Tax 101 for Startups

A startup meets five kinds of tax in its first years: tax on company profit, VAT or sales tax on what it sells, taxes on payroll, taxes on cross-border payments, and the tax its founders and employees pay on pay and equity. Most startup tax trouble comes not from clever planning gone wrong, but from missed deadlines, wrong VAT on cross-border sales, contractors who are really employees, and equity granted without checking the tax.

This guide is a country-neutral primer for founders without a tax background. It explains what each tax is, when it applies, and what to do about it. It cannot give the rates or rules of your country, because they differ and change, so each section ends with what to check locally.

The short answer

1. Loss-making is not tax-free. Even with no profit, you usually still have to file returns, register for VAT when thresholds are crossed, and run payroll taxes correctly.
2. VAT, and in the United States sales tax, is the tax most likely to bite. You collect it for the state, and mistakes on cross-border sales or reclaiming it are common and costly.
3. Payroll taxes are the largest tax cost for most startups once they hire. Employer contributions can add a large percentage on top of gross salary in many European countries.
4. Contractors are not a way around employment tax. Authorities look at how the work is done, not at the label on the contract.
5. Equity has a tax moment. Founder shares, options and share sales are all taxed somewhere. Check before you grant, not after.
6. Cross-border activity creates new taxes. Selling to other countries, hiring abroad or holding the company in one country while the team works in another can create tax obligations in several places.
7. Incentives exist and are often missed. R&D credits, reduced rates and startup exemptions can be worth real money. They usually need claims, evidence and deadlines.
8. Settle the structure before you incorporate, and get an adviser before the first hire and the first foreign customer, and keep clean records throughout.

Before you start: the questions to settle first

Some tax decisions are cheapest, or only possible, at the very beginning. Where to incorporate, who owns the intellectual property (IP) and how the entities will trade with each other are the main ones. They should be answered with a lawyer and a tax adviser before the company is registered, not after the first invoice, the first hire or the first investor meeting. Changing them later is possible but often means a taxable transfer, lost tax losses, re-papered contracts and a larger bill each year the company grows in value.

A sensible order

1. Write down the facts. Founders' countries of residence, where the team will work, where customers are, what the IP is and who has built it, the investors you expect and the likely exit.
2. Take them to a lawyer and a tax adviser together. Legal and tax answers depend on each other: company law may require something that the tax rules penalise, and the reverse. Asking one without the other is how contradictions appear.
3. Agree the structure and write down the reasons. A short memo of what was decided and why is useful in later due diligence.
4. Incorporate. Only then register the company.
5. Put the documents in place on day one. Founder share agreements, IP assignments from every founder and contractor, intercompany agreements if there is a group, and the equity plan if you will grant options early.
6. Review at each trigger. A funding round, a first hire in a new country, a new product line or a founder moving are the moments to ask whether the structure still fits.

The advice is usually inexpensive compared with the cost of fixing the structure later. Choose the simplest structure that meets the investor, team and customer facts you actually have, not the cleverest one.

The map: which taxes a startup meets

The names change from country to country, but nearly every startup ends up dealing with the taxes in the table. The last column shows how often you normally file or pay, which is what drives your calendar.

Two ideas from this table carry through the guide.

• The company is often a collector, not a payer. VAT, personal income tax withheld from salaries and employee social contributions are not the company's own money. They sit in its bank account for a short time and must be paid over on time. Missing a deadline is treated far more seriously than being late with a supplier.
• The same event can touch several taxes. Hiring an employee creates payroll tax, personal income tax withholding and possibly equity tax if you grant options. Selling software abroad can create VAT, corporate income tax and withholding tax questions at once.

Corporate income tax

Corporate income tax is charged on the company's taxable profit, which starts from the accounting profit and is then adjusted by the tax rules. A startup with losses usually pays none, but it still files, because the filing is what records the loss for use in later years.

How taxable profit is built

1. Start with revenue for the period under the accounting rules.
2. Subtract business costs that are allowed: salaries, rent, software, marketing, professional fees, depreciation of equipment.
3. Add back costs that are not deductible. Typical examples are fines, entertainment above a limit, private spending run through the company and, in some countries, part of interest or certain provisions.
4. Apply incentives and adjustments such as R&D credits or exemptions (see the incentives section).
5. Subtract tax losses brought forward, within whatever limits the country sets.
6. Apply the tax rate. Standard rates in Europe range widely, roughly from the single digits to the mid-thirties as a percentage of profit, and some countries have lower rates for small companies. Check the current rate where your company is resident.

