Invest in a Gold-1.
(photo credit: INVEST IN A GOLD)
Money doesn’t grow on trees, and taking your business international is no picnic. On June 12, the International Business Structuring Association (IBSA) held a seminar to discuss ways of growing a business from a start-up to a major multinational.
The first question: onshore or offshore?
Going offshore means registering any intellectual property (IP) in an offshore company and delegating R&D and marketing to onshore companies in Israel and elsewhere, sometimes for internal fees calculated on a limited “cost plus” basis. This won’t endear you to the Israel Tax Authority (ITA).
The ITA can apply a battery of rules to attack offshore tax planning, including but not limited to: (1) control and management exercised in Israel; (2) the transfer pricing, such as cost-plus fees, are not reasonable; (3) capital-gains tax on the export of the IP from Israel; (4) withholding tax on deemed interest and royalties; (5) VAT rules; (6) on occasion, tax-treaty abuse.
The alternative can be quite attractive: register IP in an Israeli company. Then look for investors and/or venture capital. At the R&D stage, government grants of 50 percent may be obtainable.
R&D expenditure can be expensed over one to three years, and the resulting losses, often big, can be used against future profits.
After that, tax breaks are available for industrial and tech enterprises (“privileged enterprises”) that generate at least 25% of their revenues from exports. Employees can get a 25% reduced and postponed tax rate on share options that meet certain conditions.
Foreign investors also get a tax break: no Israeli capital-gains tax when they sell their shares in Israeli companies if they invested post-2008.
How do you go international?
Usually in little steps. Initially start-ups sell directly to customers far and wide over the Internet from Israel. Later, you can use a dealer, but the dealer will be loyal not only to you. After that, it is a short jump to having your own warehouse, branch or subsidiary company overseas; for example, in the US. But each has pros and cons.
An overseas branch of an Israeli company that amounts to a “permanent establishment” (fixed place of business) may well get taxed in the country concerned. This means double reporting hassle even if Israel gives a foreign tax credit. But problems occur if Israeli tax breaks are shrunk by overseas tax, or if each country wants to tax a disproportionate share of profits. So an overseas sales subsidiary company often ensues. And after that, a foreign low-cost manufacturing company may emerge, perhaps in China.
Marketing can be an expensive proposition. But if prospects are good, an IPO (initial public offering) to raise money on a stock exchange may not be impossible.
Founders may exit at a capital gain by selling on the stock exchange or if their company/operation gets acquired. Israeli residents usually pay up to 32% capital-gains tax in Israel.
Sometimes the prey becomes the prowler and acquires other companies. If so, careful operational, managerial and fiscal planning at that stage may well pay off in the future.
Other milestones often present themselves: creation of internal finance companies, rebranding, creating a real-estate arm, even creating an internal venture-capital fund.
This may sound like around the world in 80 days, but it will take a bit longer.Preparation is everything
What does the future hold? Currently, multinational groups are often able to plan their taxes away. But the OECD is formulating new rules to make them reveal that planning by providing a so-called “master file.”
Proposals exist to tax digital enterprises wherever they have users. This would be bad for start-ups because they may have to register in each of those countries even if they have no people or assets there.
Going international often means relocating personnel. This requires care for personal, tax and pension reasons.
As always, consult experienced tax advisers in each country at an early stage in specific email@example.com Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd