A company for an IT agency is the legal entity through which a team of developers signs contracts with foreign clients, issues invoices and transfers the rights to the code it creates. It is often registered in the UK, the US or Estonia, and sometimes in an offshore jurisdiction, so that the counterparty comes from a country the client understands. Taxes, however, depend on where the people who run the projects and sign the contracts live and work.
Why the team's location matters more than the country of registration
An agency sells people's work, so tax authorities look at two things:
- permanent establishment. Under Article 5 of the OECD Model Tax Convention, this is a fixed place of business through which the business of an enterprise is wholly or partly carried on. A permanent establishment also arises when a person in another country habitually concludes contracts on behalf of the enterprise or plays the principal role in concluding them. Profit attributable to such a permanent establishment is taxed in the country where the team works;
- the company's tax residency. The UK treats any legal entity incorporated in the country as UK resident (Corporation Tax Act 2009, section 14). Other countries may treat it as their resident if its directors in fact manage it from their territory.
If the founder lives in one country, the team in two others and the company is registered in a fourth, tax questions arise in each of them. A detailed analysis is in the article company tax residency.
Which jurisdictions are compared
| Option | Corporate income tax | What to consider |
|---|---|---|
| United Kingdom (Ltd) | 19% for profits up to £50,000, 25% above £250,000, partial relief in between | Companies House online registration fee of £100, annual confirmation statement of £50, a physical address in the country, identity verification of directors |
| United States (LLC) | Depends on the form and the state | An LLC with one foreign owner files Form 5472; the penalty for failure to file is $25,000 |
| Estonia (OÜ) | 22/78 on distributed profit | Tax is paid when dividends and other distributions are made; e-Residency does not confer tax residency |
| A local company in the team's country | That country's rates | Simpler for employment contracts and employees' taxes |
More on each form: offshore company in England, US LLC for non-residents and Estonian OÜ.
The client contract
A large client vets the contractor and its contracts. In the master services agreement (MSA) and statements of work (SOW), set out:
- the transfer of exclusive rights to the code and materials after payment;
- the acceptance procedure, the warranty period and the limitation of liability;
- confidentiality and an NDA;
- processing of personal data. If the agency processes personal data of the client's customers in the EU, a data processing agreement under Article 28 of the GDPR is required, setting out the subject matter, duration, purposes and the processor's obligations;
- the currency, payment terms and the party that issues the invoice.
Relations with the team
The rights to the code pass to the client only if they have first passed from the developers to the agency. Contracts with each contributor need an assignment of rights to the work results. Whether people can be engaged as independent contractors is assessed under the laws of the country where they live: if they are in fact full-time workers, local authorities may reclassify the relationship as employment, with taxes and contributions.
Budget
A two-year cost estimate covers registration and annual maintenance, bookkeeping and tax returns, payments to the team, currency conversion and bank fees, legal work on MSA and SOW templates, and professional liability insurance if the client requires it.
Common mistakes
- Selling a UK Ltd as a tax exemption: it pays Corporation Tax in the UK.
- Signing contracts on behalf of a foreign company from your own country without assessing permanent establishment.
- Receiving payment into a personal account or the account of another legal entity.
- Leaving the rights to the code with the developers without a written assignment.
If the agency is a single specialist, compare the options in the article company for freelancers and consultants.
Next step
When the agency launches its own subscription product, payments and VAT are covered in choosing a jurisdiction for SaaS. The choice between the British and the American form is in UK LTD or US LLC, and standard structures for exporting services on offshore structures for IT and consulting.
Send us the clients' countries, where the founders and the team live, the expected turnover and large clients' requirements for a counterparty. Offshora will compare 2–3 structures with taxes, two-year costs and a banking route. Submit a request.
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