Losses: use them or lose them

Most countries let a company carry tax losses forward against future profits, some for a limited number of years or only up to a share of each year's profit. Some also allow a short carry-back. An invented example, in euros, with a flat 20% rate and no cap on using losses:

The company that earned 600,000 in year 3 pays tax on only 100,000 because it recorded the earlier losses. In practice, check three things that can reduce or remove that benefit:

• Limits on use. Some countries allow only a percentage of profit to be offset in a year.
• Change of ownership. In some countries, losses are restricted or lost when control of the company changes or its activity changes substantially. A funding round that shifts control, or an acquisition, can trigger this.
• Filing. Losses not declared in the right return may not be usable later.

Costs founders often get wrong

• Founder expenses. Business travel and equipment are normally deductible with proper records; a private holiday or home costs are not.
• Related-party payments. Fees paid to a founder's other company or to a shareholder need a contract and a market price.
• Capitalised development costs. Whether product development is deducted immediately or spread over years differs by country. It affects both the tax bill and the cash forecast.
• Missing invoices. A cost without a valid invoice is often not deductible, however real it was.

To check locally: the rate, how losses carry forward, advance payment rules, the filing deadline and whether small companies have a simplified regime.

VAT and sales tax

VAT (value added tax) is a consumption tax collected at each step of the supply chain. A VAT-registered business charges VAT on its sales (output VAT), deducts the VAT it paid on its business purchases (input VAT) and pays the difference to the tax authority. The business is the collector; the final customer bears the cost. The United States uses a different system, sales tax, which is charged only at the final sale and varies by state; the cross-border sections below are about VAT.

How it works: a simple example

An invented example, in euros, with an illustrative 20% rate.

The 1,200 is not income. It is money collected from customers, less money already paid to suppliers, and it goes to the tax authority. If purchases exceed sales in a period, as in a launch phase, the position is a VAT refund or credit, which some countries pay out quickly and others slowly.

Registration

• Domestic threshold. Most countries let very small businesses stay unregistered below a turnover threshold, which differs widely. Above it, you must register, often within days of crossing it.
• Registering early can help. A new company with large start-up costs may want to register voluntarily so it can reclaim input VAT on those costs.
• Registering abroad. Selling goods or services to consumers in another country can require registration there. In the EU, a one-stop-shop scheme lets many sellers report VAT on cross-border sales to consumers through one return in their home country. A single EU-wide threshold (EUR 10,000 at the time of writing; verify) decides when the destination country's VAT rules start to apply.

Cross-border sales, in principle

The correct treatment depends on three facts: what you sell, to whom (a business or a consumer) and where each party is established.

The rules for goods differ from those for services and change often, so confirm each case with an adviser rather than relying on a table.

Invoice basics

1. A valid invoice states the supplier's and the customer's name, address and VAT number where required, the date, a description, the net amount, the rate and the VAT amount.
2. Invoices must be numbered in an unbroken sequence.
3. Input VAT can usually be reclaimed only against a valid invoice made out to the company and for a business purpose.
4. Some purchases carry limited or no input VAT recovery, such as certain entertainment costs or private use of a company car.
5. Keep the proof that justifies any special treatment: a VAT number check for a reverse-charge sale, the customer's location data for a digital sale, the export documents for an export.

Sales tax in the United States

The United States has no federal VAT or sales tax. Sales tax is set by the states (a handful have none) and often by cities, counties and special districts on top. A single sale can therefore carry a different combined rate depending on the buyer's address, and the rules on what is taxable differ state by state. The table shows how it differs from VAT.

Nexus is the idea to learn first. Since the US Supreme Court's 2018 decision in *South Dakota v. Wayfair*, a state can require a remote seller to collect its sales tax once the seller's sales into the state pass a threshold, even with no office there. Thresholds are commonly set around USD 100,000 of sales (some states also count 200 transactions), but they differ by state and change, so verify each. Physical presence also creates nexus: an employee or contractor working in a state, inventory held there, or an office. A remote hire in a new state can therefore trigger sales tax duties as well as payroll tax duties.

