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Open Up Challenge: Twelve winning fintechs selected to advance the future of small business banking



Open Up Challenge: Twelve winning fintechs selected to advance the future of small business banking

London – Nesta’s Challenge Prize Centre has today announced the twelve fintech businesses who will participate in the final phase of the ‘Open Up Challenge’ – a £2.5m prize fund backing the next generation of financial technology for small businesses.

The Open Up Challenge was announced by Nesta’s Challenge Prize Centre in February 2017. It is part of the Competition & Markets Authority’s package of remedies to shake up the UK retail banking market. It builds on the UK’s pioneering role in implementing open banking to bring greater competition and innovation to the market.

The Challenge led a global search for talented teams building innovative products and services that will help small businesses save time and money, find better services, reduce stress and discover the intelligence in their financial data.

The twelve Finalists, who were selected by an independent judging panel, will each receive a £100k grant, special access to open banking data and support to bring their products to market. Five or six of these Finalists will go on to win a further £200k each at the end of the year.

The list of twelve Finalists includes seven teams from the Challenge’s 2017 cohort, plus five new entrants. Their products and services reflect the breadth of innovation in financial technology for small businesses: personalised comparison services to find the best-value bank accounts and loans; intelligent cashflow management; ‘credit passports’ updated in real time; automated completion of tax returns; ‘trade intelligence’ tools to help UK small businesses to compete internationally; and marketplaces which enable small businesses to plug into additional fintech apps via their bank account.

Chris Gorst, Challenge Prize Lead at Nesta, commented:

“The Open Up Challenge has again been overwhelmed by the range and quality of innovations that fintechs want to bring to small businesses.

“Over the course of the next six months, we are looking for these twelve talented teams to build and take to market solutions that will have the greatest impact on UK small businesses.

“The Open Up Challenge, which forms part of the CMA’s remedies for the Open Banking rollout, is demonstrating that smart regulation plus active engagement with innovators is a powerful combination to make markets work better. There are many other markets – from energy to care to legal services – that could benefit from this strategy.”

Bill Roberts, Head of Open Banking at the Competition and Markets Authority (CMA) said: 

“We’ve put Open Banking at the heart of the action we’ve taken to shake up retail banking in the UK, remove barriers to competition and innovation, and enable small businesses to take control of their finances.

“A new generation of products and services is now transforming this sector and the Open Up Challenge, led by Nesta, will further encourage innovation and drive improvement for the benefit of small businesses and their customers.”

John Glen, Economic Secretary to the Treasury said: 

“I want to congratulate all of the innovative British fintechs that have come this far in the Nesta Open Up Challenge. The UK is leading the way in fintech and the Challenge is yet another great example of our entrepreneurs and regulators coming together to tackle new challenges and revolutionise how people and businesses manage their money.”

The Open Up Challenge is part of a package of reforms to retail banking from the Competition and Markets Authority (CMA). The Challenge is managed by Nesta’s Challenge Prize Centre, which delivers innovation through challenge prizes including the Longitude Prize and the Flying High Challenge.

For more information visit:

Interviews with Nesta and the participating teams are available on request.

*List of 12 Finalists:


Akoni aim to fundamentally change the way businesses bank. We use the multiple sources of business data and the power of innovation to deliver personalised prompts and products to SMEs. We are born out of the frustrations experienced by our CEO, Felicia Meyerowitz Singh, when she was an SME director managing cash. Akoni believe SMEs should receive the same services, tools and financial products as larger corporates.

We have partnered with Coriolis Technologies as our trade data partner for the Open Up Challenge, headed by Dr Rebecca Harding, author of ‘The Weaponisation of Trade’. Trade data, in addition to our existing partnerships for company and sector data, ratings data, bank partner and product data, allows Akoni to offer SMEs support for Trade solutions as well as existing cash, savings and corporate membership solutions.

