Going global: Tax and compliance strategies for Canadian tech exporters

If you’re a Canadian technology company, watching global trade relationships evolve, there’s a chance you’re thinking big. Maybe you’re thinking about your first American deal or a pilot project in the EU. The opportunity to scale on a global level has never been so easy to reach. And for leading tech companies, it’s an enticing door to open.

But here’s the thing: going global is more than just landing some deals abroad. Behind the scenes, your business needs the proper structure, one that optimizes your tax strategy, safeguards your intellectual property (IP), and keeps your operations compliant across multiple jurisdictions.

So, how can you safely make this leap? Let’s break down what technology business owners and CFOs need to know before crossing borders.

The common pitfalls

Expanding globally is an exciting opportunity for your tech company, but it’s also easy to stumble over obstacles that can be tricky — and sometimes expensive — to fix. Here are some of the most common challenges Canadian tech exporters could face:

Assuming there is no foreign tax liability

At the early stage of expanding business internationally, a Canadian tech company may simply sell its products or services in another country without establishing a permanent establishment (PE) there. However, the PE exposure increases when the business activities expand. For example, you may find yourself owing tax somewhere because you hired a local salesperson or needed to run local servers.

Without proper planning, this could lead to unexpected tax liabilities or even double taxation. You may want to consider speaking with a cross-border tax advisor before entering a new market.

Choosing the wrong entity structure

Once your company creates a PE in a foreign jurisdiction, you should consider whether it is beneficial to carry on business through a branch of the Canadian entity or set up a new legal entity in the foreign country. The main tax benefit of a branch is the ability to offset losses incurred by the branch against the Canadian head office's taxable income for Canadian tax purposes.

An incorporated subsidiary, on the other hand, has the advantage of protecting the parent company’s assets from the subsidiary's debts and legal claims.

Choosing the right structure requires balancing tax efficiency, asset protection, and long-term business objectives.

Misclassifying workers or contractors

Remote work makes it easier to build a global team, but it presents new risks to navigate. Every country has its own rules and criteria to determine whether a person should be treated as an employee or an independent contractor for tax purposes.

For instance, a commission-based salesperson could be viewed as an independent contractor in Canada and therefore is not subject to Canadian payroll withholding tax. However, this individual might be considered an employee elsewhere for local tax purposes, potentially resulting in interest and penalties if the company does not properly withhold payroll tax.

You may want to consider speaking with a cross-border tax advisor before signing any foreign contacts to help mitigate this risk.

Waiting too long to protect your IP

Your IP, like your code, algorithms, or product names, is a valuable asset. However, IP protection doesn’t travel across borders automatically. If you haven’t registered your patents or trademarks in the country you’re expanding into, they likely don’t exist there.

A competitor could register something similar before you do, and you’d have little recourse. So, make sure to file early, before market entry, and treat your IP as a part of your go-to-market plan.

Before expanding into a new region, take the time to:

• Register your trademarks and patents in your key markets
• Localize your contracts to ensure IP ownership is clear
• Keep an eye out for potential infringements, particularly in a fast-moving space like technology

Ignoring data privacy rules

When it comes to data privacy laws, different regions have different playbooks — like the EU’s General Data Protection Regulation (GDPR) or Singapore’s Personal Data Protection Act (PDPA). Even unintentional non-compliance could mean hefty fines or blocked access to markets.

Building privacy compliance into your product and processes from day one doesn’t only help you stay compliant, it also helps your company build credibility abroad.

Going it alone for too long

When it comes to global expansion, don’t DIY it. It rarely ends well. Engaging local tax, legal, and regulatory advisors early in the planning process could help you avoid any costly corrections and any missed regulatory nuances.