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 .