Akoni delivers significant value to small and midsize companies, increasing returns and ensuring products are aligned to the different stages of their business growth. Our platform provides personalised solutions using the various open data sources and as part of the challenge, also adding Open Banking data. Akoni is already live in the market and FCA authorised with 10+ established banking relationships. Our new platform will leverage these existing technologies to add a SME Trade Intelligence for business planning, cashflow planning and access to credit products.

The Open Up Challenge comes at a time when there is the perfect storm of market pressures impacting the sector – banks being impacted by ring-fencing and liquidity requirements under Basel III, as well as threats from innovators due to Open Banking.  We see this as the first step facing UK businesses, to be followed by global solutions.


Bokio is a proactive assistant for SME companies which automatically takes care of day-to-day administration, invoicing, accounting VAT etc, and helps companies to form better decisions for the future, free of charge. Gone are the days when companies spend lots of time and money on confirming what happened in the past and instead it is now time to look to the future and work proactively to improve the financials of the company. Open banking will finally enable banking, administration and accounting to sit in one place with an automatic and seamless process to constantly stay up to date on the financials of a company. This will enable more accurate prognoses and deeper understanding of the customer need to be able to offer increasingly more relevant services to each individual company.


Bud is the financial network that intelligently connects banks, fintechs and customers together. Our tech makes it easy for banks to collaborate with other service providers to create amazing new experiences for both their existing and new customers.

Bud was set up to help people have a healthier relationship with their finances and there’s no context where this is more important than when it comes to small businesses. These businesses make up the backbone of the British economy. Their founders’ time is immensely valuable – and yet the majority of time spent on financial management is spent on tasks that can, and should be automated. Cashflow management should be much easier than it is, as should access to credit and our tech can play a central role in making this happen. Open Banking can and should make a huge impact on this, helping more young businesses to succeed and become the big businesses of the future.


Businesses who work with an adviser are 4x more likely to receive funding than those without a trusted adviser. “Adviser-led Capital” helps accountants build a strong advisory service-line in their practice through technology and training. As of April 2018, over 1,000 accountants use to help UK business builders avoid the trap of being left with limited, last minute financial solutions – if any at all. Instead the platform encourages a change of behaviour, by moving to a more considered selection of products, exploring a network of over 100 institutional lenders to find their most appropriate match.

Open Banking has enabled the launch of Capitalise Monitor to help advisers track client portfolios and proactively identify funding needs. Their next product, Capitalise Protect, looks at protecting businesses from the short-term impact of late payments.


Coconut is a current account for freelancers and self-employed people that keeps track of your expenses and how much tax you owe. We help you manage your cashflow with confidence by automating your accounting.  With open banking we’ll get a complete picture of your finances, so you save as much money on your tax bill as possible and get access to financial products that are right for you and your business.

Last year we loved working with the Open Up team, the companies supporting them and getting early access to Open Banking data and APIs which really accelerated our understanding of open banking. We’re building on this to develop products that support personal businesses with tax and accounting and we’re really excited.

Credit Data Research

Credit Data Research is the market leader in credit behavioural analysis, it is active in 5 European countries bringing new scoring solutions for the SMEs and consumer segments. The company is innovating the credit scoring space through its Basel compliant Credit Passport® platform, leveraging credit behavioural data through Open Banking, increasing transparency and competition. Credit Passport® accelerates the capital flowing in the SME and consumer segments, facilitating transparency between small businesses, consumers and potential lenders.

The Open Up Challenge allowed Credit Data Research to really focus on PSD2 innovation for SMEs and other segments. The immediate advantages for SMEs will be quicker and safer access to funding as well as the creation of a stronger financial culture amongst SMEs. Instant lending will become possible for SMEs and new liquidity, through securitisation, will be a reality.


Finpoint is the UK’s trusted business funding platform. We redefine business funding by combining hundreds of finance options with impartial advice in a free online service.

SMEs using our platform prepare one application and publish it anonymously. This saves precious time while allowing SMEs to find finance on a whole of market basis.

