Finance managers must include taxes in the risk assessment when evaluating new markets, says lawyer Lise Ovidia Bruland of EY. Norwegian Economy24. Lack of planning can lead to unexpected costs and, in the worst case, complicated tax disputes.
– Many people have not taken taxes into account when calculating the risk of entering new markets, says Bruland.
She points out that Norwegian scale-ups often rush a bit too much in establishing companies abroad – without considering what role they should have in the company, especially from a tax perspective.
– All too often, haste leads to, among other things, unnecessary capital tying up, high costs, time-consuming tax disputes and fines. Poor internal control is not only expensive today; it also leads to a loss of reputation in the eyes of future investors, says Bruland.
Shortfalls abroad cannot always be exploited
A common challenge is that losses in foreign subsidiaries may not always be deducted against profits in Norway. This often arises because the choice of company form is not sufficiently deliberate.
– If you always had all the profits from your operations in Norway, and you later receive a profit, you can reduce future tax costs with the carry-over profit, says Bruland.
By spreading losses across several countries without the possibility of consolidation, however, the company may lose tax advantages and negatively affect liquidity.
Permanent established business and local taxation
The hiring of employees abroad can also trigger unexpected tax obligations.
– If you have hired three salespeople in Germany who have their own office they go to every day, that means you can have a branch in Germany, she says.
This means that the company must pay taxes on the value creation that takes place there. Unregistered branches can lead to conflicts with local tax authorities and complicated cleanup work.
– If you don’t do it in time, most countries’ tax authorities can become difficult to deal with, she says.
A good tax solution could be for the foreign entity to invoice the Norwegian for the work performed. Which solution should be chosen to ensure compliance with applicable regulations will depend on the activities being performed.
Bruland points out that even within the EU, tax rules vary significantly.
– In Germany, the effective tax rate is 30 percent, while in Norway we have 22 percent. So it’s something to take into account, she points out.
These differences can have a significant impact on the company's total tax burden and should therefore be carefully considered during the planning phase.
Development of IP
When it comes to the development of intellectual property (IP), it is crucial to know where the IP is owned and developed.
– Where is the asset owned from? And which country is it? Generally speaking, the company that holds the residual profit is where the development and the asset are located, she says.
This has significant tax implications, as different countries have different rules and incentives related to IP development. By planning carefully and, if necessary, utilizing tax incentives, such as SkatteFunn in Norway, the company can reduce the tax risk and increase the return on its investments.
Investors are looking for good tax management
Good tax management is also important when the company is seeking investors or planning a stock market listing.
– If you haven’t taken taxes into account and haven’t thought about it, it can affect how well you shine on the PC screen for an investment banker, says Bruland.
Investors place emphasis on the company's internal control and ability to manage tax risk effectively.
The 7 most common tax traps for growth companies
1. Lack of inclusion of taxes in risk assessments: Companies often overlook tax implications when considering the risks of international expansion. This too often leads to unforeseen tax liabilities and costs, and potentially losses of opportunities.
2. Wrong choice of corporate structure abroad: Choosing the wrong corporate form without considering tax implications. Higher taxation, such as a 15 percent withholding tax on dividends from the USA to Norway when choosing Inc.
3. Inefficient utilization of tax losses: Losses in foreign subsidiaries cannot always be deducted from profits in Norway. Liquidity is negatively affected when there is no opportunity to utilize carry-overs of losses.
4. Permanent established business without proper registration: Some companies are in a hurry to get started and in practice employ Norwegian or foreign employees abroad without registering the business locally. This can lead to unexpected tax obligations and conflicts with local tax authorities.
5. Improper handling of intellectual property rights (IP): Often (parts of) development is outsourced to foreign environments. This can lead to uncertainty about where IP is owned and developed, and who has control over it. This can also lead to tax disputes with other countries, which drag on and tie up liquidity.
6. Lack of documentation and internal control: When companies plan for failure, it often results in insufficient documentation of decisions, transactions, and pricing. And it can also lead to lengthy and costly tax disputes.
7. Loss of reputation among potential investors: When investors’ due diligence reveals unnecessarily high tax costs, it directly damages the company’s valuation – and indirectly through the risk of being revealed to have poor internal control.
Lise Ovidia Bruland will be at Aggrator 09.10 to give a masterclass titled «Prepare for Internationalization – Prepare for International Growth and Avoid Tax Pitfalls». Registration here.
The article was first published in Norwegian Economy24, Text and photo by Einar Ravndal (Managing Director and journalist at Økonomi24). Republished with permission.
See also
– International expansion for startups: 5 things you need to consider
– Avoid tax pitfalls: how to prepare for international growth