Intro
Expanding your start-up across borders can be an exciting opportunity for growth and new markets. However, it also comes with a set of unique challenges and complexities that require careful consideration.
This overview is intended to provide start-ups with key insights into essential legal and tax issues to keep in mind when setting up business operations and subsidiaries abroad.
Getting Started: Regulatory and Compliance
- Local Regulations: Each country has its own set of rules and regulations governing businesses. Understanding these regulations is crucial to ensure compliance.
- Entity Selection: Choose the right legal structure for your subsidiary in accordance with local laws and understand the tax implications of these structures.
- Registration: Be aware of the registration requirements in the target country and ensure timely compliance.
Setting Up a Clean Structure: Intercompany Agreements
Structuring the legal relationship between your start-up and its foreign subsidiaries is a crucial step when setting up operations abroad. Under most circumstances, intercompany service agreements between the entities are the means of choice here. From a legal and tax perspective it is important that these intercompany agreements are drafted at-arm's-length i.e. reflecting similar terms found in comparable third-party agreements. For a more detailed overview on Contracts in general we recommend our Essential Business Contracts sub-page.
Here are some integral parts to consider when drafting a comprehensive intercompany agreements:
- A definition of the services rendered between the companies - e.g. administrative or strategic support by the headquarter for the benefit of the foreign subsidiary.
- A proper pricing for the services, compliant in particular with transfer pricing regulations (see below).
- Regulations on each party’s responsibilities - e.g. reporting obligations.
Another important aspect in an intercompany (service) agreement refers to intellectual property. We recommend to safeguard intellectual property rights through clear agreements to prevent disputes over patents, copyrights, and trademarks. A clear allocation of IP rights between the different companies and jurisdictions is increasingly important in a cross-border structure especially in exit scenarios - a forward-looking legal drafting can usually prevent later discussions that may arise, particularly, in case of asset or licensing deals revolving around the IP.
For a more detailed overview on IP we recommend our Intellectual Property sub-page.
Avoiding a Fiscal Headache: Taxation and Transfer Pricing
In addition to the legal structure of the new foreign entity and the arrangement of intercompany relations, tax implications can play a major role in cross-boarder structures. Some key aspects are:
- Transfer Pricing Rules: Cross-border transactions and in particular intercompany (service) agreements usually attract transfer pricing regulations. In order to be at-arm's-length and ultimately be recognized for tax purposes, tax authorities generally require clear pricing policies in intercompany agreements. It is important that services are subject to a profit markup, even between affiliated companies. From our experience, usually a cost-plus approach is a feasible mechanism here, whereas mark ups are often in the range of 5-7%, sometimes going up to even 10%.
- Double Taxation Treaties: Familiarize yourself with double taxation treaties between your home country and the foreign jurisdiction. These treaties can affect tax liabilities and withholding taxes and are relevant both for intercompany services as well as dividend distributions.
- VAT and Customs Duties: Be aware of VAT and customs duties applicable to international trade, as they can impact your cost structure.
When in Rome: Human Resources and Employment Laws
Different jurisdictions - even within the EU - come with different employment/labor law regimes. Understanding local employment and labor laws, employment contracts, and benefits packages is key to attract and retain local talent abroad.
This may also affect the structure of your employee participation programs, such as Employee Stock Option Plans (ESOPs) and Virtual Stock Option Plans (VSOPs), for employees abroad, which may need to be adjusted to local tax and regulatory requirements.
Summary
Expanding your start-up across borders can unlock new markets and opportunities. However, it also requires careful planning and compliance with a range of legal, financial, and cultural considerations. By staying informed and seeking expert advice, you can navigate the complexities of cross-border business successfully. This will set the stage for sustainable growth in your home market and beyond.
Resources
- IHK (Chamber of Industry and Commerce): IHK organizations across Germany provide guidance, workshops, and networking opportunities for businesses. Each region has its own IHK website, so check with the local IHK for specific support.
- Website: https://startupverband.de/
- Bundesverband Deutsche Startups (German Startup Association): This association supports and represents the interests of start-ups in Germany. They offer insights, events, and resources for the start-up community.
- Website: https://startupverband.de/
- Bundesministerium der Finanzen (German Federal Ministry of Finance): The German Federal Ministry of Finance provides a database of all double taxation treaties between Germany and other jurisdictions.
Disclaimer
Please be aware that the information provided on this page with regard to legal and tax topics is intended for general informational purposes only. It should not be interpreted as legal or tax advice. We do not provide legal or tax advice, and we strongly suggest that you do your own research or seek advice from qualified professionals.