4 factors to consider when choosing a new jurisdiction for business

Eugene Nikolaychuk, CFO of TECHIIA

Eugene Nikolaychuk, CFO of TECHIIA Holding tells about the International Property Rights Index, the need to comply with the KYC principles, and taxation of controlled foreign companies.

Bad is a soldier who does not dream of becoming a general, and a businessman who does not think about expanding his business. For a company that is growing steadily, entering new jurisdictions is only a matter of time. Besides, we want to reduce the impact of global turbulence, changes in political regimes, and sudden economic crises. We dealt with this in more detail in the material on two issues before entering another jurisdiction.

When it comes to choosing a direction for business expansion, one key point that needs to be clarified, is whether you understand where you are leading the company? If you have a clear vision, strategy, and understanding with investors, feel free to move on to the next step ‒ find out what risks are associated with entering a new jurisdiction, and try to avoid them.

Here are four factors to keep in mind when looking for a new jurisdiction for your business.

1. Business Safety

Every year, the Property Rights Alliance issues a rating that demonstrates the achievements of different countries in the field of property rights protection. Finland, Switzerland, and Singapore lead the International Property Rights Index. The United States ranks 13th, Cyprus 41st, and China 49th. Ukraine is in the one hundred and fifth place in this list of 129 countries.

This means that in countries like ours, non-transparent court decisions are possible, and investors' rights are generally poorly protected. Although regulators should be interested in the opposite because the protection of property rights guarantees a constant inflow of investment.

Today, the International Property Rights Index is a fully operational tool, the data of which can be used when choosing a new residence permit for a company. In jurisdictions at the top of the list, taxes are likely to be higher. But nothing will happen to the business: it will not be raided, closed without reason, and will not be able to put pressure, for example, in retrospect by terminating the lease of the office.

However, a safer jurisdiction has another factor. These are always more regulated countries. If you open up to them, you will have to comply with stricter rules of doing business.

For example, developed economies are actively implementing the principles of KYC (Know your customer ‒ a policy that requires mandatory identification and disclosure of operational data of the counterparty). In such jurisdictions, the responsibility for customer compliance with business ethics lies not with regulators but with service providers.

If you work with a problematic client, you take certain risks. In case of claims from the regulator, you will have to prove that you did everything in your power to verify this client: requested the credentials of the signatories, checked the registration bases to determine the registration of this legal entity, negotiated with that client and you have a business correspondence to show, disclosed part of the operational information.

So the prestige of the jurisdiction does not appear from scratch. Business safety comes at the price of compliance with tighter regulatory policies.

2. Ease of business reporting

The rules of document circulation vary greatly depending on the jurisdiction. However, in some countries, such as Cyprus, regulators require reporting by a certified public accountant. This rule must be taken into account when drawing up the expenditure budget.

Usually, the primary attention is paid to taxation, and the issue of reporting is considered last. But by saving on the difference in rates, you can get additional unforeseen administrative costs.

Municipal fees, trademark fees, local taxes, which, while being in Ukraine, you may not know, can greatly inflate your costs and create problems. To avoid unpleasant surprises, you need to properly assess the economic part of operating in a particular jurisdiction.

I recommend considering the option of locating the parent company in one jurisdiction with simpler reporting rules, and representative offices (even without registering them as a legal entity) in another, which is the main product of the company.

Another tip for startups: before you decide to enter any market, use local expertise. In any jurisdiction, there are either international or local consulting firms that provide expertise in the areas of audit, tax law, legal consulting.

The qualified opinion of a specialist working in a particular market may be the most useful information for choosing a jurisdiction and building a business growth strategy.

3. Repatriation tax

When opening a company in a foreign jurisdiction, it is desirable to understand in which country you are going to spend your earnings. For example, you made a profit in the United States, paid state taxes, a federal tax, and then withdrew the money to Ukraine and once again paid the tax as an individual. Going through this chain, money can lose up to 70% of its value, and from the dollar of profit before tax, you will have 15-30 cents. The cost of this money will be very high.

There is another important nuance. Today, a Ukrainian company can hold an account in an American bank and operate in Cyprus. In this case, regulators may ask: to what jurisdiction does it belong?

Often, the jurisdiction of such a business is based on the region in which most of the operating activity is located. Otherwise, if the audit shows that the company's management is located in Ukraine, and the activities are carried out in Switzerland, the fiscal authorities may have questions about taxation, and investors may have problems with the withdrawal of profits.

4. Taxation of controlled foreign companies

Last year, Ukraine adopted Law 466-IX, which provides amendments to the Tax Code. This document mentions CFCs ‒ controlled foreign companies, that is, Ukrainian enterprises registered in other jurisdictions.

With the evolution of the information exchange system between the fiscal authorities of different countries, our regulators have gained access to documents that make the structure of your company and its profits clear. Previously, they did not have such information, but now the Ukrainian tax will claim part of the income of foreign companies.

Law 466-IX is a large document, so I will highlight general recommendations. When opening a company abroad and calculating the tax burden, get advice on this Law. Your business may be subject to double taxation regulations.

Here the advice from the previous paragraph will be appropriate. If your startup has not yet participated in investment rounds, you may need to work in Ukraine for now. At the same time, place several representative offices in another jurisdiction without registering them as a legal entity.

Original article on liga.net

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