In today’s globalised economy, international business expansion is more than just a bold move, it’s often a necessary step for SMEs aiming to access new markets and boost revenue streams.
Recent insights from BDO, based on a survey of 500 leaders from mid-sized UK businesses, show that international growth is firmly on the agenda. Nearly 37% plan to boost exports within the next year, with even higher export ambitions among retail and wholesale businesses (52%) and technology firms (56%).
Smaller businesses are also moving in the same direction. According to Airwallex, 28% of UK SMEs plan to expand internationally within the next two years, showing global growth is firmly on the radar for early-stage and growing companies alike.
The global outlook is diverse. Many companies are eyeing growth in key international markets such as Australia (38%), Africa (35%) and Asia (30%). Europe continues to be a strong focus, with 41% of businesses planning to grow exports to the EU by 2025.
While international expansion opens exciting opportunities, it also brings added complexity around accounting, tax and payroll compliance across borders. As your SME grows beyond the UK, navigating these evolving requirements is key to stability.
In this blog, we’ll walk you through the key considerations for turning your UK-based SME into a global entity.
What are the main ways in which you can scale internationally?
When it comes to international business expansion, there are two primary routes your SME can take: trading with a country or trading in a country.
Trading with a country means selling into an international market without establishing a physical presence there. You may have contracts and clients in place, but no local staff, offices or operations.
Trading in a country, on the other hand, involves setting up some form of permanent operation, such as an office or a local team. This often creates what’s known as a taxable presence, which comes with a range of accounting, payroll and corporate tax obligations that must be carefully managed.
For example, if you’re trading with the US without a physical presence, you may still face state-level sales tax obligations. Trading in the US comes with specific tax obligations that require early planning.
Understanding these differences is critical to building a compliant and stable international business.
When should you set up a permanent establishment in a new country?
A permanent establishment (PE) refers to a recognised taxable presence in another country. Whether you need to set one up depends on how and where your SME operates. Here are three common scenarios to consider:
Fixed place of business
- If you have a physical site like an office, warehouse or even a co-working desk abroad, that could be a PE.
- Home offices may also count, especially if they’re used consistently over a certain period.
- Using third-party logistics providers (3PLs), however, doesn’t automatically trigger PE, whether you’re storing goods in the US or the UK.
Agency PE
- If someone overseas can negotiate or sign contracts on your behalf, it might create PE.
- In the UK, a PE is generally created only if contracts are habitually concluded in the country. Occasional meetings to discuss deals usually won’t qualify.
- In the US, using an authorised representative to handle contracts can still create a PE, even without a formal entity, bringing potential tax and compliance obligations.
Service PE
- Some countries like the Philippines and Malaysia apply special PE rules where delivering services locally for a set duration can create a taxable presence.
- Even without a fixed office, extended in-country service delivery may trigger PE status.
While OECD guidelines offer a baseline, each country interprets PE differently. That’s why reviewing your team’s activities and local rules is critical before international business expansion.
How to hire new employees in a foreign country without having a PE?
If you’re looking to hire in a new country without setting up a local entity, using an Employer of Record (EOR) can be a practical solution.
What is an Employer of Record (EOR)?
- An EOR is a third-party provider that legally employs workers on your behalf in another country.
- You manage the employee’s tasks and responsibilities while the EOR handles payroll, local taxes, HR compliance and employment contracts.
But before choosing an Employer of Record (EOR), it’s important to assess whether it’s the right fit for your business. Key factors to consider include:
- Cost: EORs can be expensive. If you’re hiring 3–5 employees in a single country, establishing a local entity might be more cost-effective in the long run.
- PE Risk: While EORs can reduce the likelihood of creating a Permanent Establishment, it’s still essential to ensure your structure complies with local tax and employment laws.
- Intellectual Property (IP) Ownership: If you’re hiring technical talent such as software developers through an EOR, make sure your contracts clearly specify IP ownership to avoid future disputes.
If you plan to hire local staff in a country where you already have a Permanent Establishment (PE), it’s essential to comply with local employment laws and tax regulations from the outset.
