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Greece: Start-up businesses have no tax and TP considerations or do they?

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Tax and TP considerations tend not to be on the radar of start-up entrepreneurs

Christos Kourouniotis of EY Greece describes why tax and transfer pricing considerations tend not to be a priority for start-up businesses.

Common elements found in various existing definitions for start-up businesses include: new business, in the early development stage of a new/unique/innovative product or service, seeking to raise funds, looking to scale its operations. In other words, a start-up business has potential for growth and, in its early years, is focused on creating a market or gaining market share.

Focusing on market shares usually results to losses in the early years – thus, tax and transfer pricing (TP) considerations tend not to be on the radar of start-up entrepreneurs (and usually are not, until it is too late). This is explained by the fact that, more often than not, there are no taxable profits and it is also assumed that tax authorities have no motive to select for an audit, scrutinise and challenge a business which is, overall, in a loss position. 

Even investors in start-ups tend not to consider the tax position of such entities as an important factor, in view of existing losses and the perception that such losses can shelter any potential tax adjustments.

In reality, looking only at the corporate income tax liability of most start-up businesses during their early years, indeed there are sufficient losses to shelter tax adjustments and little concern exists on its tax and TP affairs. 

What about the following years? What about the tax treatment of a future consideration, in case a ‘transaction’ (sale of all or part of the shares in a start-up business, or sale of a valuable asset developed, monetising its success or potential for success) occurs? Does the tax position of the early years create a precedent that may have a material impact in the start-up’s tax affairs in the future? In our view, in most of the cases where a start-up business is growing beyond the borders, this is indeed the case. 

During the early years, certain important decisions are taken regarding the operating model of a start-up business, which ‘tell a story’ that, later on – and assuming the business is successful – will be used by the tax authorities in the various jurisdictions it may operate, as a basis for exercising their taxing rights.

Important aspects of a start-up business that are decided during the early years, include: place for development (mainly for tech start-ups) of the service/product, place for setting up a holding entity, remuneration of employees through stock option programmes, place of management of the start-up business, marketing of the service/product through local entities in other countries or directly through remote sales, allocation of resources in various jurisdictions, retention of any income generated in selling entities or accumulation in a central entity, provision of debt versus equity upon raising any funds by investors, etc.

In addition, remote working has been adopted by more and more entities and especially start-up businesses, which, in any case, have not scaled their operations to fixed offices, and, as a result, are more flexible to attract employees offering the ‘work from anywhere’ choice. This creates an additional tax aspect that may impact the future allocation of profits and/or taxation rights.

Questions that may arise during a tax audit and are partially answered by important decisions taken, include:

  • Which entity/part of the start-up business conceived and developed the product/service, and is this being remunerated sufficiently for the risk (and loss) incurred upon development?

  • Which entity/part of the start-up business marketed the product/service and whether this is receiving an appropriate remuneration, in line to its profile and substance?

  • If a valuable asset or the whole business is transferred, which entity/part of the group is entitled to receive remuneration, and is it entitled to full remuneration?

In addition, a potential investor may ask:

  • Are there tax losses incurred in the early years that could be utilised (offset with taxable profits) in the later years, and is there any risk that such tax losses become unavailable? 

Different answers to the above questions lead to different levels of taxation and, sometimes, to differences between the business’s expectations and tax reality.

A start-up business may not require an extensive operating modelling exercise in order to ensure tax compliance and avoid surprises (usually, during the early years, this would be a luxury that a start-up would not able to afford), however, a high-level tax understanding of the potential impact of important decisions, may go a long way. 

Upon deciding on an important aspect of their business, entrepreneurs may consider asking themselves:

  • Is my decision shifting value from one location to another?

  • Is my decision creating entitlement for an entity/part of the business to remuneration that is not currently paid?

  • Does my resources’ location stop being aligned to income allocation? 

Any affirmative answer to the above is a hint that the current versus the future tax position may be changing, thus the impact on future entitlement to potential profits needs to be considered.  

Effectively managing tax affairs and ensuring tax compliance cannot start at the time the business becomes profitable. Even mitigation actions at that point may trigger exit taxation and/or TP issues in certain jurisdictions, abolishing potential income (even if under a substance analysis they are not anymore entitled to or they were never entitled to said income); it starts in the early years of operation, considering its high-level tax impact on decisions taken and needs to evolve along with the development of the business. 


Christos Kourouniotis

Partner, EY Greece


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