As your business grows, no wonder that you may need to move it to a jurisdiction other than Ukraine. This is your chance to attract investors and get loans from foreign creditors. In addition, you will be able to do business and carry out monetary transactions in the developed countries. How to choose a jurisdiction to incorporate a startup?
At last, you have drained the cup of bureaucracy to the end, passed through a few circles of existence, so now The Trial by Franz Kafka looks like an action book to you. Your business is going to reach the break-even point soon enough, so not only will you gain profits, but you will become committed to staying afloat and further development.
Now prepare yourself to deal with completely different and even more complicated issues. During the pre-seed, your main task was to survive, so you had no time to reflect. Now you have to figure out what to do in the first place. On top of that, you have to think your strategy over, so that you wouldn’t need to do a 180 at full speed.
Let’s say, your project is somewhere between the seed-stage and prototyping, so you are all into crowdfunding and attracting venture investors eager and willing to help you make it to the IPO.
Most of Ukrainian reputed companies started as Ukrainian residents by setting up legal entities and individual entrepreneurs. As their businesses continued to grow, they felt the need to put down new roots outside of Ukraine and moved their head offices to foreign jurisdictions. Why would they do that? Here is why.
Apple owns a holding company in Ireland. Why not me?
It doesn’t matter whether you are developing mobile applications, devices for blood glucose dynamics monitoring, or doing both at once. If you have managed to live through the seed round and you are still committed to succeed, then you obviously have a few empirical questions.
- Which jurisdictions are good enough to ensure asset protection and are attractive for investors (or, Heavens forbid, moneylending)?;
- Do I need to set up a holding company and how to structure a holding company?;
- Where to register IP rights and what is the IP box regime?;
- How to optimize taxation in a holding company?;
- How to choose a vendor to take my products to App Store and Google Play?;
- Are convertible notes, option vesting, and other essential corporate management tools for IT companies applicable in a jurisdiction I’m about to choose?;
- What to do and what not to do to prevent lawsuits or greenmail?
Well, it’s pure and simple corporate structuring, and rules here are the same as in the Go board game: there are no two similar combinations. With multiple options, decision-making is even more complicated. However, you get extra opportunities.
The grass is always greener on the other side of the fence
It’s a long-established worldwide tradition to incorporate companies in jurisdictions with appropriate product markets, investors, and more or less adequate tax regulations.
However, in some cases, industry specifics should also be taken into account. Asia works great for fintech startups and bitcoin projects, tech companies focusing on a wide range of customers who are ready to spend their money, prefer the USA, while GameDev opts for Britain.
Certainly, this is a cut-down version of the possible options, and in the fast-moving world they are nothing but a cliché. In actual practice, all kinds of jurisdictions may be used, depending on the situation.
Offshores playing hide-and-seek
As your business grows, you need to move it to a foreign jurisdiction. What’s important here is to understand the difference between offshore and onshore jurisdictions. This will influence your ability to attract investors and get loans from foreign creditors, to do business and carry out monetary transactions in the developed countries.
BEPS (Base eroion and profit shifting), the sword of Damocles that’s hanging over the offshores, doesn’t seem like a phantom threat even to the most optimistic market players, while every step taken by the OECD (Organization for Economic Co-operation and Development) only proves that this threat is real. The good case in point is the BVI (British Virgin Islands) restricting control over local companies and implementing the OECD common reporting standards.
In addition to Cyprus, Ireland, Malta, Luxembourg, some of the US states, including Delaware, California and Nevada, the newcomers like Poland and Hungary are included in the lists of onshore jurisdictions with an increasing frequency. And it’s no wonder, since in the globalized world, tax and other incentives attract businesses like a magnet. The states cannot afford to ignore this trend, since favorable environment works great for capital flow, like Thailand works great for average freelancers.
