Selling to customers abroad is easy. Hiring abroad, opening an office or moving the company is where tax gets complicated. This guide covers the concepts that cause most of the surprises.
Residence vs. source
Countries tax companies on two bases:
- Residence: Where the company is incorporated or effectively managed. Most countries tax residents on worldwide income.
- Source: Where the income is earned. A country can tax non-residents on profit sourced there, typically through a permanent establishment or withholding tax.
Many countries now use territorial systems that exempt foreign dividends and branch profits, including the UK, Germany, France and, since 2018, largely the US through the 100% dividends-received deduction.
Permanent establishment
You create a permanent establishment (PE) in another country when you have:
- A fixed place of business: office, branch, factory, or a home office used regularly for company work.
- A dependent agent who habitually concludes contracts in your name.
- A construction or installation project lasting longer than a treaty threshold (often 6 or 12 months).
Profit attributable to the PE is taxed locally. Hiring your first employee abroad is the most common trigger. Employer of record services handle payroll and employment law but not your corporate PE exposure.
Withholding taxes
When money crosses borders as dividends, interest or royalties, the source country often withholds tax before it leaves.
| Payment | Typical domestic rate | Typical treaty rate |
|---|---|---|
| Dividends | 15% to 30% | 0% to 15% |
| Interest | 10% to 30% | 0% to 10% |
| Royalties | 10% to 30% | 0% to 10% |
The US withholds 30% on payments to non-treaty foreign persons. A W-8BEN-E form claims treaty benefits.
Transfer pricing
Transactions between related companies, such as a US parent and a UK subsidiary, must be priced at arm's length, as if the parties were unrelated. Common arrangements:
- Cost-plus for a subsidiary that provides R&D or support services (often cost + 5% to 15%)
- Limited risk distributor margins for a sales subsidiary
- Royalties for using IP owned by another group company
Tax authorities expect documentation. Many countries require a master file and local file once revenue passes a threshold.
Controlled foreign corporation rules
CFC rules stop companies from parking profit in low-tax subsidiaries.
- United States: US shareholders owning 10% or more of a CFC include Subpart F income and net CFC tested income (renamed from GILTI by the One Big Beautiful Bill Act) in their own income each year, taxed at an effective 12.6% for corporate shareholders from 2026 before foreign tax credits.
- EU: The Anti-Tax Avoidance Directive requires member states to tax undistributed low-taxed income of foreign subsidiaries.
The global minimum tax (Pillar Two)
Groups with €750 million or more in revenue pay at least 15% effective tax in every jurisdiction. If a subsidiary pays less, a top-up tax is collected by the subsidiary's country (QDMTT), the parent's country (IIR) or other group countries (UTPR). In January 2026, the OECD Inclusive Framework agreed a side-by-side arrangement that recognizes the US minimum tax regime and largely exempts US-headquartered groups from IIR and UTPR top-ups.
VAT and digital services
Exporting digital services is often VAT-free at home but taxable in the customer's country:
- EU: B2C digital sales are taxed at the customer's country rate, registered through the One-Stop Shop (OSS).
- UK: Non-resident businesses selling digital services to UK consumers must register for VAT from the first pound.
- Australia, Japan, India, Singapore: GST/consumption tax on imported digital services applies to foreign sellers above set thresholds.
Choosing a holding jurisdiction
Holding companies are usually placed where:
- Dividends and capital gains from subsidiaries are exempt (participation exemption)
- The treaty network reduces withholding taxes
- Substance requirements can be met with real people and decisions
Common choices include the Netherlands, Ireland, Luxembourg, Cyprus, Singapore and the UAE. Compare them with our comparison tool.
Practical checklist
- Map where your employees and contractors physically work.
- Check treaty PE thresholds before signing local contracts.
- Put intercompany agreements in writing and price them at arm's length.
- Register for foreign VAT/GST once you cross local thresholds.
- Collect W-8 or W-9 forms before paying foreign vendors.
Related reading: Tax Guide for Founders and Corporate Tax 101.
Frequently Asked Questions
What is a permanent establishment?
A permanent establishment (PE) is a taxable presence in another country. It is usually created by a fixed place of business, such as an office, or by a dependent agent who habitually concludes contracts on your behalf. Once you have a PE, that country can tax the profit attributable to it.
Do remote employees create a permanent establishment?
They can. An employee working from home abroad may create a PE if the home office is at the company's disposal or if the employee negotiates and signs contracts. Using an employer of record reduces but does not eliminate PE risk. Recent updates to the OECD Model Tax Convention commentary give specific guidance on home offices.
What is a tax treaty and how does it help?
A double tax treaty allocates taxing rights between two countries, reduces withholding taxes on dividends, interest and royalties, and gives a mechanism to resolve disputes. The US has income tax treaties with about 60 countries.
Does the 15% global minimum tax apply to my startup?
Almost certainly not. Pillar Two applies to multinational groups with consolidated revenue of at least €750 million in two of the last four years.