Best country of incorporation for a SaaS business with partners

[dziter]

Hi,

Context:
3 partners (2 EU, 1 NON-EU) are looking to acquire a SaaS business (just the asset, not the company)
All are tax residents in Cyprus
All have their own personal Cypriot company for their main business activity

Goal:
To acquire few online businesses and to sell some at some point (hopefully with nice profits)

What would be the best countries to incorporate the company in that case?
(easy & not expensive to setup/maintain, taxation, banking etc)

Suggestion:
US? It might be easier for future buyers if we want to sell at some point (and change the ownership of the payment providers).
Some partnership between the 3 existing Cypriot companies?

Thanks.

 

[Onassis]

UK LLP maybe?

 

[JustAnotherNomad]

acquire a SaaS business (just the asset, not the company)

Can't you just use a CY company? Would probably be the simplest solution since you're all in Cyprus anyway?

 

[dziter]

UK LLP maybe?

I was considering this option indeed:

Pros:
- Banking should be fine
- Good reputation
- Easy to setup and cheap to maintain

Cons:
- Paperwork headache with Cyprus?
- Dealing with 2 juridictions (double accounting etc)

Do you know if we have to charge VAT with a company based in UK for B2C customers based in EU?

Can't you just use a CY company? Would probably be the simplest solution since you're all in Cyprus anyway?

Yes, we are considering it of course. Straightforward and we know the classic processes etc.

My doubts are more about: banking, reputation (for future sell) and claiming back VAT from EU B2C customers.
I have to dig more into it and get some knowledge about why not a CY partnership between the 3 existing CY companies too?

 

[Don]

Hi,

Context:
3 partners (2 EU, 1 NON-EU) are looking to acquire a SaaS business (just the asset, not the company)
All are tax residents in Cyprus
All have their own personal Cypriot company for their main business activity

Goal:
To acquire few online businesses and to sell some at some, easy point (hopefully with nice profits)

What would be the best countries to incorporate the company in that case?
(easy & not expensive to setup/maintain, taxation, banking etc)

Suggestion:
US? It might be easier for future buyers if we want to sell at some point (and change the ownership of the payment providers).
Some partnership between the 3 existing Cypriot companies?

Thanks.

Estonia: cheap maintenance and substance, easy to manage, straightforward legal and tax system, 0% tax if you don't distribute dividends, perfect combination with Cyprus holding as you can exit tax free as non-dom and leverage tax deferral, debt pushdown, etc., no immediate auditing requirements, good reputation (highest number of unicorns, startups and VC investments per capita).

 

[JustAnotherNomad]

claiming back VAT from EU B2C customers.

Claim back VAT B2C...? Did you mean B2B?

why not a CY partnership between the 3 existing CY companies too?

I would imagine that it could be difficult to find external investors and/or sell with a partnership? But I don't know.

Estonia: cheap maintenance and substance, easy to manage, straightforward legal and tax system, 0% tax if you don't distribute dividends, perfect combination with Cyprus holding as you can exit tax free as non-dom and leverage tax deferral

He said there's a non-EU partner. If he's Russian, I could imagine that could be a problem in Estonia. But I'm not sure.
I guess it could work this way (Cyprus might not even care about substance?), as long as the company itself is sold. I just wouldn't use an Estonian company as a holding company as capital gains are taxable in the company - taxes are only deferred until distribution.

 

[Onassis]

- Paperwork headache with Cyprus?
- Dealing with 2 juridictions (double accounting etc)

You will have to do that anyway if you involve any kind of entity

 

[DBeker]

My doubts are more about: banking, reputation (for future sell) and claiming back VAT from EU B2C customers.
I have to dig more into it and get some knowledge about why not a CY partnership between the 3 existing CY companies too?

This is an important point - if you are considering selling the business in the future (perhaps a share sale and not just an asset sale) then indeed where you incorporate matters. In such cases, you are often better off incorporating in a country where there is an advanced transactions market, easy access to capital etc. These are often in high-tax places (i.e. US, UK, France, Belgium, Germany etc.). Unfair or not Cyprus doesn't exactly have the best of reputations with would-be investors. A US LLC nor UK LLP would be suitable neither if you have a future intention to sell both the assets and shares of your company. A US C-Corp is often the preferred vehicle for investors (or its equivalent in other countries). Although if you are planning on selling the company through its shares, you will need to make sure you can certify its debt (or that its debt free) and some countries have more advanced frameworks on this part than others. This too might be something you may want to consider.

 

[dziter]

Estonia: cheap maintenance and substance, easy to manage, straightforward legal and tax system, 0% tax if you don't distribute dividends, perfect combination with Cyprus holding as you can exit tax free as non-dom and leverage tax deferral, debt pushdown, etc., no immediate auditing requirements, good reputation (highest number of unicorns, startups and VC investments per capita).

We are 3 partners. You mentions a holding.
Does it mean: Estonia company with 3 partners + a Cyprus holding to setup. So it’s a 2 structures setup?

