A Chief Financial Officer setting up various businesses in Europe has learned the hard way about compliance. His experiences, including once facing a possible bill for $50 million of underpaid VAT and fines, have led him to pay more attention to staying in good standing with local authorities when setting up businesses abroad. Unsurprisingly, he wants to remain anonymous as he reflects on some of the trickier aspects of entering new markets overseas.

My former company's expansion into Germany is something I will never forget - and not for the right reasons. The business started off with a handful of salespeople, but we quickly began to hire nationwide. So far, so successful.

But we overlooked the plethora of different state and federal rules and created a lot of complications in a short time. We were facing fines at almost every level - and, worse, there were tax consequences for the US parent company.

We eventually resolved the situation by setting up a new entity and transitioning all employees in situ into it.

Easy to get caught out

The German expansion experience taught me just how much work it takes to be compliant and how vital it is to get the right local advice before entering a country.

Those that seem culturally similar at first are not always so. European Union rules might appear uniform but can be interpreted differently across the bloc. 

Another company I worked for, this time in Sweden, had not grasped this. We got into hot water after starting to sell a product for which the VAT directive was interpreted differently compared with other EU countries. We did not have a local office and were on the back foot because all the communications were in Swedish - our dealings with the authorities suffered.

The tax people came after the business for about $50 million of underpaid VAT and fines. We had to go to court to unfreeze our bank accounts. However, the company took on local advisors. As Swedish speakers, they helped us resolve the situation and avoid the fines. We then changed our whole group structure to make sure the business was protected in the future.

These experiences demonstrate how fast-growing businesses can be wrongfooted when entering a new territory. Not having help on the ground or the right skills within the existing team can present challenges surrounding company registrations, employment, tax and labour laws. It's very easy to underestimate what's involved - and the time it will take.

Nowadays, when we look at a jurisdiction, we plan for three key things: first, how to set up the tax structure. Is it better to have a branch or an entity? Second, how are we going to file corporation tax in line with the country requirements, while making sure we can repatriate profits to the parent? Third, regarding employment: what are the various government add-ons on top of salary? How should they be managed to provide full visibility of all costs and requirements - avoiding nasty surprises?

You have to look at each country with new eyes. In Italy and Greece, there can be large penalties for tax underpayment. Greece has many different filing periods and getting it right is almost always a convoluted process.

Greece - where complexity rules
  • Rapidly changing legislation, including complex labour laws
  • Payroll legislation changes frequently and can be applied retroactively
  • Businesses can face government-imposed hiring restrictions
  • Laws can be conflicting, for example on VAT refunds 
  • Guidance can be scant, making it tough to navigate
  • Some Greek islands operate as independent provinces for compliance and tax

Good communications and controls

When a business grows rapidly, communication lines will be stretched, exacerbated by different time zones. There needs to be good internal communication between the HR, financial and legal teams. Now we have a sign-off process between all functional leaders before we enter a new country or market.

The right controls are vital, too. For example, setting up a steering group for international expansion to make sure managers aren't making uncoordinated decisions.  It is key that the people in the business appreciate they don't have all the answers and are happy to seek local advice. Further, it is best to use one set of advisors with all the necessary skills to enhance co-ordination.

Becoming compliant takes time, patience and expertise. The rules are often tricky to navigate, more so in some countries than others.

Over time, I've learned that with the right strategy and advisors, you can maintain your focus on maximising growth and profits, while keeping the authorities happy.

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