Why it gets complex quickly.

1. A startup can pass the threshold in several states within months of growth, each with its own registration, rates, taxability rules, return dates and penalties.
2. Whether your product is taxable can differ from one state to the next, and the answer can change with the law.
3. The seller is liable for tax it should have collected but did not, often with interest and penalties, and for the period before it noticed the problem.
4. Combined state and local rates depend on the customer's exact address, which means calculating the tax on every invoice.
5. Business customers may owe nothing if they give you a valid exemption certificate, but you must collect and keep those certificates.

What to do about it. Do not try to run this with a spreadsheet for long. Once you sell to customers in more than a couple of states, or expect to pass a threshold in the near term, it is usually better to use a tax compliance platform such as Sphere. A platform of this kind can monitor where you have nexus, help with registrations, calculate the tax on each sale and handle the filings. Look at a few options, check what each covers in the states you sell to, and agree with your accountant who is responsible for what. Also run a nexus review for past sales, because exposure for periods before you registered is common.

Sales tax is separate from income tax. Having sales tax nexus in a state does not by itself mean the company owes income tax there, but the same facts (employees, offices, activity) often raise both questions.

To check locally: the registration threshold, return frequency, e-invoicing or real-time reporting duties (several countries require invoice data to be sent to the authority) and refund timing.

Payroll and contractors

For most startups, payroll is the largest cost and the largest tax. Three layers sit on top of a salary: the employer's own contributions, the employee's contributions and the employee's personal income tax. The company pays all three over to the authorities, even though only the first is its own cost.

Keep the money set aside for payroll taxes in its own account or pot, as described in Banking for Startups.

What one salary really costs

An invented example, in euros per month, with illustrative percentages. Real rates differ by country, by salary level and by year.

Two lessons follow. First, the cost of a hire is well above the gross salary in many countries, so a hiring plan built on gross salaries understates burn. Second, the gap between what the company pays and what the employee takes home is large in high-tax countries, which is one reason equity and benefits matter in offers.

Obligations when you hire

1. Register as an employer with the tax and social security authorities before the first working day.
2. Use a written contract that matches local law on notice, probation, working time and holiday.
3. Run payroll every month and pay withheld taxes and contributions by the deadline. Late payment carries penalties and, in some countries, personal liability for directors.
4. File the periodic reports the country requires, monthly or annual.
5. Handle benefits correctly. A company car, a phone, a meal allowance or a relocation payment can be taxable income or tax-free depending on type and limits.

Employee or contractor?

A contractor is paid on invoice and handles their own taxes. An employee is on payroll. Authorities look at how the relationship works, not at what the contract calls it. The signs of employment usually include:

• the person works under your direction and to your schedule;
• they work mainly or only for you, over a long period;
• they use your equipment and are integrated into your team;
• they cannot send a replacement or take other clients freely;
• they are paid regularly for time rather than for a defined result.

If a contractor is reclassified, the company can owe back payroll taxes and contributions, interest and penalties, sometimes for several years. The risk rises for founders' friends, long-term freelancers working full time for one client, and anyone engaged through a personal service company in a country with strict rules.

Hiring abroad

An employee working in another country is usually taxed and covered by social security there, and the company may need to register as an employer in that country, work through a local entity, or use an employer of record (EOR) such as Deel. An EOR becomes the legal employer on paper: it signs the local contract, registers for local payroll taxes and social security, and files the returns, while you manage the person day to day. It is a practical way to hire in a market before committing to an entity, and it costs a monthly fee per employee on top of the salary. This is a frequent first cross-border trap; the next sections return to it.

To check locally: employer and employee contribution rates, the employee-versus-contractor test, rules on benefits in kind, and what a company needs to employ someone who lives abroad.

Founders and equity

There are two layers of tax here: the founders' own pay from the company and the shares or options that founders and employees hold. Employee equity is covered in depth in the ESOP guide; this section gives the founder view and the principles.

For how to design the option plan itself, from pool size to vesting and leaver rules, see ESOP for Startups: A Founder's Guide.

How founders take money out

Most early startups pay founders little or nothing. When founders do take pay, the usual question is the balance between salary and dividends, and the answer depends on the country's rates, so it is a task for the adviser.