Finpoint is regulated by the FCA and we offer free access to over 100 lenders with AI technology matching businesses seeking funding with the best lenders for their circumstances. We check each funder before they can access any SME data on our platform. This means we can feature a high-quality selection of providers. From high street banks, P2P lenders, trade financiers to asset finance specialists.

The Open Up Challenge will help us to introduce new functionality to extend our platform, i.e. a new ‘eligibility checker’ that will require fewer data inputs than those our competitors require, while allowing SMEs or other users to access options anonymously. This strong emphasis on data privacy is informed by positive feedback from users. The new Finpoint ‘one-stop-shop’ will enable its users to compare BCAs, overdrafts and loans in one of three ways:

  1. ‘fast track’ option for users that want a quick decision,
  2. a ‘whole of market search’ for users that want the best terms without time constraint,
  3. ability to find a suitably skilled advisor, for users that are seeking advice.


Fluidly is an Intelligent Cashflow engine – our technology plugs into accounting packages and bank accounts and uses machine learning to predict and optimise business finances. We help SMEs to sleep better at night by providing tools to intelligently manage cashflow.

Cashflow management is the single biggest painpoint for SMEs; 80-90% of small business failure is due to cashflow problems. It’s also time consuming. SMEs spend over 1,300 hours/year chasing late payments.

Fluidly provides automated credit control and cashflow forecasting so that small businesses can get paid more quickly and have more certainty around their cash position. Fluidly saves time for small businesses and allows them to make better financial decisions using a cashflow forecast that is always up to date.

Backed in September 2017 with a £2M seed round from leading investors such as Octopus Ventures, Anthemis and Nyca, Fluidly combines human, financial and artificial intelligence to deliver control, certainty and confidence around cashflow.

Funding Circle

Funding Circle is a global small business loans platform, matching small businesses who want to borrow with investors who want to lend in the UK, US, Germany and the Netherlands. Since launching in 2010, investors across Funding Circle’s geographies – including more than 70,000 retail investors, banks, asset management companies, insurance companies, government-backed entities and funds – have lent over £4.5 billion to more than 45,000 businesses globally.

Funding Circle was founded in 2010 in direct response to the decrease in bank lending to small businesses that followed the 2008 financial crisis. Small businesses make up half of the UK’s turnover and half of all employment, yet continue to struggle to access finance through traditional channels. Funding Circle is on a mission to help these successful small businesses to grow and thrive. The platform provides small businesses with fast and flexible financing through a simple online application, allowing businesses in even the most rural locations in the UK to access the funds they need in days rather than months. As a result, 90% of businesses would return to Funding Circle first in the future, rather than a bank or another provider.

Open Banking has the power to create real value for small businesses across the UK. Participating in the Open Up Challenge provides us with the opportunity to demonstrate how Funding Circle can use Open Banking data to help businesses better manage their finances and improve eligibility for finance. Ultimately, these services will support the growth of even more small businesses, which in turn will add huge value to the economy and job creation across the country. In 2017 alone, businesses used their Funding Circle loans to create and sustain 45,000 British jobs, which contributed £2.4 billion to the UK economy (measured in Gross Value Added).

Funding Options

Funding Options is Europe’s leading online marketplace for business finance, each year raising £100m+ in vital finance, for thousands of UK SMEs, from 50+ active lenders. With globally award-winning financial technology (fintech), Funding Options brings consumer-like ease and speed to comparing business loans, and has funded firms in less than an hour. With partners including leading banks and comparison sites, Funding Options is also designated by HM Treasury for the mandatory bank referral scheme.

In its winning entry for Phase 1 of the Open Up Challenge, Funding Options used anonymised Open Banking data to show that once a small business hits its overdraft limit for the first time, there is an 80% chance that this will become a recurring problem. Funding Options then worked with leading UK artificial intelligence (AI) firm Logical Glue to identify signals to predict in advance firms at risk of hitting their overdraft limit. In Phase 2 of the Open Up Challenge, Funding Options will use Open Banking to enable banks and trusted advisors to deliver proactive and personalised finance offers to their SME customers, solving cashflow challenges even before they emerge.


