and/or have specific clauses included regarding timeframes for the exercise and/or sale of the underlying shares.

c) Using ‘employers of record’ for overseas offices

More companies are using employers of record – independent third parties that hire people and run payrolls – in new jurisdictions. While this can offer greater flexibility and enable faster expansion, there can be complications:

  • tax advantaged employee share awards may not be available
  • share plan rules, such as leaver provisions, need to be tailored to acknowledge participants are not group employees
  • additional tax considerations can require very clear communication to make sure the employer of record operates the payroll with respect to the share awards, when required
  • in the worst case, the granting of options to non-employees of the group (which in theory is the situation for the individuals on the books of the employer of record) could invalidate the entire option scheme, resulting in a number of adverse tax consequences for the group and its employees.

As participants are not group employees, the legal and regulatory position will need careful review.

2- UK investment incentives

We are seeing rapid change, especially across the key incentive areas listed below. This will require planning to ensure reliefs are optimised for businesses.

a) R&D

After HMRC’s consultation on the R&D regime, the following will start to be introduced from 2023:

  • the inclusion of cloud and data costs in R&D claims
  • the exclusion of overseas costs from UK claims (with some exceptions)
  • pure mathematic activities will qualify
  • changes around compliance to tackle abuse. These include 100 new HMRC inspectors to review claims, R&D claimants being required to name advisors, and needing a senior officer to sign off R&D claims.

Further changes are expected in the Autumn Budget.

b) Capital relief

The super deduction regime offering 130% relief on capital expenditure is now in force and in the Spring Budget, further changes were announced that may come in for capital spend. These include:

  • raising the Annual Investment Allowance to £500,000
  • increasing Writing Down Allowances from 18% and 6% to 20% and 8%
  • introducing First Year Allowances and full expensing so businesses can write off the costs of qualifying investments in one go.

c) Patent Box

With the grandfathering of the old Patent Box regime coming to an end, companies are required to use the Nexus approach plus track and trace to claim the relief. In addition, with corporation tax rising to 25% in 2023, the benefit of Patent Box will increase from 9% to 15%.

d) Grants

The Government is announcing new UK grant funding for companies across all sectors, with a significant focus on sustainability and the race to net zero.

3- Global digital tax regimes

There has been a fundamental shift in the international tax landscape. The ‘user base’ concept is increasingly being considered as a key indicator of value driving activity for tech businesses, alongside more traditional incorporation, ‘bricks and mortar’ and ‘feet on the ground’ reference points.

The OECD is continuing its work on addressing tax challenges associated with an increasingly digitalised economy, including international design and implementation of the Pillar 1 & 2 solution. Many countries, however, have taken unilateral steps to self-allocate taxing rights based on local user interaction. This brings businesses into the scope of new direct and indirect tax obligations across the world, creating huge complexities in assessing exposure and maintaining compliance.

The Deloitte Tax Atlas provides a global overview of these regimes. We would also be pleased to discuss any of these tax and legal requirements with you.

The content provided has been prepared to provide a high-level overview based on the Deloitte’s understanding of current or proposed legislation. It is general in nature, intended purely for information purposes only. It is not intended that you rely on or act based on the tips we lay out here, rather we strongly recommend you obtain specific professional advice before acting on any of the summaries provided.