Founder shares

• Issue founder shares at the start, at a nominal price and with a clear record of who paid what. Shares issued later at a higher value can create a taxable benefit.
• Vesting of founder shares can change the tax moment in some countries. In the United States, for instance, a founder with restricted shares normally files an election within 30 days of receiving them (the 83(b) election) to fix the tax at the low early value. Missing that window can be expensive and cannot be fixed afterwards. Other countries have no equivalent, so ask.
• Founders who move countries can create tax events by moving. Residence at the time shares are sold or at the time of vesting can decide where the gain is taxed.

Employee equity

Options, restricted shares and similar awards are taxed at one or more of these moments: when they are granted, when they vest, when they are exercised and when the shares are sold. The right plan design pushes the tax to the latest moment, ideally the sale, when the employee has cash to pay it. The tax is on the individual, but the company often has reporting duties and sometimes a withholding or contribution cost. See the ESOP guide in this series for the instruments, the worked examples and the pitfalls, including the risk of paying tax on paper value when there is no cash.

Selling the company

When a company is sold, the founders and investors normally pay tax on the gain on their shares, not the company. Whether that gain is taxed, and at what rate, depends on the country of the seller, how long the shares were held and any special regime for qualifying small companies. In the United States, for example, a rule on qualified small business stock can exclude part or all of the gain if strict conditions are met (verify the current rules). Plan for this early; the conditions are often about structure and timing that cannot be restored later.

To check locally: the tax on salary versus dividends, rules on loans to directors, the tax treatment of founder shares and vesting, reliefs on selling shares, and what changes if a founder moves country.

Cross-border tax

Most startups sell, hire or raise money across borders early. Each border adds questions that a single-country company never meets. Four concepts cover most of them.

Where the company is tax resident

A company is generally taxed on its worldwide profit in the country where it is resident, and only on local-source profit elsewhere. Residence is usually decided by where it is incorporated, or where it is effectively managed and controlled. A company incorporated in one country but run day to day by directors in another can be resident in both, which creates double-tax risk and filing duties. Where the board meets, where the key decisions are made and where the founders live all matter.

Permanent establishment

A permanent establishment (PE) is a sufficient presence in a country that lets that country tax the profits attributable to it, even though the company is resident elsewhere. The triggers usually include:

• a fixed place of business, such as an office or a co-working desk used on a long-term basis;
• an employee or agent who regularly concludes contracts on the company's behalf;
• in some views and treaties, a remote employee working from home in another country on a continuing basis.

A PE can mean corporate income tax filings and payments in that country, plus payroll and VAT duties. Treaties between countries and local rules decide the thresholds, so the first remote hire in a new country is the moment to ask.

Withholding tax

Some payments to another country are taxed at source by the payer, who pays the withheld amount to its own authority and sends the rest to the recipient. This commonly covers royalties, interest and dividends, and in some countries fees for services or software. Tax treaties usually reduce the rate, but often only if the recipient provides a certificate of residence or a form in advance. A startup that pays a foreign licensor or receives payments from a foreign customer should ask whether withholding applies, because it is much harder to fix after the payment.

Transfer pricing

When two related companies trade with each other, such as a parent and a subsidiary, the price they charge must be one that independent parties would agree. This is the arm's-length principle. Typical startup cases:

1. a local subsidiary that provides development or sales support to a foreign parent, which should be paid a cost-plus margin;
2. a parent that licenses its intellectual property to subsidiaries for a royalty;
3. loans between group companies, which should carry a market interest rate.

The documentation burden is usually lighter for small groups, but the principle applies from the first intercompany invoice. Write intercompany agreements early, and charge on a consistent basis.

A quick map of common cross-border situations

To check locally: the tax treaty network of your country, the residence test for companies, the local rules on a PE and remote workers, and which payments attract withholding tax.

Company structure, intercompany and IP: the tax view

The structure a startup chooses at the beginning, and the way it moves money and intellectual property (IP) between its entities, decides much of its tax position for years. Structure is also a legal, investor and operational choice; this section covers only the tax effects. Changes later are possible but get more expensive as the company's value grows, because moving shares or IP can itself be a taxable event.

