Expansion abroad: What should you know before you enter a new market?

Expansion into foreign markets is becoming an increasingly topical subject for Slovak entrepreneurs. There can be several reasons for these considerations – whether it is expanding one's business activities or seeking a more stable business environment with a lower tax burden. Expanding abroad does not automatically have to mean establishing a new company abroad. On the contrary, it can take many forms, from doing business remotely, through the purchase of an existing company, to the complex relocation of all activities abroad.

PR article CLA Slovakia

It is, however, important to realise that each of these options brings with it a wide range of new obligations, which it is good to know and take into account even before actually entering a new market. In our series „Expansion abroad“ we will therefore gradually look at the most common options for expansion, starting with the simpler ones, and at the related impacts on your business.

In the first part of our series we will take a closer look at doing business remotely – that is, the situation where an entrepreneur operates on a foreign market but manages and carries out their activities primarily from the territory of Slovakia. A typical example of such a form is an e-shop, but it can also be another activity or the provision of services, for example carrying out construction activity, or commission sale of goods through a foreign partner.

In the model of cross-border business, however, it is necessary to bear in mind that the absence of a physical seat abroad does not automatically mean that the entrepreneur has no obligations towards the given state. In practice, even without formal presence and under certain conditions, a so-called permanent establishment may arise. From this, in turn, the possibility of additional tax, accounting, legal or other administrative obligations follows. It is therefore very important to take this aspect into account already when planning the expansion.

Permanent establishment abroad and income tax

When assessing the conditions under which a permanent establishment arises, it is necessary to proceed from the local regulations of the given country as well as from international double taxation treaties („DTT“). At the same time, it holds true that a permanent establishment must arise both under the DTT and within the meaning of local legislation. Since these conditions may differ in individual treaties, the same business model may have different tax and administrative impacts in different member states.

In general, a distinction is made between the following types of permanent establishments:

• classic permanent establishment – arises if the entrepreneur has a fixed place from which they carry out their activity or organise it;
• service permanent establishment – arises in the provision of services;
• construction permanent establishment – arises in the implementation of construction, assembly or installation projects;
• agency permanent establishment – arises when the company has a person or representative abroad who repeatedly concludes contracts or otherwise acts in the interest or for the benefit of the company.

The creation of a permanent establishment standardly establishes the obligation to tax part of the Slovak person's profit abroad in accordance with the tax regulations of the given state. At the same time it is necessary to consult with a foreign advisor on the need to register with the tax authority or other institutions (social insurance company, health insurance company, etc.), the obligation to keep local accounting, to have transfer pricing documentation prepared, the obligation to keep documentation in the territory of the given state, the obligation to ensure compliance with other local rules related to the subject of business, as well as many other specific obligations. Underestimating this fact can lead to additional tax obligations, default interest, but also sanctions of another kind.

Taxation of income in Slovakia and abroad?

When selling goods or providing services abroad, a Slovak company obtains income from customers abroad without having its own company, branch or warehouse in the given state.

A Slovak tax resident generally taxes its worldwide income in Slovakia. The tax base therefore includes income from both Slovak and foreign customers. Sometimes, however, the source country also has the right to tax the income, especially in the case where a Slovak company creates a permanent establishment abroad.

The already mentioned DTTs protect taxpayers against the risk of double taxation of income (profits). They usually allow one of two methods to be used to avoid double taxation in the country of residence:

• the tax credit method, in which the tax paid abroad is, in simplified terms, credited against the Slovak tax liability,
• the income exemption method, in which income (profits) taxed abroad is exempted from the tax base in Slovakia.

Which of these methods is applied is always determined by the relevant treaty between Slovakia and the given state.

VAT in distance selling

In the cross-border supply of goods and services, there is usually no risk of the existence of an establishment for VAT purposes abroad. Nevertheless, other obligations may arise in relation to VAT abroad, for example local registration in the status of a foreign person, the filing of VAT returns and the payment of tax. The exact scope of obligations depends on several factors, especially the status of the customer in the given country, the manner of arranging the transport of goods, but also the type of goods and services supplied.

If obligations do arise abroad (primarily in B2C trades), in many cases it is, however, possible to make life easier by using the special OSS scheme (One Stop Shop). This allows foreign VAT on supplies taxable in other countries to be paid uniformly and directly in Slovakia, without the need to register and file VAT returns in each state.

A special VAT regime is also available for small enterprises, which can supply their goods and services abroad with exemption from VAT, thanks to which they are not obliged to pay VAT abroad or to register. The person must not, however, exceed a total turnover in the EU of 100,000 euros, nor the turnover limit of the country into which it is expanding.

To use such special regimes, separate registration and the fulfilment of reporting obligations in the SR is, however, necessary.

Workers abroad: hidden aspects that companies often do not see

When doing business in foreign markets, it is important to also bear in mind practical questions related to employees. For example, in the case of foreign business trips it is necessary to fulfil the obligations specified by the Slovak Labour Code and by the Act on Travel Allowances. In practice this means, for example, agreeing in writing with the employee the details of the business trip, such as its start, end, place of duration or means of transport. The employee is, of course, also entitled to travel allowances.

In the case of posting employees abroad, the scope of obligations is different and it is necessary to also follow the legislation of the host country. The employee is not entitled to travel allowances, but on the other hand they must be guaranteed the same working conditions as apply in the country of posting, the so-called „hard core“ conditions.

An inseparable part of work abroad is also the A1 form, which proves which social insurance system the employee is subject to.

With growing activity abroad and the need for a larger employee base, companies often begin to employ local employees as well. In such a case it is essential to follow local labour-law and payroll legislation and to fulfil one's employer obligations. This can involve payroll administration, withholding tax advances, paying insurance contributions and the like. When cooperating with external persons (sole traders, freelancers) it is, in turn, important to verify whether their activity might be assessed in the given state as concealed employment – which is a frequent problem especially in construction and assembly activities.

If you are considering expansion abroad and are not sure of its tax impacts, turn to the specialists from the advisory company CLA Slovakia s. r. o. Together with our cooperating partners abroad, we will be happy to help you enter a new market with confidence.

SOURCE:APZD