Startup: Get Funding(seed / high tax country) or stay offshore?

[MarkusCostigan]

Hi guys, we often read on the forum that it is not possible to create (large?) successful companies starting offshore because it is difficult to scale... so at this point the question is: If you find yourself having an online saas startup that is starting to scale well (company in low tax offshore country) but they offer you a seed investment (between $100k and 500k) in the United States. Would you accept or stay offshore?

SaaS is doing well, company is profitable, costs are very low and management is easy. On the contrary, a seed round could speed up and boost scaling, but increase costs (drastically?). Often the vcs put you in contact with an important professional network.

Thank you.

 

[ilDavid6311]

Focus first on growing your business, scale it, and only then think about tax optimization.

 

[CyprusLawyer101]

If your offshore set up is solid and carries the necessary substance there is nothing wrong with being offshore. Also if you have created good value then don't deviate from your position by merely someone coming along and offerring a seed. Do not forget that the operational value is with you, do not compromise, your seeder/angel should be able to accept your offshore structure provided this has been build on solid ground.

 

[Martin Everson]

Where you need to be should be based on your exit plan and whether you need multiple rounds of funding to get to exit plan. If any funder requires you to be in U.S and you need that money then the answer is simple.

 

[12345]

You can start a subsidiary company in the US and get the financing. You don't have to move the entire company to the US. In case of having a subsidiary if you have a proper substance in the offshore jurisdiction then you pay some of your income tax in the US related to the PE that is there and the rest of the taxes offshore, maybe even entire tax offshore. Correct me if I'm wrong but that's how I understand it. I'd get the financing if I were you but contact a professional tax advisor about it.

 

[Don]

You can start a subsidiary company in the US and get the financing. You don't have to move the entire company to the US. In case of having a subsidiary if you have a proper substance in the offshore jurisdiction then you pay some of your income tax in the US related to the PE that is there and the rest of the taxes offshore, maybe even entire tax offshore. Correct me if I'm wrong but that's how I understand it. I'd get the financing if I were you but contact a professional tax advisor about it.

Investors tend to be more comfortable investing into the parent company, so incorporating in the US seems more reasonable. Quite often the long term plan is to get listed publicly, and US is likely the best choice.

US has CFC rules, but foreign taxes can be credited against the US tax liability.

Here is where Estonia offers quite unique advantage for tax planning:

"Despite GILTI’s apparent reach, however, and its intended impact of requiring immediate U.S. federal income tax recognition for almost all income earned by a CFC (specifically a CFC without sufficient high-basis tangible assets), Estonia’s tax system, coupled with a few key provisions in the U.S. tax rules, may afford U.S. taxpayers a unique opportunity to avoid immediate taxation under both the Subpart F income and GILTI rules, without paying any current foreign tax."

 

[12345]

Investors tend to be more comfortable investing into the parent company, so incorporating in the US seems more reasonable. Quite often the long term plan is to get listed publicly, and US is likely the best choice.

US has CFC rules, but foreign taxes can be credited against the US tax liability.

Here is where Estonia offers quite unique advantage for tax planning:

"Despite GILTI’s apparent reach, however, and its intended impact of requiring immediate U.S. federal income tax recognition for almost all income earned by a CFC (specifically a CFC without sufficient high-basis tangible assets), Estonia’s tax system, coupled with a few key provisions in the U.S. tax rules, may afford U.S. taxpayers a unique opportunity to avoid immediate taxation under both the Subpart F income and GILTI rules, without paying any current foreign tax."

thanks so if he incorporated in the US how would the taxation increase? federal CIT of 21% and thats it ? then OP can cashout dividends and the dividends would be taxed in his home country?

 

[Sols]

In most cases, scaling is the better choice over day 1 tax planning. Tax only becomes a problem when you have a bunch of profit. If you run at a loss while scaling up, you can bring in a tax adviser to optimize your taxes before you have profits.

Lots of investors run away when they see offshore, unless it's a BVI holding company or something quite common like that where investor rights are protected and courts can be relied upon.

If your investors are from the US, the most common structure is a Delaware C corp holding company that owns the underlying business and its entities. BVI and Caymans are also quite common but investors will often want additional guarantees if it's offshore.

 

[bubbledouble]

Scaling your business should be your first priority. Just get professional assistance with the contracts and agreements you make with your investors. You risk to loose everything if you don't know better.

 

[ab94]

Been there done that. Worry about scaling your business first and taxes way down the line. Your VCs will not be ok with you taking the dividends anyways. So incorporate as a C corp and start the clock on that QBS so you can, one day, exit capital gains tax free.

 

[jafo]

between $100k and 500k) in the United States.

Hmmm... That's a bit low, IMHO, but I don't know your profit margins! In the early '90s, 500K delivered about $2M in profit in the pharma wholesale business (before the internet snitches started selling courses and spilling the beans), so if it's something similar, go for it.

accept

100%...only if you can really scale the business.

United States

That's where "a friend of a friend" scaled "his" business in the '80s, '90s, and early 2000s...(then "he" snuck out in the middle of the night in the late 2000s when no one was watching )

 

[apres777]

I would definitely prefer incorporating in the US if the business has a good "suit" for VCs / PE or might even just larger debt funding. Obviously only if that's your "roadmap" and it's suitable for your business.

For your private interests as a shareholder, however, it may certainly make sense to hold your shares in a tax-optimized manner at an early stage (depending on how strict the tax office is where you have your tax domicile). This can save you a lot of money in the long term, even if you have higher costs at the beginning.

PS: I knew a lot of companies back then that offered loans to American companies / European "SaaS" companies. (2022 not sure if all of them are still around) The same game here too, the companies have strict guidelines based on licenses with which jurisdictions they are allowed to work. At the time, I had the problem that US banks (rather fintechs) were therefore unable to finance EU companies even though all the other parameters were right. With offshore companies, the issue will certainly take on completely different dimensions.

 

[alain]

Personally, after all the years I've been in business, I want to keep my company to myself for as long as possible. Bringing in investors and external capital just makes everything much more complicated.