At OpenWrks, we build the technology that makes Open Banking work. Our toolkit makes it easy for SMEs to share their data securely with businesses they trust, so those businesses can deliver better products and services.

The Business Current Account market is broken. SMEs are paying too much for their business banking and the service they receive is not good enough. SMEs need free access to a personalised comparison of all business bank accounts and overdrafts in one place.

OpenWrks is building a free, personalised SME bank account and overdraft comparison tool. For the first time SMEs will be able to get an accurate, independent and real-time comparison of the true cost of business bank accounts so they can find the right product for them.

At OpenWrks we’re obsessed with helping small businesses succeed. So, to make sure our tool is available to the whole SME market, we are going to make the service completely open source. This means companies that help SMEs, from banks to accounting software providers can make it available to their customers for free, to deliver our vision of all SMEs having the best bank account and overdraft tailored to their businesses unique challenges.

OpenWrks are small business experts having already helped 50,000 small businesses find the right finance for their business. We are also at the leading edge of Open Banking technology and will now combine our expertise, using Open Banking APIs to connect to an SMEs bank account to provide them with the true cost of their current BCA based on their own unique usage.

We’ll also help those that decide to switch to a better deal, by using Open Banking to securely passport key information between banks, delivering a fast and painless switching experience so SMEs no longer have to take a leap of faith when changing bank accounts.


Swoop is a one stop money-shop for businesses. We simplify and speed-up access to business loans, grants and equity finance. Swoop has built a simple to use technology platform that enables businesses to apply for multiple sources of funding through one application. Swoop analyses every opportunity on the market across lenders, investors and grant providers to find the best finance for your business in seconds. Once we find you the right options, our experts will manage your application from beginning to end so that you can focus on building your business.

When it comes to funding, most businesses get stuck navigating a highly fragmented market. 60% of businesses spend less than an hour shopping around for finance, 76% are not confident when it comes to their knowledge of finance options outside their bank and 71% have never applied for a grant. Why? It is too complex and time consuming. And that is why we built Swoop.

Using Open Banking data and combining this with accounting and other data sources, Swoop enables businesses to get make the right funding choices in a fast and frictionless way.

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Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room



Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 1

By Jeff Carlson, author of The Photographer’s Guide to Luminar 4 and Take Control of Your Digital Photos

suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”

Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online. 

It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.

But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.

  1. Improve the picture quality of your call

The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.

Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”

Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”

  1. Place your camera at eye level

A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.

Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.

Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 2

Low camera placement from a MacBook

  1. Make the most of natural lighting

Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.

Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.” 

Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 3Lockdown 2.0 – Here's how to be the best-looking person in the virtual room 4

Backlit against a window Facing natural light

  1. Use supplementary lighting like ring lights

The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.

Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.

“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.

Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.” 

In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.

  1. Centre yourself in the frame

Make sure you’re getting the right angle and that you’re using the frame effectively.

“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”

  1. Be mindful of your backdrop

It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.

“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”

A busy background as seen by a webcam

  1. Make the most of virtual backgrounds

If you’re really struggling with finding a background that looks professional, try using a virtual background.

Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”

  1. Be aware of your audio settings

Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.

“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.

The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”

  1. Be wary of video app add-ons

Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.

“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”

  1. Be the best looking person in the virtual room

What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.

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Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation



Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation 5

By Keith Phillips, CEO of TISATech

If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.

Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.

If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.

But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.

For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.

Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.

The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.

However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.

The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.

With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.

The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.

With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.

Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.

Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.

The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.

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What to Know Before You Expand Across Borders



What to Know Before You Expand Across Borders 6

By Sean King, Director of International Tax at McGuire Sponsel

The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?

Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.

Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?

Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.

Permanent establishment

Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.

Foreign entity incorporation

To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.

As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.

U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.

Check-the-box planning

Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.

Toll charges, transfer pricing and treaties

When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.

Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.

Are you GILTI?

Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.

Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.

The end goal

Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.

If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.

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