How To Set Up a Mobile App Business Offshore

There has been a huge explosion of mobile app businesses in the past few years (including businesses which might operate in a similar way to Uber or AirBnB).

 

Such a business (ie a predominantly Online Business – where services are both produced and delivered online) lends itself particularly well to an “Offshore” Corporate Structuring Plan. See below “HOW TO SET UP AN ONLINE BUSINESS OFFSHORE” which explains in simple/general terms how it can work.

 

Structuring Options

 

These kind of businesses usually operate in one of two ways:

 

  1. Where all the marketing and service delivery is done online and the customer deals with one central Trading (nil or low tax jurisdiction incorporated) Company
  2.  Where the business has its headquarters Offshore but for credibility/marketing reasons (or for licensing reasons) needs an on the ground presence in each of the country/s where it is selling/providing services

 

In the latter example a local subsidiary company is usually incorporated to market to or liaise with the customer but certain key functions are exported to (and a large chunk of the sale price diverted to) the business’s Trading Company (or a tax haven subsidiary thereof)

 

In either example what you normally have is a twin company structure at the top of the tree ie a Trading Company + an IP Company.

 

How and Why To Set Up An Offshore IP Company

 

Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.

 

IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition or financial benefit from whatever it is he/she has invented or created.

 

An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.

 

Practicalities

 

So how does it work from a practical perspective?

 

At core the Offshore IP Company (which is usually set up in a nil or low tax country) is used to divert income from Trading Companies or Businesses trading in developed or high tax countries.

 

The first step is to transfer ownership of the IP rights to the Offshore Company/Entity.

 

Once that’s done the Trading Business then enters into a legal agreement (contract) with the IP Company whereby, in return for being allowed to use the IP, the Trading Company agrees to pay the Company royalties or license fees. The income arising from these agreements can then be accumulated offshore in a nil or low tax environment.

 

Timing is of critical importance – It is clearly preferable to acquire the IP (for example, a patent) at the earliest possible time (e.g. at the patent pending stage) before the IP becomes highly valuable. That way the capital payment for the acquisition of the IP (e.g. patent) can be set at a lower amount i.e. before its true worth has been determined in/by the market. (These capital payments may even be deferred and or staggered by way of an instalment contract such as would enable the IP Company to use subsequent royalty payments to fund the cost of the IP).
If a deal is struck for the Offshore IP Company to buy the IP before the IP gives rise to a product or service which is offered/advertised in the market the IP might even be transferred for nominal consideration enabling the IP inventor/creator to transfer patent, copyright or trademarks in favour of the low/nil tax company before the IP suffers significant appreciation in value.

 

Businesses Who Pay Royalties or License Fees for the use of IP

 

Once it has acquired the Property the Offshore IP Company can then issue (IP) sub-licenses or exploitation rights to appropriate third party structures.
For example, a majority of software companies license their users through companies which are established in an offshore jurisdiction, or through a firm, which is not established in a classical offshore jurisdiction, but is owned or controlled by such a firm.

 

Typical examples of businesses that might pay license fees to a nil/low tax Offshore Company include:
- Software companies
- Companies doing business in information technologies
- License and copyrights to books, articles, music, films, etc.
- Users of Franchise operating systems

- Trademark product (e.g. Clothes/Consumer Goods/Accessories etc. Brand) manufacturers and or retailers

 

In some circumstances the royalties may be subject to withholding tax at source, however, the interposing of a second company in another jurisdiction may reduce the rate of tax withheld at source (a carefully selected jurisdiction can withhold taxes on royalty payments with the commercial application of double tax treaties).

 

Structuring Options

 

Another option, whilst you are still in the process of creating a new piece of intellectual property, is to involve or engage an offshore (nil tax) company as a foreign partner or financial sponsor. Participation in development at this early stage would entitle it to register as the owner or co-owner of the property.

 

If you involve an offshore company later, you have to sell or assign the title to the property to the offshore company, and these kind of transactions requires at the least that a fair market price deal be apparent as if no associated parties were involved (+ the transfer may involve the incurring of some CGT on the part of the inventor/creator of the IP).

