Stories of an IT lawyer. Life outsourcing business. Part 3

    The first and second part of this entertaining story at the link below:

    IT Lawyer Stories. Life outsourcing business. Part 1
    Stories of an IT lawyer. Life outsourcing business. Part 2

    # Search for a solution

    Sasha continued to look for a solution that would save him from the administrative penalty for not declaring the CFC and would further keep personal profit in the account of a foreign company without tax losses.

    The lawyer explained to Sasha that you can’t but pay taxes. Even if the profit was not distributed from the Cyprus Offshore Ltd account, you still need to pay 13% of the total retained earnings.

    Sasha did not differ in love for compliance with the law and continued to ask questions until he found out that PSP (Payment Service Providers) or EMI (Electronic Money Institutions) did not exchange tax information under the CRS protocol.

    # Farewell, bank, hello, payment

    Sasha gave instructions to the lawyer to open a current account in payments and from that moment his company will receive dividends on this current account (instead of a bank account)


    Sasha did not want to allow the automatic exchange of financial data between the Cypriot bank and the tax authorities of the Russian Federation.

    What helped to make the decision:

    Sasha realized that according to the degree of reliability, payments (PSP and EMI) are not inferior to the banks that serve such an outsourced business.

    A payment can make transfers SWIFT (in dollars) and SEPA (euros).

    Sasha received a current account with full details, the same as the bank.

    The speed of opening a current account in a payment takes a month, and compliance is not as tough as in banks.

    *** From the author:the financial world is changing, banks serving non-resident business in the future will perform the function of storing money (deposits, or the “safe” function), possibly issuing loans. The function of calculating (servicing business transactions) will be taken over by “payments” (EMI, PSP and financial institutions similar in structure) ***

    # Startup

    Outsourcing is characterized by the presence of downtime. Sasha and Igor decided to find use for workers who “got on the bench”. At a conference in Kiev, Igor heard about a startup, in fact it is another SaaS service for internet marketers, but with a number of distinctive USPs (unique trading offers). Startup guys were looking for money for development, and Igor and Sasha offered to play the role of investors, but invest not as much money as human resources, namely, the time of the developers of their outsourcing company.

    Startups with confidence inherent in startups have already registered a company like C-Corp in Delaware, broke a piggy bank, flew to the USA and opened (with difficulty) a bank account there. In addition, they managed to participate in a number of acceleration programs in the Netherlands. The acceleration program gave the Startupers a lot - knowledge, experience, mentors, but also took a lot in return, but more on that later.

    *** From the author: There are no tax-free companies in Delaware. Federal tax - 21% of net profit (according to the formula income minus expenses), state tax - 8.7% (on its federal taxable income allocated and apportioned to Delaware). Many people register a company in Delaware thoughtlessly, and we like to ask the question: “why not register a business in Nevada or California?” ***

    #Due diligence startup

    Sasha and Igor hired lawyers to audit the startup and participate in the negotiations on the project.

    What the lawyers found:

    - It turns out that the startup signed an unsuccessful Convertible Loan with a business incubator (which, by the way, is not uncommon), the incubator received excessive anti-dilution rights (under no circumstances could the share of the incubator erode below 8% of the total equity ), as well as such a right as multiple liquidation preference (upon liquidation, they were the first stage creditor with the right to demand an amount four times the amount of the loan and the accumulated interest on the loan).

    • the trademark (logo) and the right to use the domain do not belong to the Delaware company, but directly to the founder
    • Intellectual Property Not Transferred to Delaware Company
    • the company has already violated the law, because it used the logos of non-profit organizations on the site without consent

    *** From the author: not to go into the details of contracts - this is a common mistake not only of startups, but also of a “mature” business. It does not matter who drew up the contract - a British, Dutch or local counterparty lawyer. Contracts need to be checked and questioned.

    A common mistake inherent in 90% + contracts in IT (for this separate place in hell is reserved for lawyers who allow this to happen) - this is an incorrect transfer of ownership of an intellectual property (code, program, design, etc.). Look at your contracts, most likely you will find an act in which it is written that Vasya transferred the software, and Petya accepted the software, but you will not see a clear identification of the software that will serve as evidence in court. ***

    #As agreed

    Igor and Sasha could not “dive” into the deal, therefore the Startupers had to seek a compromise and correct the jambs.

    We made an agreement on the transfer of intellectual property rights in favor of the Delaware company.
    The domain owner was changed through the admin panel, but at the same time he secured himself and secured the fact of transfer as a receipt (it took 20 minutes, and in the US court they will accept it as evidence)
    Startups “outplayed” the conditions with the accelerator . On the advice of a lawyer, they put pressure on the fact that not a single investor would enter equity with the current conditions, and without the next round investor, the project would probably not survive.

    *** From the author:you won’t believe it, but the last point is a story from life. One Dutch accelerator signed an extremely unprofessional, incorrect agreement with startups, which is easier to call Kabbalah ***

    # Documents for buying a startup

    We managed with one document - shares purchase agreement.

    By the way, based on the final agreements, Sasha and Igor still invested a little money. The startup sold the stake on a cash-in basis. The proceeds from the sale of shares belonged to the company.


    After some time, and by joint efforts, the new startup team brought the project to the market.

    • Stripe is connected to a company registered in Delaware to accept payments on the website and in the application
    • For European users implemented GDPR Compliance
    • We opened a PayPal account and passed full authorization

    *** From the author: I recall that Stripe connects only to the countries shown in the figure below.

    But other PSPs, not as public as Stripe, work with companies from other jurisdictions ***

    • We learned about the existence of VAT (value added tax) and US backup withholding tax.
    • Placed the application on Google Play and the AppStore

    *** From the author: EU VAT is the usual VAT for us, but be careful, because the rules in Europe are far from what we have. In addition, there are features about which there is no information in official sources. For example, in 2019, if you conduct business on behalf of a Dutch company, you need to get a VAT number. And without a real office in the Netherlands and the presence of local employees in the status of employees (such requirements are called - substance) they will not give a VAT number. Moreover, you need a substance in order to apply double taxation avoidance agreements, and such a substance is quite expensive for small businesses and startups, sales are estimated at about 40,000 EUR per year.
    In addition, some services (marketplaces, payments) are required to obtain EU VAT Collection Agent status and levy VAT on sales in the European Union.

    US BACKUP WITHHOLDING TAX is also an interesting phenomenon. The meaning of this tax is better disclosed by some example. Suppose there is a marketplace on which authors place and sell intellectual property, for example, website templates. If the site template was bought by an American buyer, the marketplace must withhold 30% from the author’s fee (or less if the author is entitled to a preferential rate according to the agreement on avoiding double taxation between the USA and the place of registration of the author) of the tax on such a sale and pay to the US treasury. The country in which the market place is registered does not matter, in any case, the market place will act as the US BACKUP WITHHOLDING TAX AGENT (the person who is responsible for withholding and paying taxes). The idea behind US BACKUP WITHHOLDING TAX is so that the whole world pays taxes on sales carried out in the United States, and the approach to determining the location of the sale was not trivial, but clearly spelled out in US law. ***

    # ICO Age

    The time has come for the next round of investment. And why not conduct an ICO, Startups thought.

    To be continued ...

    The whole story is fictitious. LAWBOOT Lawyers & Consultants worked on the text.

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