Keep your foot in the EU, but don’t lose your toe!
Guest article from Jeroen Knuist, Tax Partner at Kreston Grip, Netherlands
In the face of Brexit you simply want your business to keep going on. So you’re wondering: can I get a VAT number somewhere in the EU? The answer is “yes”, but it’s not as straight forward as you might think.
Where to turn to?
With the UK out, there are 26 Member States left to choose from. The tax rates vary from country to country. So do the filing requirements and payment periods. So where would you go? Rather than looking for the penny (the lowest tax rates) it is more important to think about what makes sense for your organisation. Is there already a production or storage facility in place? Where are most of your customers located?
Registration means business
Times have changed, letterbox companies won’t work anymore for getting you a registration, not even in the Netherlands. Most countries have a minimum level of substance requirements. In other words, a VAT registration in mainland Europe cannot be obtained without business activity or substance and activity can trigger other types of foreign taxation, such as corporate income tax.
Branch or corporate entity?
You carefully picked the right structure for setting up your activities at home. Don’t go for less when you take your activities abroad. Choose wisely between opening a ‘simple’ branch or a more formal local legal entity. There are a range of factors to consider. A branch may enable more direct control but on the other hand the allocation of profits between the branch and host company can be complex. Profit allocation might be less complex with a ‘ring-fenced’ legal entity. On the other hand a foreign legal entity have more statutory obligations and demands a proper system of checks and balances. For instance, shareholder’s instruction can be in place, but a foreign manager might have extensive powers on his own.
The grass is always greener
As it comes to inter- or intracompany transactions it is directly clear that an international structure is something completely different than a pure national structure. Every transaction has a direct effect on the level of profit on two sides of the border. Therefore, finding the ‘right’ price has more significance in international transactions. Sometimes it’s even mandatory to describe the conditions of cross-border transactions (transfer pricing).
Also, repatriating the funds earned abroad might have unexpected implications, such as withholding taxes. This can relate to dividends, interest, royalties or management fees paid. It should be checked whether there are tax treaties in place to prevent double taxation.
But the difficulty is not only in taxation. Ordinary stuff, such as opening a bank account, can be unexpectedly cumbersome. Finding a proper software tool that is able to meet the local requirements on the one hand, but still enables you to keep track of the foreign activities in your currently seamlessly running software system could be a challenge. Local employment laws can also vary wildly across the EU and may be an important consideration.
Setting food on the ground in mainland Europe seems like a small step. But yet there is a lot of ground to cover. Don’t cover that ground alone. Use the guidance and experience of people who know the routes and routines.
About Kreston Grip
Contact Jeroen Knuist, Tax Partner
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