Why do some IT companies choose to set up their business abroad?
Summary
Introduction
Relocating IT operations outside of France is no longer an isolated incident. Software publishers, digital agencies, digital service companies, and SaaS startups are exploring relocation scenarios every year that would have seemed exotic ten years ago. This trend is driven by a combination of tax, operational, and commercial factors that must be examined separately before any conclusions are drawn . Such a fundamental decision should never be based solely on the corporate tax rate.
The reality observed in the cases is more nuanced than the prevailing narrative. An IT company that relocates its headquarters without moving its teams, infrastructure, and decision-making bodies risks reclassification by the French tax authorities, and the anticipated gain then transforms into a tax reassessment accompanied by penalties. The central issue is not the country chosen, but the actual economic substance transferred .
This article examines the objective reasons why IT company executives choose to establish operations outside of France, the legal conditions that make the operation defensible, and the recurring errors that lead to its failure. The rates cited are publicly available data from national legislation , not commercial projections. They change, sometimes rapidly, which necessitates verification at the project's date.
We addressed this issue from the perspective of the freelancer in our article on destinations to consider before moving abroad as an IT consultant . The reasoning changes quite significantly when a company, employees, and intangible assets are involved. Coreway Consulting supports these decision-making processes in around twenty jurisdictions, always starting from the company's actual situation.
A movement that goes beyond the sole issue of taxation.
Executives considering international expansion rarely cite taxation as their primary reason. They typically mention the difficulty in recruiting certain technical profiles, the administrative burden of hiring, the volatility of the regulatory framework, or the need for a physical presence where their key accounts are located. Taxation often ranks third or fourth in the hierarchy of stated motivations.
This does not mean that taxation is secondary. It acts as an accelerator: when a company already has sound operational reasons to relocate, the tax difference transforms a possible project into an obvious one. Conversely, a purely tax-driven motivation weakens the legal position, as it leaves the case open to the abuse of law procedure outlined in the tax procedures code.
The IT sector also has a characteristic that clearly distinguishes it from industry or retail. Its main asset is intangible, its production tool consists of shared servers, and its employees can work from any time zone. This structural mobility of digital companies explains why they are overrepresented in relocation projects, far more so than their actual weight in the French economy.
Corporate taxation, the primary acknowledged trigger
France applies a standard corporate tax rate of 25%, to which are added levies on profit distributions when the executive receives their remuneration in dividends. A special tax has also been introduced for very large companies, but this does not affect the majority of software companies. Compared to the jurisdictions studied by IT executives, this difference in nominal tax rates remains the starting point for consideration .
Interest rate differential and its effect on self-financing capacity
A publisher that generates significant operating profit and reinvests it entirely in research and development directly measures the impact of the tax rate on its growth rate. Every percentage point of tax saved translates into additional months of engineering, which matters more than immediate distribution. This logic of reinvesting profits in the product structures most serious projects, far removed from the cliché of tax avoidance.
The United Arab Emirates applies a 9% corporate tax rate above a certain annual profit threshold, with a specific regime for qualifying entities established in free zones. Cyprus has long maintained a rate of 12.5%, one of the lowest in the European Union, and the alignment with the European Union's 15% floor for large groups is the subject of ongoing legislative work that should be verified during the planning phase. Therefore , providing support for tax relocation to Cyprus requires an up-to-date understanding of local law, not a static understanding of it.
Singapore maintains a 17% tax rate, higher than one might expect, but this is accompanied by partial exemptions on the first profit brackets and no capital gains tax. Mauritius combines a 15% rate with a partial exemption mechanism applicable to certain income categories, which significantly reduces the effective tax burden. The nominal rate, therefore, reveals almost nothing about the actual tax burden until the tax base has been recalculated.
Intellectual property at the heart of arbitration
For a software publisher, value lies not in the premises or the hardware, but in the source code, the brand, the databases, and the license agreements. The location of these assets determines where profits are legitimately taxed, far more so than the address on the letterhead. Any planning for a location therefore begins with a precise mapping of the intangible assets held .
Where to locate the code, trademark, and licenses
Several jurisdictions have developed tax regimes favorable to intellectual property income, often based on OECD standards known as the nexus approach. These regimes make the tax advantage conditional on the existence of research and development expenditures actually incurred locally. In other words, one cannot relocate a software asset without also relocating the engineers who maintain it, otherwise the benefit of the regime will be lost.
Malta has built part of its attractiveness on an allocation mechanism that reduces the effective burden borne by shareholders well below the nominal rate of 35%. The country has an English-speaking legal ecosystem and an administration experienced in software licensing structures. However, a tax relocation project in Malta relies on demanding formalities, and improvisation is costly.
The risk of transferring an undervalued intangible asset
When a French company transfers its code or trademark to a foreign subsidiary, the tax authorities verify that the transaction was carried out at market value. An undervaluation constitutes an indirect transfer of profits, penalized under Article 57 of the French General Tax Code. Providing an independent valuation of the transferred asset is not optional but the cornerstone of the defense.
