A LOOK AT JURISDICTION: Who Will Tax My Business?

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A LOOK AT JURISDICTION: Who Will Tax My Business?

You’ve weighed the entity options for your Start-Up. You now understand the tax differences between corporations and transparent entities and the impact they could ultimately have on your bottom line. You think you have a strong sense of where you want to set-up your legal entity. Or do you?

Jurisdiction plays perhaps the most critical role in the tax structure of a business. As we know, the Internet provides boundless and borderless opportunities. When launching an Internet or e-commerce business, there is a strong possibility that your Start-Up will be global – in one way or another. For example, you may license software or have sales in non-US jurisdictions or you may outsource some of your development to India, the Ukraine or Israel. Conversely, you may have a non-US parent company, say in Israel or Europe, who has set up a branch or a subsidiary in the US. These types of arrangements categorize your Start-Up as a “global business.”

Therefore, an entrepreneur must understand the basic aspects of international tax law that will govern which countries have the right to tax the future profits of not only the business but also its owners and employees. In addition, the entrepreneur needs to understand which countries will provide tax benefits, tax holidays and the use of current tax losses.

Start-Ups and their founders/owners/investors who are engaged in borderless Internet and e-commerce transactions, outsourcing development of intellectual property or whose ambition is to establish a beachhead in another country and to become globally relevant, must deal with issues of tax jurisdiction, not only for the business but also for themselves and their employees. The complexities and conflicts among international tax laws require that an international tax practitioner be a member of the advisory team.

The right time to engage in international tax planning is when the company is being formed. The appropriate form of legal entity for international operations located in the US or abroad; the necessity to establish potential subsidiary entities in multiple countries to minimize the worldwide effective tax rate can best be achieved when the Start-Up is being formed. It is possible to restructure an existing business structure but it can be very expensive and the result will seldom be optimal. When the Start-Up is in a pre-revenue phase, an international tax plan may, under certain circumstances, be customized so that it is phased in, as revenue is generated, provided the foundation has been set up properly at the outset.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jeanne Goulet, Marks Paneth & Shron LLP Certified Public Accountants & Consultants | Attorney Advertising

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