Expanding Internationally? The Hidden Tax Risk That Can Catch Scaleups Off Guard

You land your first overseas customer. Hire your first employee abroad. Open a new market and start building momentum. Focus is naturally, on growth.

But beneath the excitement, there is a risk that many scaling businesses overlook, until it becomes a problem: Creating a taxable presence – also known as a Permanent Establishment (PE) in more technical terms.

Why is it relevant?

The reality is that your business can create tax obligations in another country long before you establish a local company or open an office. By the time the issue is identified, often during a fundraising process, due diligence exercise or tax audit, the consequences can be costly.

What has fundamentally changed is new guidance provided by the Organisation for Economic Co-operation and Development (OECD) focusing on remote-working and the activity of the employees themselves as previously outlined here.

In simple terms, Permanent Establishment is the point at which a foreign tax authority decides that your business has enough economic activity within its borders to be subject to local corporation tax.

Historically, this was largely a concern for large multinational organisations with offices and substantial operations overseas. Today, the rules are far more nuanced. With remote working, distributed teams, and international sales models becoming the norm, tax authorities increasingly focus on where business activity takes place rather than where the company happens to be registered.

Who does it affect?

For founders and leadership teams pursuing international growth, this means PE can become relevant far earlier than many expect. Many businesses assume they need a legal entity overseas before local tax obligations arise. Furthermore, using contractors or 3rd party arrangements like Employer of Record would remove this risk and therefore ’no entity required’.

Activities such as these can potentially create exposure meaning you need an entity:

• Hiring employees in another country
• Recruiting a local sales representative
• Appointing a country manager
• Allowing team members to negotiate or conclude contracts
• Delivering long-term projects overseas
• Operating from a fixed place of business such as an office or warehouse

None of these are unusual decisions for a growing company. In fact, they are often precisely the right commercial decisions. The challenge is understanding the tax implications before they become an issue later when least expected.

What do you need to know?

Three factors are making Permanent Establishment a growing concern for scaling businesses:

1. Global hiring has become easier – ’No Entity Required’

The ability and options available to access talent anywhere in the world has transformed how businesses scale. The pivot to remote working compounded this and increasing adoption of digital tools means anyone can work anywhere. Many businesses now hire sales, technical and operational talent across Europe, North America and beyond before establishing any local infrastructure.

While commercially attractive, these arrangements may create unexpected tax consequences depending on the individual’s role and responsibilities.

2. Tax authorities have more visibility

Governments are investing heavily in compliance, data sharing and international cooperation leveraging digital tools and AI. Cross-border business activity is becoming increasingly transparent, making it far more difficult for potential issues to remain unnoticed. The statement that you can switch compliance on and off isn’t really sustainable when focus now is on the activities of the individuals and who the ultimate employer is.

3. Businesses are scaling faster

High-growth businesses are entering new markets earlier and with greater ambition than ever before. That acceleration creates opportunity, but it can also create governance gaps if expansion outpaces internal controls and planning.

What happens if you get it wrong?

PE issues rarely appear at convenient times. More often, they come to light during:

• Investment due diligence in funding rounds
• M&A transactions
• International tax reviews
• Financing processes
• Tax authority enquiries

At that point, businesses may face:

• Historic corporation tax liabilities
• Interest and penalties
• Additional filing requirements
• Transfer pricing obligations
• Significant management distraction

While the financial implications can be material, many founders find the operational disruption equally challenging. It can slow down investment discussions or lower the value of a deal if an acquisition where the buyer seeks additional warranties from the seller.

The most successful leadership teams take a different approach

The businesses that navigate international growth most effectively do not view Permanent Establishment as purely a tax issue. They view it as a growth planning issue.

When tax, legal, operational and people considerations are aligned from the outset, businesses can expand with confidence, knowing that their chosen structure supports both growth and compliance.

Before entering a new market, founders should ask:

• Who is representing our business locally?
• What authority do they have?
• How are we engaging employees and contractors?
• Is our current structure still fit for purpose?
• At what stage should we consider establishing a local entity?

These conversations are significantly easier, and far less expensive, before expansion takes place. They become a foundation for future success and compliance strategy for the long-term.

What should you do next?

Having the right policies and procedures in the first place is key. Whether you’re hiring your first employee abroad, entering a new market or reviewing an existing international footprint, it’s worth understanding whether your current structure supports your growth ambitions.

If you’re planning international expansion or simply want to health-check whether your existing overseas activities could create any exposure, please feel free to contact Simon Gleeson below. We would be happy to share practical insights from working with founder-led and high-growth businesses scaling across multiple jurisdictions.