We do not necessarily need to take off the profits but part of it from time to time would be nice. Some salary are probably necessary and the tax on dividends in Estonia is not the best I think.
From what have in mind, it’s a nice setup if you always reinvest profits. Otherwise, I do not see it better than Cyprus except for reputation of the juridiction and some maintenance fees.

Claim back VAT B2C...? Did you mean B2B?

He said there's a non-EU partner. If he's Russian, I could imagine that could be a problem in Estonia. But I'm not sure.
I guess it could work this way (Cyprus might not even care about substance?), as long as the company itself is sold. I just wouldn't use an Estonian company as a holding company as capital gains are taxable in the company - taxes are only deferred until distribution.

Sorry I made mistake about the VAT. Indeed, we cannot claim it back for B2C and we should charge it in accordance of the customer location I think (the payment processor has to do it).

The non-EU partner is not russian. He is from Latin America.

This is an important point - if you are considering selling the business in the future (perhaps a share sale and not just an asset sale) then indeed where you incorporate matters. In such cases, you are often better off incorporating in a country where there is an advanced transactions market, easy access to capital etc. These are often in high-tax places (i.e. US, UK, France, Belgium, Germany etc.). Unfair or not Cyprus doesn't exactly have the best of reputations with would-be investors. A US LLC nor UK LLP would be suitable neither if you have a future intention to sell both the assets and shares of your company. A US C-Corp is often the preferred vehicle for investors (or its equivalent in other countries). Although if you are planning on selling the company through its shares, you will need to make sure you can certify its debt (or that its debt free) and some countries have more advanced frameworks on this part than others. This too might be something you may want to consider.

We were actually thinking about a US C-Corp. I met someone in Cyprus with this setup. However, I was not able to figure out at the end if it’s easy to maintain and compliant/legal in Cyprus. He was not able to explain it correctly to me.

Will you go for a US C-Corp over a CY/UK company?
Are you familiar with the taxation/maintenance costs and may be how it works with Cyprus?

 

[Don]

3 of you could hold the shares of Estonian company using your Cyprus companies to benefit from capital gains exemption when you sell the shares, so you can cash out the profits tax free when you exit - when selling the company as a whole.
Since you will be injecting assets to Estonian company you can benefit from the tax deferral (you can cash out from the company tax free up to the extent of the valuation of the injected assets). Assuming you keep the company for a few years you can possibly avoid paying any tax during this period and reinvest more (as compared to paying CIT in most other jurisdictions).
In any case reputability is often important, so if you target US customers/investors its probably best to set up an US c-corp.
If you incorporate abroad you should establish the company with local directors and substance, so factor these costs in as well.

 

[JustAnotherNomad]

3 of you could hold the shares of Estonian company using your Cyprus companies to benefit from capital gains exemption when you sell the shares, so you can cash out the profits tax free when you exit - when selling the company as a whole.

In other countries, there are typically some conditions for this (e.g. holding at least 25% of the shares for at least 2 years). If there are no such conditions in Cyprus, then I guess this could work.
Otherwise, one would have to make sure that the ownership is sufficient (i.e. that each CY company still owns enough shares after external investors getting in).

In any case reputability is often important, so if you target US customers/investors its probably best to set up an US c-corp.

From what I've read, moving out of the US is a taxable event in the US, while if you move from Europe to the US, it typically isn't. If that's correct, it would probably be better to start with a European entity.

 

[dziter]

3 of you could hold the shares of Estonian company using your Cyprus companies to benefit from capital gains exemption when you sell the shares, so you can cash out the profits tax free when you exit - when selling the company as a whole.
Since you will be injecting assets to Estonian company you can benefit from the tax deferral (you can cash out from the company tax free up to the extent of the valuation of the injected assets). Assuming you keep the company for a few years you can possibly avoid paying any tax during this period and reinvest more (as compared to paying CIT in most other jurisdictions).
In any case reputability is often important, so if you target US customers/investors its probably best to set up an US c-corp.
If you incorporate abroad you should establish the company with local directors and substance, so factor these costs in as well.

Interesting. The goal is to have one common structure to manage different businesses that we will create from scratch or acquire (only the assets).
So in this scenario, if we want to exit one business, we have to sell the shares/get away of the company. Most of investors, for small SaaS businesses prefer to take the asset without taking the company. Some fear about potential liabilities or to have the freedom of their own structure probably in place I guess.

Why a US c-corp will need local substance? We do not mind paying the taxes in Cyprus at all.
If the company is managed from Cyprus, then it's deemed tax resident in Cyprus and has to follow most of the rules like a CY company, right?

If you have any idea about the costs, feel free to expose them please.

 

[JustAnotherNomad]

Most of investors, for small SaaS businesses prefer to take the asset without taking the company.

Then Estonia wouldn't be good because it would be difficult to get the money out from the Estonian company without paying 20% tax in Estonia.