Relocating existing staff to a new country is another viable option. It enables bringing established understanding of your product, service and company culture into the new market. This can be particularly useful when the local talent pool doesn’t offer the specialised skills your SME needs.
However, this can be an expensive approach. Each option has its own benefits and challenges, the right choice depends on your business goals, costs and long-term expansion plans.
How should you handle transfer pricing abroad?
Transfer pricing (TP) refers to how you price transactions between different parts of your SME operating in various countries typically between your UK head office and foreign teams. If you’re expanding and hiring abroad, TP can impact compliance and profitability.
Here are a few scenarios to consider:
Remote development teams
If your international team is supporting R&D for your UK SME, ensure they’re being fairly compensated based on market rates for those services.
International sales operations
If you have sales teams based abroad generating revenue, you’ll need to implement an appropriate TP model. One widely used approach is Return on Sales (ROS), which allocates a profit margin based on the revenue earned. It effectively measures how well revenue is converted into operating income.
A higher ROS implies effective cost control and pricing, while a lower ROS may point to thinner margins or operational inefficiencies.
Many SMEs overlook transfer pricing because they fall below the UK’s exemption thresholds. However, applying TP principles from the outset can simplify future audits, due diligence, and cross-border compliance.
Keep in mind that many countries don’t offer the same exemptions and where they do, they typically apply only to documentation, not to the application of TP rules themselves.
What are the major tax residence factors for corporations to consider?
Below is a simplified comparison of key tax residence rules and accounting requirements in the UK, Dubai and the US:
UK | |
Key Tax Residence Criteria | Based on where central management and control (CMC) is exercised in the UK. |
Corporate Tax Rate |
· 25% on profits over £250,000 · 19% for profits under £50,000 |
Accounting Standards | · Most companies follow UK GAAP. · IFRS is mandatory for listed and certain large entities. · Audits are regulated by the Financial Reporting Council (FRC) · Auditing standards align with International Standards on Auditing (ISAs) |
Payroll Considerations | · Payroll must be processed through HMRC’s PAYE system, even for a single employee · Employer NICs: 13.8% on employee earnings above £175/week (2024/25) · Class 1A/1B NICs may apply to employee benefits and expenses · Pension auto-enrolment is mandatory with a minimum contribution of 3% from the employer and 5% from the employee (8% total) |
Dubai (UAE) | |
Key Tax Residence Criteria | Incorporated or effectively managed from the UAE |
Corporate Tax Rate |
· 9% on profits above AED375,000 (£74,460) · No tax on profits below AED 375,000 (£74,460) |
Accounting Standards | · Annual financial statements must follow IFRS · Corporate tax returns must be filed with the Federal Tax Authority (FTA) (mainland) or relevant Free Zone Authority |
Payroll Considerations | · Salaries must be processed via the Wage Protection System (WPS), the government-mandated electronic salary transfer platform |
US | |
Key Tax Residence Criteria | Incorporated or effectively managed in the US |
Corporate Tax Rate |
· 21% federal rate · Additional state-level taxes (varies by state) |
Accounting Standards | · Public companies must follow US GAAP |
Payroll Considerations | · Salaried employees are typically paid a fixed amount per pay period (monthly or bi-weekly) · Most salaried workers are exempt from overtime pay but exceptions apply under Department of Labor (DOL) rules · Overtime eligibility varies by state, employers should consult state labour laws to determine exemptions · Employers must deduct mandatory payroll taxes, including federal income tax, Social Security tax, Medicare tax, and state income tax (if applicable). |
Poor planning could result in being taxed in more than one country. Clarifying tax residence early is especially important if you’re seeking investment or preparing for an exit.
As Ravi Monga from the Institute of Directors notes:
“The fundamentals of international tax planning are about making smart choices in how you structure your business across borders. It’s about understanding different tax systems, treaties and rules so you can legally reduce your global tax burden. Think of it as finding the most efficient path to grow and move profits without getting caught up in red tape. With the right strategy, you stay compliant and competitive while keeping more of your earnings.”
At Rise Accounting, we support growing companies with expert financial guidance as they expand across tax regimes like the UK, UAE and the US.
If you have any questions or need tailored advice, get in touch today!
