If you want to do business abroad, you do not necessarily require a branch in that other country. Customers in Germany, for instance, can sometimes be served from your Dutch office. Or you can deliver goods directly to a neighbouring country from your Dutch warehouse. This sounds simple, but it is important to remain alert to the legal and tax implications. When will you face tax obligations abroad? Is a foreign legal form perhaps mandatory after all? And if your business continues to grow: how do you best structure this expansion?
➔ In this article we examine the initial choices you will need to make. In other words, how do you structure the international expansion of your company?
Tax consequences
Pay close attention to the tax implications when expanding your Dutch company’s operations to other countries. For example, the fact that you are personally resident in the Netherlands or do business through a Dutch company (e.g., a limited liability company or ‘BV’) does not necessarily mean that you will only need to pay Dutch taxes. Each country has its own tax rules. A country’s desire to levy tax is often aligned with the type of activities you perform in that country. Whether that country can indeed levy taxes may depend on tax treaties. The Netherlands has concluded agreements on taxing rights with a many different countries.
Although each country has its own specific tax rules, most countries are in broad agreement about what constitute local taxable activities. If you own a factory in another country, this will likely lead tot taxation in that country. In such cases it often makes no difference whether the factory operates though a local legal form. Additionally, many countries wish to levy taxes over all the legal forms established in their country or under their law.
Permanent establishment in another country
A tax obligation may also apply in another country if the foreign business operations are part of a Dutch BV (i.e., there is no local legal form or entity in the other country). The operations may then form a ‘permanent establishment’. In brief, this is a fixed place of business through which the business of your enterprise is carried on. This structure must be permanent in terms of geography and time. This might include, for example, company premises that you have bought or rented for your business. In such cases, you must determine the income and expenses that are allocatable to the permanent establishment.
Permanent representative
You may still need to pay tax in another country even if you do not have a permanent establishment: if a so-called ‘permanent representative’ is present. This may, for example, be the case if you have an employee in another country who maintains all the contacts with local customers for or on behalf of the Dutch company. If there is a permanent representative, you will also need to determine the amount of profit that can be attributed to their activities. This share of the profits will then be taxed in the other country.
Taxation in the case of a permanent establishment or permanent representative
For both a permanent establishment and a permanent representative, the facts and circumstances determine the tax treatment.
You must first determine whether the allocated profits are taxed locally, based on the laws and regulations of the country in which you are doing business. This is determined on the basis of the factual circumstances, the type of activities and the relevant powers of authority. The profits of the permanent establishment are then taxed in accordance with the rules of the country in which the activities are carried out. A source exemption usually applies in the Netherlands. In other words, the profits taxed in the other country are exempt from taxation in the Netherlands. In principle, this prevents a BV having to pay taxes twice on the same profits.
We note that in certain cases an exception may apply to the concept of permanent establishment: the Netherlands retains its taxing rights if the activities performed in the other country are only of a preparatory or auxiliary nature.
Fixed establishment for VAT purposes
A permanent establishment and a permanent representative are relevant for personal income tax and corporate income tax. VAT uses a specific, differing concept of the permanent establishment, known as the ‘fixed establishment’. In brief, a fixed establishment for VAT purposes is an establishment outside the company’s head office, characterised by a sufficient degree of permanence. There must be an appropriate structure - in terms of personnel and technical resources - for supplying or receiving services.
A fixed establishment for VAT purposes is the starting point for levying VAT and also has implications for the possible deductibility of input-VAT. It is possible that your company may have a permanent establishment abroad for corporate income tax purposes but does not have a fixed establishment for VAT purposes, and vice versa.
In recent years, the concept of a fixed establishment for VAT purposes has frequently been the subject of VAT case law at the EU Court of Justice. There are several ongoing cases relating to the concept of the fixed establishment. It is therefore important to keep a close eye on developments in this respect. Our VAT & Customs Advisory consultants would be happy to tell you more about the concept of the fixed establishment for VAT purposes.
A local legal form after all?
Although you can often operate abroad without a local legal form, there are several possible reasons why opting for a local legal form in another country may be preferable after all. One is to ensure that liability is clearly defined. And your local customers may prefer to do business with a legal form with which they are familiar. From an administrative perspective too, it may be useful to keep the numbers separate. Incidentally, you would also need to differentiate the numbers for tax purposes if a permanent establishment is present. And finally, you may sometimes encounter specific legal form requirements when, for example, you wish to apply for a permit or own real estate.
As your business grows or starts to do business in more countries, it can also be useful to work with local entities rather than permanent establishments when structuring the group. This helps to keep your structure clear and uncluttered. You can place different branches or business lines in different legal entities. If part of the business is sold later on, the tangible and intangible assets are already concentrated in a separate entity. You can then transfer the shares of that entity, which is generally a lot easier than transferring individual assets from the Dutch company.
Finally, in practice we note that the phenomenon of the permanent establishment can sometimes hamper discussions or negotiations on the tax position with local tax authorities. A legal form that the local tax authorities are familiar with can be helpful here.
Choices and advice
Whether there is a permanent establishment and / or a foreign tax obligation depends on your specific facts and circumstances. The same goes for the desirability of a local legal form, with your growth plans playing an important role. It is important to consider this carefully, preferably at an early stage. We can help you with this.
➔ Together we can discuss the ideal structure for your international growth plans. This involves not just your tax position but also aspects such as legal obligations, transfer pricing and personnel matters.
➔ For input on local regulations in other countries, we can rely on the collaboration of the specialists in our global Baker Tilly International network. This helps you gain a clear picture of the relevant aspects, so that you can enter the international market well-prepared.
Would would like to talk about the opportunities for international growth? Or would you like to review your current international business structure? Please do not hesitate to contact our experts!
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
