The prospects for the development of a startup largely depend on how competently the needs and structure of the future business are determined at the initial stage, the jurisdiction is chosen, and the agreements between the founders and investors are correctly drawn up. International structuring allows for optimizing taxes, preserving capital and assets, and effectively attracting investors. But, when choosing a jurisdiction, you cannot rely only on "zero corporate income tax rate", "cheap and fast registration", "prestigious company registration", and so on.
Here is a list of questions and criteria you need to pay attention to choose the most favorable jurisdiction for your company:
What tasks do you set for the company?
Is it attracting investment or entering the markets with a new or already-known product? Does it have several specific advantages, and is it able to compete in the market?
Capital raising and company management
What are the key ways to raise capital? What responsibility are the founders/partners of the company willing to bear? It will depend on which organizational and legal form of the company will suit you.
How will the involved investment be spent?
Will it be the purchase of necessary products and equipment or payment for the work of contractors? From which country do you plan to attract contractors?
What is the number of employees in the company?
Will employees work outside the intended jurisdiction? Some organizational forms of the company require the mandatory presence of a resident in the company (director or employee).
The tax resident of which country is the founder of the company.
It is necessary to consider the signed and ratified agreement on the avoidance of double taxation between countries so that in the case of the distribution of dividends from the company, a double tax rate is not paid in each country.
Does VAT apply to your product? Does this activity require a license in the country? Availability of preferential regimes related to your training. Degree of protection of intellectual property rights, if applicable to your product.
Who is your customer?
B2B or B2C? In which market of the country/region do you plan to work?
Legal security. The attractiveness of the jurisdiction to your clients. The convenience of receiving payments from customers.
Ability to optimize taxation.
Related purposes of incorporation
Do you have the goal of further relocation to this country? Investing in a company can be the basis for obtaining a residence permit.
Top-3 jurisdictions for registering your startup
Keep in mind that jurisdictional benefits are general and may be insignificant for your startup individually. When choosing a jurisdiction, pay more attention to the criteria and questions described above.
The USA. State of Delaware
Reasons for the popularity of the state of Delaware:
favorable tax conditions
a specialized court, the Court of Chancery, which hears only corporate disputes
long-term judicial practice of protecting the rights of investors
prospects for attracting investment
Popular forms of organization of a legal entity in the USA:
LLC (Limited liability company)
C-corporation is a legal entity owned by shareholders, the authorized capital of which consists of shares. The most optimal organizational and legal form for non-residents.
The LLC does not operate with a non-resident who does not have an individual taxpayer identification number — ITIN.
For a C-corporation, the shareholders' liability is limited to the investment capital. The owner can be held liable for the company's debts for an LLC.
Features of C-corporation:
A company can have one or more founders (not necessarily a US resident, legal entity, or individual)
The company can be managed by a participant/participants. Their number is not limited;
Flexibility in the organization of internal relations in the company
The minimum size of the authorized capital is defined
The distribution of profit between participants is not tied to the amount of each contribution
Many years of legal practice of protecting the rights of investors. That is why company registration in Delaware is a must-have for projects aimed at attracting American investors
Opening a bank account requires a physical presence in the US
The need to obtain an ITIN for directors and owners to work with some financial institutions
In Delaware, there is no need to file an auditor's report
Federal income tax. 21% Tax Rate - Federal taxes are the same for all corporations in all US states
Income tax is present at the state level only. The tax rate is 8.7% (Corporate Income Tax Rate). Privilege. A corporation with an official corporate office in a state but does not conduct business in that state (no office or employees) is exempt from tax. The tax rate is 0%
Franchise tax at the state level only. The annual franchise tax rate depends on the number of shares provided for in the corporation's charter: 5,000 shares or less — 175 USD, 5,001-10,000 shares — 250 USD, each additional 10,000 shares or their parts add 85 USD
Value-added tax (VAT). Not available in the state. VAT is payable only when a US company provides services to customers in the EU who are located there and use those services. When working with customers from the USA, there is no VAT
A startup in Cyprus is a profitable solution for entering the European market with a favorable tax regime.
Private company limited by shares — a form of organization of a legal entity, a company with the limited liability of a closed type.
Features of a Private company limited by shares:
Shareholders can be individuals and legal entities of any state ownership. The minimum number of shareholders is one
The minimum number of directors is one. Directors can be individuals or legal entities resident in Cyprus. At the same time, the director will perform only nominal functions (provided during registration)
The cost of registering a company is higher than in the other two jurisdictions being compared
There are no requirements for the minimum size of the authorized capital. However, the amount of issued share capital is usually 1,000 EUR
It is necessary to provide an audit opinion
Corporate income tax. Cyprus's standard corporate tax rate is 12.5%
Value-added tax (VAT). VAT has a standard rate of 19%. Under certain conditions, the rate is reduced to 9% or 5%
There is no withholding tax on dividends.
According to the Doing Business ranking (an assessment of business regulation), Estonia ranks 18th (out of 190) in the Ease of Doing Business category and 12th in the Taxation category.
There is a myth that Estonia is a tax-free country in demand among entrepreneurs. There is no separate capital gains tax in Estonia. But capital gains are treated as part of the income of Estonian resident companies and are taxed after the distribution of profits.
That is, doing business in Estonia is about tax optimization. If you put income in expenses, you get a tax-free jurisdiction. If you withdraw income in the form of dividends, please pay tax.
A private limited company (OÜ) is a closed type limited liability company, similar to LTD in the UK or LLC in the USA.
Features of OÜ:
The founder and director of the company can be non-residents of Estonia and the EU
The founder and director of the company can be the same person
The minimum amount of authorized capital is 2,500 EUR. When registering a company, it is unnecessary to deposit the authorized capital immediately. You can deposit it into the account for ten years
The need for substance (confirmation of the company's stay and activity in the country) to obtain a VAT number and open a bank account in Estonia
Difficulty opening a bank account in Estonia
In some cases, an audit report is required
Corporate income tax. The corporate tax rate in Estonia is 0%. It only applies to the company's earned profit, i.e., undistributed
If the shareholders or owners decide to distribute the profits as dividends, the firm pays 20% income tax on behalf of the shareholders. The tax rate on dividends paid (starting from the 3rd year of regular payments) is reduced to 14%
Value-added tax (VAT). Suppose a company in Estonia sells goods and services on the territory of Estonia, on the territory of the EU, to private individuals or companies that do not have a VAT number. In that case, the VAT rate is 20%. Suppose a company in Estonia sells goods and services to companies in the EU territory with a VAT number or companies and individuals in another region (outside the EU). In that case, the VAT rate is 0%. These operations should be considered when calculating the threshold for mandatory VAT registration (40,000 EUR)