The main structures

What drives the choice

1. Where the founders live. Their personal tax on dividends and share sales depends on residence, not on where the company is.
2. Where the team works. Employees in a country typically need a local employer, or create a permanent establishment for the company.
3. Where customers are. This drives VAT registration and, for larger sales, local profit taxation.
4. What investors require. Many funds prefer certain jurisdictions and structures, which sometimes means restructuring before a round.
5. Where the IP will be built and owned. See below.
6. The likely exit. A sale of shares and a sale of assets are taxed differently, and a holding company or a qualifying-company regime can change the outcome for sellers.

Intercompany flows

Once a group has more than one entity, every payment between them is a tax question. The price must be one that independent parties would agree (the arm's-length principle), and the paperwork must show it.

An invented example, in euros, with an illustrative 10% margin. A subsidiary in country B develops software for its parent in country A. Its costs for the year are 800,000, so it invoices the parent 880,000. The subsidiary reports a profit of 80,000 and pays tax on it in country B; the parent deducts 880,000 in country A. If the margin were set at zero, country B could argue the subsidiary underpriced its work and adjust its profit upwards. If it were set far above a market level, country A could refuse part of the deduction. The reasoning is recorded in the agreement, which is why early documentation matters more than the precise percentage.

Intellectual property

IP is often the most valuable asset in a startup and the one with the greatest tax sensitivity.

• Know who owns it. Code, designs and inventions created before incorporation, or by contractors, belong to the individual unless they are formally assigned in writing. Fix this on day one; a late assignment is harder and can be priced and taxed as a sale.
• Moving IP is a taxable event in many countries. Selling or contributing IP to a company, or moving it from one group entity to another, can create a gain on the IP's market value at the transfer date. The later it happens, the larger the gain.
• Where the value is created matters. Tax authorities increasingly ask who develops, enhances, maintains, protects and exploits the IP, and allocate the profits accordingly. A shell entity that holds IP but employs nobody to manage it is open to challenge.
• Ownership affects incentives. Patent box regimes and R&D credits usually need the claimant to own or develop the qualifying IP in that country.
• Choose one clear model for a group. In one common model the parent owns the IP and subsidiaries are paid for services. In another, a subsidiary develops and owns IP and licenses it. The first is simpler for startups; the second needs real substance in the owning company.

Pitfalls

1. Setting up entities for tax reasons alone. Anti-avoidance and substance rules can deny benefits to entities with no real activity, and each entity brings accounting and filing costs.
2. Restructuring after the value has grown. Moving shares or IP at a high valuation can trigger tax that would have been small at the start.
3. Directors in the wrong country. If a company's decisions are taken from another country, that country may claim it as tax resident.
4. No intercompany agreements. Authorities can reprice or disallow charges that were never written down.
5. Ignoring the founders' personal tax. A structure that is neat for the company can still tax the founders heavily on a share swap or a later sale.

To check locally: whether holding company regimes and participation exemptions exist, how a share-for-share exchange with a foreign parent is taxed, the transfer pricing documentation thresholds, withholding rates on royalties, interest and dividends under the treaties that matter to you, and the exit tax rules if IP or the company's seat moves.

Tax incentives for startups

Many countries use the tax system to encourage innovation and early-stage investment. These incentives are often worth real money, and they are the part of startup tax that is most often missed, because nobody claims what they do not know exists. Most come with conditions on size, age, activity and evidence, and many have to be claimed in the return or by a set deadline.

How to claim without making a mess

1. Ask the question early. Put "which incentives could apply to us?" on the agenda when you first meet an adviser.
2. Keep records from day one. The strongest R&D claims have a clear record of who worked on what, for how long, and on what problem. Reconstructing that two years later is slow and weak.
3. Separate the project. Use a project code or a cost centre for eligible work, so the cost is easy to extract.
4. Watch the deadlines. Claim windows are often tied to the filing deadline, or a fixed number of years after the period.
5. Be honest about the boundary. An aggressive claim for routine development can attract an audit and penalties. Authorities often look hard at claims by small companies.

Tax on grants and subsidies

A grant is not automatically tax-free. Some countries treat grants as taxable income in the year received, some spread the income over the period the grant funds, and some reduce the costs eligible for relief. Grant rules may also limit how you can claim other incentives on the same costs, because the same expense cannot be funded twice. Before you accept a grant, ask how it is taxed, how it is recorded in the accounts and whether it affects your R&D claim.