 

Benefits of an Offshore IP Company


There are numerous benefits that an IP holding company can deliver including:

 

  • By placing your IP in one entity you are able to streamline the internal processes for inter-group licensing
  • Cross-jurisdictional tax issues become simpler as you will be regularly licensing IP between the same jurisdictions
  • You can justify staffing that entity with people who have the skills to manage the same so protecting valuable assets of the company further, simplifying the licensing process
  • Assets can be valued due to the income stream that accrues for the benefit of the IP holding company
  • The value of the shares in the entity can be included into the accounts which will benefit the shareholders of the holding company
  • You can split your income streams in two enabling you to sell one chunk of your business first up (i.e. the operational business) whilst retaining the other (i.e. IP) arm of the business which would entitle you to receive passive income
  • If your business or trading company ever gets sued and the IP is owned by a 2nd (e.g. Offshore) Company the most precious asset of your business can/will not be lost.
  • You get to retain ownership of your IP in a highly private environment where no one knows what you own or how much the IP is worth. (There have been many documented cases of inventors and artists who rise suddenly to fame only to lose their fortune just as quickly via a law suit filed by a disgruntled gold digging ex-lover or confidante… The chances of that happening if your IP is owned by a privacy haven company are GREATLY reduced)
  • You can significantly if not dramatically reduce the tax that your operating/trading company would otherwise have to pay

 

Proprietors Holding Entities

 

By the time each of the business owners becomes entitled to a share of the profits he/she would be wise to have already in place a nil tax entity to hold his/her interests in the business.

 

For many clients all that they will need is a Full Nominee IBC (For those who live in countries with Controlled Foreign Corporation Laws a Foundation should be included as part of the Corporate Structure). Such an entity can enable you, during the lifetime of the business, to avoid paying tax at home on all but the monies the business pays you (eg by way of wages or consulting fees or profit share). The nett result is tax deferral (ie you avoid having to pay tax on the business’s profits until the business is sold or shut down. Meanwhile (without having to pay tax each year on the business’s profits) your capital/asset base should have  grown massively thanks the power of compounding.

 

How To Set Up An Online Business Offshore

 

Offshore Companies are commonly used to own/operate online businesses. Please check out these links for some examples of how certain kinds of businesses can be set up “Offshore”:

http://offshoreincorporate.com/common-offshore-corporate-strategies/#1

http://offshoreincorporate.com/common-offshore-corporate-strategies/#2

 

In principle here’s how it can work:

 

  1. A nil tax offshore company (commonly an International Business Company “IBC”) is incorporated
  2. The IBC owns/operates the web based business (eg ownership of the web-domain and the website/artworks or trademark/s or any sole distributor rights are held by or transferred to the IBC)
  3. An Offshore account (which received payments via a merchant account) is set up in a nil tax banking centre
  4. Ideally the server is located in a country which does not tax business on the basis of server location (eg Singapore)
  5. Customers contract with and pay the IBC. All such monies are banked free of tax in the first instance
  6. You or your local company would be contracted by the IBC to manage sales/delivery of product/website maintenance/whatever.
  7. You would invoice the IBC periodically (eg monthly) for this service which income would be assessable income in your home state – though a smart Tax Accountant should be able to assist you to claim a series of expense against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.
  8. Often there is some kind of intellectual property (“IP”) created or behind the website based business (even if it’s just the website/design). It may be advantageous to you down the track if ownership of the business and the IP were held by 2 different entities. What you can do there is set up a 2nd IBC to own the IP. The first IBC (ie the Trading Company) pays license fees periodically to the 2nd IBC which fees wold be receipted tax free. This could be advantageous if you wanted to bring ownership of the web-business onshore or if you wanted to sell the business but keep a passive (potentially tax free) income stream
  9. Ideally once you start to grow you and to add substance you would be wise to set up your MD/Board and or a sales team onshore to take orders and receive income in a low tax onshore environment (eh Hong Kong, Ireland, Singapore, Cyprus etc as per the Amazon/Google model)

 

To minimise the chances of the IBC being taxed onshore ideally the IBC should be (and be seen to be) managed and controlled from offshore. How this can be achieved is including a Nominee Director etc as part of the Corporate structure. See these pages for details of how that can work:

http://offshoreincorporate.com/faq/should-i-engage-nominees-or-should-i-direct-and-hold-the-shares-in-my-offshore-company/

http://offshoreincorporate.com/faq/how-can-i-protect-my-underlying-ownership-of-my-offshore-company-where-a-nominee-is-engaged-to-act-as-director-or-shareholder/

 

As always local laws can have an impact, so be sure to seek local legal/tax/financial advice before committing to set up an Offshore Company for such purposes.

 

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