 

[Don]

Then Estonia wouldn't be good because it would be difficult to get the money out from the Estonian company without paying 20% tax in Estonia.

This is subjective. Note that access this tax regime, you can use a Cyprus company with a PE in Estonia.

We do not mind paying the taxes in Cyprus at all.
If the company is managed from Cyprus, then it's deemed tax resident in Cyprus and has to follow most of the rules like a CY company, right?

Yes, and I hope the extra tax paid in the US will justify itself.
Why not open more than one company so you can reap the benefits of each jurisdiction?
The classic recommendation is to immediately form three companies: separate entities for assets, liabilities, and profits.

 

[dziter]

Yes, and I hope the extra tax paid in the US will justify itself.

Which tax are you referring to?

Does anyone have experience about real fees, tax obligations and legal framework about managing a US LLC from Cyprus?
Tax implications are messy in my mind. Especially the branch tax or other things I am not aware of.

We are interesting to create 1 US LCC (or many: 1 per future asset we purchase) owns by 3 partners (CY LTD). The reason we want to dig into US is mainly for financing/investment reason.
In that regard, we could distribute dividends (not personally -> self-employed rules) if I am not mistaken?

 

[Don]

Which tax are you referring to?

Does anyone have experience about real fees, tax obligations and legal framework about managing a US LLC from Cyprus?
Tax implications are messy in my mind. Especially the branch tax or other things I am not aware of.

We are interesting to create 1 US LCC (or many: 1 per future asset we purchase) owns by 3 partners (CY LTD). The reason we want to dig into US is mainly for financing/investment reason.
In that regard, we could distribute dividends (not personally -> self-employed rules) if I am not mistaken?

The United States taxes the foreign income of U.S. resident corporations as they are following the principle of "worldwide taxation." U.S. resident corporations are taxed on their income from all sources, whether inside or outside the U.S.

However, it's important to note that the U.S. has mechanisms in place to prevent double taxation, which is when the same income is taxed by two different countries. The most common of these mechanisms is the foreign tax credit, which allows U.S. corporations to offset the taxes they've paid to foreign governments against their U.S. tax liability.

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced significant changes to the taxation of foreign income. One of the major changes was the introduction of a one-time "deemed repatriation" tax on previously untaxed foreign earnings. The TCJA also introduced a new minimum tax on Global Intangible Low-Taxed Income (GILTI), which is designed to limit the tax benefits of shifting income to low-tax jurisdictions.

U.S. Cross-border Tax Reform and the Cautionary Tale of GILTI

The Biden campaign and Senate Democrats identified changes to GILTI that would increase the taxes U.S. companies pay on their foreign earnings. Rather than tacking on changes to a system that is currently neither fully territorial nor worldwide, policymakers should evaluate the structure of the...

taxfoundation.org

 

[dziter]

The United States taxes the foreign income of U.S. resident corporations as they are following the principle of "worldwide taxation." U.S. resident corporations are taxed on their income from all sources, whether inside or outside the U.S.

In my case, the US LLC is not resident I think.

 

[Don]

In my case, the US LLC is not resident I think.

A corporation organised or created in the United States under the law of the United States or of any state is a domestic corporation. A domestic corporation is a resident corporation even though it does no business or owns no property in the United States.

 

[OffshorePhantom]

A corporation organised or created in the United States under the law of the United States or of any state is a domestic corporation. A domestic corporation is a resident corporation even though it does no business or owns no property in the United States.

If the US LLC is a disregarded entity it is tax transparent and the tax burden is passed directly to its members, thus it will not pay any taxes in the USA if the sole member is a foreign individual or company. It will pay taxes in the USA only if it has FDAP income or workers and facilities in the USA.

 

[Don]

If the US LLC is a disregarded entity it is tax transparent and the tax burden is passed directly to its members, thus it will not pay any taxes in the USA if the sole member is a foreign individual or company. It will pay taxes in the USA only if it has FDAP income or workers and facilities in the USA.

Foreign-owned LLC that is owned by only one member is that it would be treated as a branch of the foreign parent company for U.S. tax purposes. Under U.S. tax laws, the U.S. imposes a 30% branch profits tax on a foreign corporation’s U.S. branch earnings and profits that are effectively connected with a U.S. business, to the extent that the profits are not reinvested into branch assets. A U.S. branch would be taxable at the federal and state level. At the federal level, the branch profits tax at the rate of 30% is levied on the effectively connected earnings and profits of the U.S. branch.

It might be beneficial for the LLC to elect to be taxed as a corporation for U.S. income tax purposes. This election would create a separate taxable entity in the U.S. and consequently prevent the foreign parent company from having U.S. federal and state income tax filing obligations. If the LLC is taxed as a corporation, the foreign parent will avoid U.S. trade or business income tax (though it may still be subject to tax on any dividends it receives from the LLC) and the branch profits tax mentioned above. The LLC, instead of the foreign parent, will pay federal income tax as a corporation at 21%. There would be no branch profits tax.