As the saying goes, every French soldier carries a marshal’s baton in his knapsack. Put in other words, every decent startupper dreams about the IPO. Sooner or later, in order to streamline the management and corporate structures, you will obviously need to incorporate a super holding company to manage the corporate rights of all companies in the group. You’re determined to create such a group, don’t you? After all, you’re not planning on setting up some kind of a second-rate company. Besides, someone has to submit the application for the IPO with NASDAQ, and it has to be someone who controls the whole business.
Here are some examples of structural optimization:
You met your foreign partners during a business forum. You agreed to develop a computer game together – three developers from three countries. You made a shareholder agreement, agreed on how to share obligations concerning the product development and project funding, and decided to sell your project on Steam. Oops! According to Steam rules, the sales profit may be placed only to one account. Sure enough, you are partners. Still, this is business. You have to manage your income, so that there will be something left after you’ve paid the taxes. Besides, you have to register your IP rights somewhere. So, you set up a limited liability company in each of the countries and incorporate a Limited Partnership in Scotland. It seems that you haven’t even done anything yet. However, you’ve already incorporated at least three companies in different jurisdictions.
Let’s say, you’ve got a couple of great ideas. You want to make wrist-wearable devices and establish an amazingly smart R&D center in Ukraine. However, you have no money, and no one would give you a loan. Finally, here is this investor who wants to give you money, provided that you reinforce your agreement with something more solid than a word of honor given by a startupper, preferably a stock certificate in a Delaware C-corporation. Besides, you have to incorporate a company in China, since Chinese companies make only the components you need. You have handle aggregate assembling by yourself, and China is your most convenient and budget-friendly option. You also have to optimize your profits in the EU, so you set up a company in Ireland with an account in Cyprus. What you’ve got is at least four companies, and this is just the beginning.
Well, let’s return to your would-be super holding company. For starters, you have to incorporate a company. Let’s say, you’ve already chosen the best possible jurisdiction, the way you see it. Now all the fun begins: to incorporate a company in a foreign jurisdiction, Ukrainian residents are required to obtain a special exchange control license from the National Bank of Ukraine. While it is has been totally impossible to obtain this license before, now things are even worse. However, a flat ban imposed by the Ukrainian lawmakers is usually balanced out by the lack of any liability for breaking this ban.
As the holding grows, you have to structure it to ensure that there are double tax treaties between the chosen jurisdictions, you can give intragroup loans, and royalties are not taxed heavily.
Generally, it’s better when IP rights belong to the super holding. However, it’s not always the case. Sometimes, it’s better to register IP rights in a jurisdiction with a little bit more favorable attitude towards the creative businesses, i.e. jurisdictions with the IP box regime. There are two main types of such jurisdictions: (i) with strict regulations regarding its application (Netherlands, the UK, Belgium) and (ii) with less strict regulations (Cyprus, Malta, France, Hungary).
Incorporation is only half of the battle: you also have to run the company, keep the books, file financial statements, including consolidated, hire corporate secretaries, use/or avoid using nominee service, and deal with lots of other sensitive issues. Just take the Tax Code alone, according to which non-resident companies are considered to have permanent representation in Ukraine based solely on the fact that their board meetings take place in Ukraine.
Apart from all the outlined advantages of incorporation, here’s a nice bonus – additional protection to your business. Risk management is very important, and if you want to protect your business, you will only benefit from international structuring. Here you can protect your investments under international treaties and go to international investment arbitration. At least, blackmailers will think twice before they start doing their dirty business.
Business structuring is a delicate matter. You should decide what’s best for you. With the globally vanishing monopoly over expertise, relatively small businesses can make efficient decisions without seeking expert advice. Luckily, there is more than enough publicly available information about business structuring, and that’s why there are so many brokenhearted tax advisers.
The world is gradually moving towards the unified and transparent taxation with automated tax management and information exchange between jurisdictions all over the map. While Ukraine is only to join FATCA, and the EU, as well as the US, are thinking of implementing blockchain into the tax management system, the UK is already implementing it. The current system is too heavy, while blockchain can work on primary data, and information goes to the tax database directly from taxpayers. So, the abandoned tax offices may be turned into coworkings and talent boutiques. Sounds great, doesn’t it?