Access to markets, talent and currencies
The commercial motivation is real and often underestimated in public debate. A publishing company targeting the Gulf, Southeast Asia, or East Africa quickly finds that its sales cycles shorten when it has a local entity, a local bank account, and invoices in the client's currency. Some public or semi-public tenders even require registration in the buyer's country .
Singapore perfectly illustrates this regional gateway dynamic. The country offers legal and logistical access to the whole of Southeast Asia, a stable business law modeled on the British system, and an abundant technical workforce. Exploring a relocation to Singapore is often driven by a commercial expansion strategy rather than a tax calculation.
The issue of talent also plays a role. Certain skills in cybersecurity, data engineering, or applied artificial intelligence are more easily recruited in pools where salary competition is different. The Emirates and Singapore have developed visa policies specifically for technology professionals, with short processing times, which is an operational advantage independent of taxation .
Economic substance, a condition for the project's validity
The concept of economic substance has become the cornerstone of all controls regarding international establishment. It refers to all the human, material, and decision-making resources actually present in the host jurisdiction. A company that has no office, no employees, and no resident directors finds itself in a legally indefensible position when faced with an audit , regardless of the quality of its articles of association.
What the administration is actually examining
The auditors focus on very tangible elements: the location of board meetings, the email addresses used by executives to access internal systems, the location of operational bank accounts, local employment contracts, and commercial leases. They then compare these elements with the declared distribution of profits. A clear discrepancy leads to the recognition of a place of effective management that remained in France , with taxation of the entire worldwide profit.
The United Arab Emirates has introduced its own economic substance rules applicable to certain activities, mandating the presence of qualified personnel and proportionate operating expenses. This long-absent requirement has significantly improved the local landscape. Preparing tax relocation advice in Dubai now involves establishing a substantial team, a real office, and effective governance.
The good news for IT companies is that this core business is easier to establish than in other sectors. A small development team, a resident technical lead, and a fully operational management team are often enough to define a genuine business. However, the cost of this core business must be factored into the project's profitability calculation ; otherwise, the decision rests on a flawed assumption.
Transfer pricing, Article 209 B and abuse of rights
Three mechanisms of French law govern the establishment of a business abroad, and it is essential to understand them before setting up any company. The first concerns transfer pricing: transactions between related entities must be remunerated as they would be between independent parties. The second, Article 209 B of the French General Tax Code, allows for the reintegration into French taxable income of the profits of a low-taxed subsidiary when it is controlled by a French company.
The third mechanism is the abuse of law procedure, which targets arrangements whose primary or exclusive purpose is tax-related. The distinction between legitimate tax optimization and artificial arrangements hinges precisely on the existence of genuine and documented economic motivations. A business location driven by a market, identifiable clients, and recruitment needs withstands this scrutiny, whereas a purely legal shell does not.
Documentation to prepare from the first year
A robust dossier includes a written transfer pricing policy, signed and dated intragroup contracts, minutes of on-site board meetings, and a memorandum justifying the project's economic rationale. These documents should be compiled gradually, not retroactively three years later under pressure from a proposed adjustment. Establishing this permanent dossier from the outset represents the most cost-effective investment of the entire process.
In addition, there is automatic banking transparency. The OECD's Common Reporting Standard (CRS) facilitates the exchange of information between more than a hundred jurisdictions, and the United Arab Emirates, Cyprus, Malta, Mauritius, and Singapore all participate. The French tax authorities therefore receive account data automatically, rendering any strategy of discretion completely ineffective .
Dividends, capital gains and the manager's situation
Relocating the company does not resolve the personal situation of the executive, and this is the most common analytical error. As long as the executive remains a French tax resident, the dividends received from their foreign entity remain taxable in France according to the usual rules, subject to applicable tax treaties. The executive's tax residence is treated as a separate matter from that of the company.
Article 123 bis of the French General Tax Code also applies to individuals holding a stake in a foreign entity subject to a preferential tax regime. It allows for the taxation in France of the undistributed income of that entity. This provision directly targets schemes where a manager remaining in France shelters their profits in a foreign company, and it is one of the most frequently used tools during tax audits .
As for the future sale of the company, it requires planning from the initial structuring stage. The French exit tax applies to shareholders whose shareholdings exceed certain thresholds when transferring their tax residence outside of France, with a deferral of payment under certain conditions. Therefore, considering a transfer of residence to Mauritius or another jurisdiction requires simultaneously addressing the fate of the company and the personal assets of the manager.
Mistakes that cause an IT implementation to fail
The first mistake is to set up the business before determining the jurisdiction. The costs incurred create a bias towards commitment, leading to persistence with an unsuitable choice. The correct approach prioritizes analyzing the situation before any company formation , even when service providers offer incorporation within forty-eight hours.
