Choosing a country to trade in

Considering setting up a company overseas? If you know which country you want to trade in then the process is pretty straight forward, and through our network can offer introductions in many countries. But if you know you want a presence overseas but don’t know which one the decision can be much harder.

This is something that we have been asked to consider, by a few clients this year: Brexit is less than a year away, and some companies are having thoughts about whether they should have a presence in Continental Europe to make trade easier.

One mistake is too put too much weight on the headline tax rates of the different countries that you are considering. At the time of writing the EU average headline rate is 21.29%, but the range within that is large: Examples include Hungary (9%); Italy (24%); The Netherlands (25%); Germany (30%); France (33.33%).

These headline rates are misleading. In Germany for example, The overall corporate tax rate can range approximately between 22.83-36.83% due to local trade tax rates. The overall income tax rate for corporations includes corporate income tax at a rate of 15%, a solidarity surcharge at a rate of 0.825% (5.5% of the corporate income tax), and local trade tax. The local trade tax generally varies between 7% and 21%, with rates determined by municipalities.

Tax rates can be expected to vary over time, and those changes can be significant. Based purely on the current tax rates above, France looks like a poor choice, but the French Finance Law for 2017 followed by that for 2018 decided a progressive reduction of the corporate rate from 33.1/3% down to 25%. (And on a personal note that benefit is further enhanced by the availability of good French wine and cheese to be enjoyed when visiting your overseas company!)

You also need to be aware of employment taxes: Sticking with the example of France, employer's social security contributions are due up to a maximum rate of 50% and for earnings in excess of EUR 317,856 the effective rate of employers social security should be between 25% and 30%. (Now the cheese and wine based decision doesn't look as good!)

In my experience, having represented clients overseas as a director, from as close as the Netherlands to as far away as Vietnam, practical issues are much more important drivers than tax. In Vietnam, the driver was labour costs, but they have increased significantly in the last three years. Whilst cost will be higher, we may set up a subsidiary and switch operations to, for example, the Czech Republic, which then has the benefit of being in a time zone closer to the rest of the group. 

A full list of practical considerations would be too many to mention but will include availability of labour, premises, ease of getting to, proximity to suppliers and customers etc.: Essentially the same factors that you would consider when setting up in the UK.

If you do decide that you need a presence overseas, please talk to us, and we will happily talk through your options, and where we can, will make introductions for you.