To check locally: which of these schemes your country offers, the eligibility tests, how to claim, whether credits are paid out in cash or only offset against tax, and how grants are taxed.

The tax calendar and record keeping

Tax compliance is mostly a calendar problem. The rules are not hard to follow once the dates are known, but a missed date carries a penalty whatever the reason. Build one shared calendar in your first month, and put it in the monthly close routine.

A typical calendar

The table shows the pattern most countries follow. Exact dates and frequencies differ, and small companies are sometimes allowed to file less often.

Good habits: put every deadline in the shared calendar with a reminder ten days earlier, name one owner per filing, and pay tax money from a separate account so that it is not spent by accident.

Records to keep

• Sales invoices and credit notes, in unbroken sequence;
• supplier invoices and receipts, matched to bank payments;
• bank and card statements and payment-provider reports;
• payroll records and employment contracts;
• contracts with customers, suppliers and contractors, including intercompany agreements;
• board minutes and shareholder decisions, share registers and the cap table;
• VAT evidence for special cases, such as customer location data or export documents;
• R&D time records and project descriptions where you claim incentives.

Most countries require books and supporting documents to be kept for a fixed number of years, commonly in the range of five to ten, and sometimes longer for specific items such as land or contracts. Check the period locally. Cloud accounting with attached documents makes this far easier than paper.

When a notice arrives

1. Do not ignore it. Authorities often have short response windows.
2. Note the date it arrived and the deadline to reply.
3. Send it to your accountant the same day.
4. Reply on time, even if only to ask for more time in writing.
5. Keep a log of every letter and reply; it is useful if a dispute follows.

Common mistakes, a checklist and questions for your adviser

Ten mistakes

1. Treating VAT collected as company money. It is held for the authority and must be paid on time.
2. Charging the wrong VAT on a cross-border sale, or not registering abroad after crossing a threshold.
3. Treating a full-time freelancer as a contractor, then facing back payroll tax and penalties.
4. Hiring in another country with no local registration, and creating payroll and permanent establishment exposure.
5. Granting equity without checking the tax, so employees face a bill on paper gains.
6. Missing the founder-share filing windows that cannot be fixed later.
7. Mixing private and company spending, which turns costs into taxable pay and erodes trust in the books.
8. Not filing because there is no profit. Losses are only usable if declared.
9. Never claiming incentives such as R&D credits, because no one asked.
10. No tax calendar and no named owner, so deadlines pass without anyone noticing.

Starter checklist

• Company registered for corporate tax, VAT (when required) and as an employer
• A shared tax calendar with owners and reminders
• A separate account or ledger for tax and payroll money
• Invoice template that meets local VAT rules, with unbroken numbering
• A written rule for classifying contractors versus employees
• Payroll set up through a provider or the accountant before the first hire
• A check on every cross-border sale or hire before it starts
• Intercompany agreements in place if you have more than one entity
• Founder share and vesting filings completed within local deadlines
• Tax advice on any option plan before the first grant
• R&D and other incentives reviewed at least once a year
• Records stored in one place, in line with the local retention period

Questions to bring to a tax adviser

1. Which taxes does our company have to register for now, and which will it have to register for in the next twelve months?
2. What are the VAT thresholds and rules for the countries we sell to?
3. How should we classify the people who work for us, and which of them are at risk of being reclassified?
4. What would hiring our first person in another country trigger?
5. How should founders take money out, and how does that change if a founder moves?
6. Which incentives and grants could apply to us, and what evidence do they need?
7. How are our tax losses treated, and what would a funding round or sale do to them?
8. How should intercompany charges be set and documented?
9. What is our filing and payment calendar for the next twelve months?
10. What do you need from us each month to keep it all on time?

A note on sources and numbers

All example figures in this guide (the loss carry-forward table, the VAT example, the salary cost example) and all percentages are invented for illustration; they are not rates from any country.

Statements about specific schemes, such as the EU one-stop shop and its EUR 10,000 threshold, the US 83(b) election and the US qualified small business stock rule, should be checked against current official sources, because the rules change often.

Retention periods, thresholds and deadlines are described as ranges and patterns, not as the rules of a particular country.

This guide is general information, not tax, legal or accounting advice. Ask a licensed adviser in the relevant country before you act.