The three most common pitfalls
The second pitfall lies in underestimating the substance's recurring costs: office space, local salaries, accounting, auditing, and license renewals. These annual expenses reduce the true difference between the two scenarios and sometimes change the outcome. The third concerns clients, as some large accounts apply restrictive purchasing policies to suppliers located in jurisdictions on watch lists, which can jeopardize contracts already signed .
A final, more insidious error is to reason based on the law as it stood three years ago. The Emirates have introduced a corporate tax, Portugal has closed its historical regime to new entrants, and the 15% global minimum tax now applies to groups with consolidated revenues exceeding €750 million. Verifying the law in force at the time of the project is the first step in any serious work.
Comparative table of the jurisdictions studied
The table below summarizes publicly available legal parameters, which should be verified as of the date of your project. It is not a ranking but a basis for discussion, as each company profile requires a different interpretation of this data.
Jurisdiction | Corporate tax | Capital gains from disposal | Convention with France | IT company profile suitable |
United Arab Emirates | 9% above the threshold, specific regime in free zones | Not taxed in principle | Yes, the agreement is in effect. | Publisher targeting the Gulf, with management based locally |
Cyprus | Historically 12.5%, European alignment underway | Exemptions on securities | Yes, the agreement is in effect. | European SaaS retaining customers in the Union |
Malta | 35% nominal value, allocated to the shareholder | Exempt under certain conditions | Yes, the agreement is in effect. | Software and trademark licensing structure |
MAURITIUS | 15% with partial exemption on certain income | Not taxed | Yes, the agreement is in effect. | Francophone company focused on Africa |
Singapore | 17% with partial exemptions | Not taxed | Yes, the agreement is in effect. | Publisher targeting Southeast Asia |
Testimony from a software publisher executive
A 47-year-old executive of a business management software company, with a dozen employees and an annual turnover of around two million euros, consulted us after signing his first contracts in the Gulf. His question concerned the advisability of creating a regional entity rather than continuing to invoice from France. His clients were demanding a legal representative based in the region , and payment delays were increasing due to the lack of local invoicing.
The analysis showed that a subsidiary in the UAE was fully justified from a commercial standpoint, provided that a regional manager and two support engineers were stationed there, and that product development and code ownership remained in France. The chosen structure allocated functions according to their economic reality rather than a target profit margin. This documented allocation of functions and risks resulted in a defensible arrangement, while also resolving the commercial issue that had prompted the initial approach.
Frequently Asked Questions
Is it possible to set up an IT company abroad while retaining its French clients?
Yes, provided that no undeclared permanent establishment is maintained in France. If employees, an office, or a complete business cycle remains in France, the tax authorities will attribute the corresponding portion of profits to France. Cross-border invoicing of IT services does not, in itself, present any difficulty.
At what size does an international presence become relevant?
There is no legal threshold. In practice, the costs of substantive support, auditing, and compliance make the operation difficult to make profitable below an annual profit of a few hundred thousand euros. The actual threshold depends primarily on the existing commercial presence in the target area.
Should the head office be relocated or a subsidiary created?
Both options exist and have different consequences. Relocating the registered office of a French company can trigger immediate taxation of unrealized capital gains, while creating a subsidiary preserves the existing structure but requires a strict transfer pricing policy. The choice depends on the desired location of the intangible assets.
Are these jurisdictions included on the French list of non-cooperative states?
The United Arab Emirates, Cyprus, Malta, Mauritius, and Singapore are not included on the list of non-cooperative states and territories published by France. This list is regularly updated and should be consulted as of the date of this project, as inclusion would result in increased withholding taxes.
Does the 15% global minimum tax apply to software SMEs?
No, in the vast majority of cases. The framework developed by the OECD applies to groups with consolidated revenue exceeding €750 million. Medium-sized publishers and agencies are not included, but should monitor national implementation.
How long does a properly prepared implantation take?
Between three and nine months, depending on the jurisdiction and the complexity of the assets to be transferred. Company formation is often the quickest part, while opening bank accounts, local recruitment, and transfer pricing documentation take up most of the time.
Conclusion
IT companies relocate abroad for a combination of reasons, including market access, skills availability, regulatory stability, and, indeed, taxation. None of these reasons alone is sufficient to justify a move whose effects are measured over ten years. Success hinges on the consistency between the stated strategy and the operational reality , verifiable through concrete evidence.
The rigorous approach involves examining several jurisdictions simultaneously, calculating the full cost of the substance in each, and then comparing this cost to the expected tax savings and anticipated commercial benefits. Many cases conclude with the company remaining in France with a simple representative subsidiary, and this is sometimes the correct conclusion . Sound advice is evident in its ability to tell you this.
You run an IT company and want to objectively assess the benefits of establishing a presence abroad. You can request a personalized study from Coreway Consulting and explore with us the jurisdictions best suited to your business.
