Why Offshore Corporate Structuring Needs To Be On The Agenda
From the fast paced and cash constrained environment of
start-ups to the expansion challenges experienced by more
established growth companies, raising capital and entering new
markets are key focal points for companies.
Typically for small to medium sized companies, consideration of
corporate structuring, let alone offshore corporate structuring,
has not been high on the agenda and generally assessed by
what works right now. As is now obvious in the global
market, the big players are truly international companies that use
offshore corporate structuring as a competitive advantage. To keep
up, companies need to put corporate structuring on the agenda and
ask themselves what will provide an advantage going
forward.
General Benefits of Offshore Structures
The general benefits of utilising an offshore corporate
structure can include:
- Access to global funding: Offshore vehicles
familiar to a company#39;s target investors and financiers can
attract a wider pool of global investors and tap into the
considerable funds currently in the offshore market; - New market entry: Gateway for international
market expansion, facilitating both western companies#39;
investment and expansion in developing markets and also acting as a
base for companies in emerging markets to attract investment at
home and expand to western markets; - Asset separation/protection: Offshore
ownership of IP can enable efficient international licensing and
separation of core asset ownership from operating entities; - Stable and business centric legal systems:
Generally common law based jurisdictions that are recognised
globally, they provide streamlined stable and flexible legal
processes for raising capital, investing in assets and ultimately
exiting through mergers and acquisitions or IPOs; - Tax neutrality: Financial benefits that come
from tax neutrality on international earnings. Benefits from tax
neutrality can come from no personal or company income tax, no
capital gains and no inheritance tax on international earnings
depending on the jurisdiction.
When selecting an offshore jurisdiction (more than one may be
used) it is important to consider both current and future business
objectives and understand which jurisdictions are favoured by your
target future sources of capital and your target markets.
There is no single corporate structure that is best for
companies at every stage of the funding cycle and a range of
opportunities should be considered and aligned with the
business#39;s objectives.
Seed Capital
At the seed capital stage the corporate identity of the start-up
becomes very important. Commonly at this point, a partnership or
limited liability company is established in the founder#39;s home
jurisdiction. Even at this stage, establishing a simple offshore
holding structure in which to raise funds and split the
#39;pie#39; is beneficial as it establishes from the outset an
offshore identity that can become the home for IP being developed,
a base for future international earnings and it creates an entity
that will provide on-going flexibility.
Angel Investment
When looking to attract Angel investors (typically raising from
US$100,000 to $600,000), establishing an offshore structure can be
of itself a financial advantage in the business plan due to tax
neutrality of international profits that might be forecast. In any
event, such a structure will provide greater flexibility to Angels
to re-invest existing offshore funds in another offshore entity and
widen the pool of potential Angels.
Venture Capital
At the VC stage (typically raising US$500,000 ), corporate
structuring will most certainly be put on the agenda. Companies
that have already established the basis of an offshore structure
are likely to benefit from reduced restructuring costs and the
existence of the offshore identity. Even more so than with Angels,
an offshore structure could attract VCs from a wider audience and
tap into funds seeking offshore investments with a route to
operations in target markets or industries. Importantly, a well
selected offshore jurisdiction will provide flexibility to set-up
stock structures that are desired by the target VCs.
IPO and Exit
Companies and investors who have planned their offshore
structure ahead can typically leverage, at a lower cost, the full
benefits of liquidating their equity and exiting through the sale
or merger of an offshore entity, or by raising further capital and
partial exit by way of IPO and public trading. Offshore entities
also offer a relatively flexible capital structure as to conversion
rights, super voting rights and employee options pre and post IPO
which are helpful to investors in IPO#39;s.
Creating a new offshore structure is also common at the IPO
stage. In Asia particularly, usually the first step for an IPO is
to establish an offshore holding structure and to utilise an
offshore vehicle to access international public markets. The
offshore vehicle then acquires, or acquires control, over the
relevant operating company. By way of example, typically for IPO
structures from the People#39;s Republic of China
(PRC), Wholly Foreign Owned Entity
(WOFE) structures are used to capture most of the
economic benefit of PRC operators while protecting the economic
interests of the offshore investors.
Market Expansion
At any point in the funding cycle where companies are looking to
raise funds to facilitate expansion across international markets,
or even simply operate in new markets, offshore corporate
structuring can be a valuable tool for all sides. Offshore
structures can be leveraged by companies in developing markets to
attract international investors by providing a vehicle that is
understood by investors and provides the necessary asset
protection, share structures and tax structure required by the
investors. Depending on the target market for entry, key benefits
of offshore structures go beyond the immediate financial benefits
of tax neutrality on international profits and can provide an
actual avenue to do business in restrictive markets and protect
companies from some of the inherent jurisdictional risks of such
markets.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
