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VAT implications of establishing a foreign sales entity

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Last Updated

VAT implications of establishing a foreign sales entity

As you expand your global presence, you may consider establishing foreign selling entities. Here are the implications for managing VAT as a multinational business.

Anrok | Streamlined sales tax for SaaS

Brad Silicani

Chief Operating Officer, Anrok

Brad was previously Treasurer at Dropbox, managing the treasury and global real estate and workplace services organization, and helping scale the finance and operations functions from Series B through IPO.

As a SaaS business, your product and go-to-market approach is naturally well-tailored to attracting customers from across the globe. As you expand your global customer base, you may start to consider the right time to establish a foreign sales entity, in order to optimize the company’s global income tax structure.

Establishing multiple sales entities for tax purposes is different from expanding your physical presence internationally with offices and employees. Neither activity directly changes the contractual relationship between your customers and your company, but can create favorable outcomes for your business.

Typically, companies consider transferring sales contracts to foreign selling entities as late-stage private companies, or even early in their public company lifecycles. Shifting sales contracts to foreign entities can allow better alignment with corporate structure and consolidation of revenue for favorable tax treatment as a company turns toward becoming profitable. For example, an American software company may look into opening an Irish selling entity a few years ahead of IPO.

In establishing a foreign sales entity, you will determine which territory that entity will cover. In most instances, that entity will take on sales to customers outside the country where it’s located. For example, a selling entity in Ireland may cover sales to all of your customers in EMEA, or perhaps even the rest of the world outside of the U.S.

Managing VAT and GST as a local seller

Once you’ve established a new sales entity, you will need to consider local-seller VAT requirements for sales that are made by the entity to customers within the same home country. These requirements differ significantly from foreign-seller VAT requirements.

Although rules vary by country, practically this means that under most VAT schemes you will be required to charge VAT on all taxable product transactions to customers within the home country of the new entity, whereas as a foreign seller you may have only needed to charge VAT to customers who did not have a valid VAT ID.

In addition, you will need to continue to comply with foreign-seller rules in jurisdictions where you sell to customers outside of the home country of the new entity. This will typically align with how you’ve managed VAT as a foreign seller prior to establishing the new entity .

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Getting started with local-seller VAT

As a local seller, you can follow many of the same processes you’ve already established for VAT compliance, though you’ll need to pay close attention to the variance in requirements for local and foreign sellers.

Tips for managing local-seller VAT include integrating your systems to calculate tax properly across jurisdictions, monitoring exposure as sales grow and you exceed VAT registration thresholds abroad, registering your local entity for VAT as required and noting filing timelines, and filing returns and remitting VAT on time to avoid penalties.

When your subsidiary reaches the VAT registration threshold in its country, make sure to register right away. Tax authorities don't look kindly on late registration. Many companies also decide to register as soon as their entity is established to ensure they can reclaim VAT paid on purchases. Stay on top of filing deadlines as well—set calendar reminders if needed. And involve your finance team to ensure VAT gets incorporated properly into your ERP or billing system at the outset.

Managing multiple entities at once

Operating an international business with multiple entities comes with added tax complexity. Seek out tools that centralize compliance, provide an audit trail, and allow customization by country. The goal is avoiding duplicate work while still adhering to local rules.

Make sure you’re carefully tracking invoices and transactions to report properly per entity, using a tax reporting solution that supports multiple entities and consolidates reporting, and standardizing tax processes across entities for consistency.

Robust processes and software are essential when dealing with complex international VAT obligations and operating globally at scale. With the right strategy and solutions, you can tackle compliance across markets confidently. Don't let VAT slow down your global growth plans.

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