For many startups, the design and distribution of a successful product is the initial goal, followed by getting investment and building scale. Making a profit may be something to aim for in a few years time, at the earliest. So you may be wondering why you should care about tax.
Here are five reasons.
1. Accessing investment reliefs for shareholders
Many jurisdictions offer generous tax reliefs for founders and early-stage investors. These can significantly boost the post-tax return on equity and form an important part of any investment decision by venture capitalists/angel investors. Failing to structure your startup to take advantage could cost you dearly in tax and lost investment.
The earlier you identify which schemes apply in your jurisdiction, and the requirements you’ll need to meet, the more likely it is that you and your prospective investors will be able to take advantage.
2. Monetising tax reliefs
Enhanced tax incentives are often available for startups that incur R&D costs in their development stage. In some cases, these incentives can be paid in cash even where the business is not yet profitable. Maximising access to these tax reliefs can provide an important source of funding that is often overlooked.
It is well worth spending time finding out which reliefs are available in your jurisdiction, and taking the necessary steps to meet the conditions and complete the admin.
3. Avoiding double (or worse) taxation
You probably assume that where you establish your business is where it will pay tax on its profits. That may be true, but if you have employees working across the world, or you sell (or plan to sell) your products overseas, you could inadvertently find yourself taxed in multiple jurisdictions.
It is easier to get your structure right at the beginning than to restructure later when your product has become valuable.
4. No profits ≠ no tax
We all know that tax is charged on profits. But that doesn’t mean you can ignore it just because you are not yet profitable.
Many jurisdictions impose a value-added or goods-and-services tax on sales/revenues. And if you pay interest, dividends, royalties or service fees, you may need to pay withholding tax.
It’s far better to deal with these issues up front than to risk nasty surprises when a tax authority comes calling!
5. Looking forward to a future exit
At some point, you may consider selling your business.
If you haven’t kept on top of your global tax compliance, potential acquirers may be concerned about contingent tax exposures, reputational risk and penalties. At best they will discount their value of the business or seek onerous indemnities. At worst it can scupper a sale altogether.
To ensure that you obtain the best possible valuation for the business you have built, be in a position to show acquirers or investors (and their advisers) that there aren’t (tax) skeletons in the closet.
Digitisation is affecting every industry, with businesses making greater use of technology in both the way they work and the products and services they offer.
Freshfields is operating at the forefront of these developments, advising our clients on the opportunities and risks that flow from digitisation and harnessing the power of digital technology to rethink the way we deliver our advice.
As part of our commitment to technological innovation, we also sponsor Europe’s Digital Top 50 awards, in conjunction Google, McKinsey and Rocket Internet.
The DT50 awards aim to bolster Europe’s thriving tech scene by rewarding the bold and trailblazing work of the entrepreneurs behind the continent’s most promising startups.
