How to set up an ICO – Part 5: The Proceeds, ICO Tax & Structuring
Flag Theory Weekly Letter – Tuesday, June 12th, 2018
In this new edition of how to set up an ICO, we will review the key aspects post-ICO and how to structure the vehicle which will manage the ICO proceeds and the tokens not sold.
The facts and circumstances of your token sale will be unique, and it’s vital to get tax advice from a qualified professional in the relevant jurisdiction where the issuer and related companies, promoters or affiliates are located. This article is NOT tax advice for your situation.
Also, a note that many jurisdictions treat tokens differently, and we are summarizing broad strokes of tax law very generally in order to help you think and seek help on these issues.
ICO Tax Optimization – Start with the end in mind
Let’s say you have raised millions of dollars to carry out your Project but have the wrong set up – you can end up in a considerable ICO tax liability, which can truncate your plans and budgets.
The fact that your funds are in cryptocurrencies, whether in Ethereum or Bitcoin, does not exempt you from taxes. Moreover, even unsold tokens may be subject to taxes.
That is why when we structure an ICO tax optimization is of the utmost importance. Tax implications are complicated and sensitive issues and you must consult with a qualified tax attorney to assess your specific situation.
For instance, you may have the idea to simply incorporate in a 0% tax offshore jurisdiction and thus avoiding taxes. This alone might not work.
Depending on where you are tax resident and the place where the company is effectively managed (mind and management) you may end up having to pay ICO tax.
CFC laws and corporate tax residency laws vary between jurisdictions, but broadly, they can determine that the income of your offshore company is attributable, whether or not it is distributed – to the individuals who manage the company and where they are tax residents.
This is where applying a Flag Theory strategy makes more sense.
A Flag Theory strategy uses all the tools available globally to minimize your tax obligations.
Given its global and digital scope, ICOs, blockchain and cryptocurrencies businesses can really benefit from a Flag Theory strategy, as we will see below.
The Foundation – Optimal ICO Tax Structuring & Management of Proceeds
First, we need a corporate vehicle which will be the beneficiary of and will be in charge of managing all the funds raised and the tokens not sold.
By establishing an entity that was not involved in and is not related to the token sale, you make sure to start developing the Project with a pristine entity whose liability is limited.
This entity does not need to be in charge of the ongoing business operations, but it also could be.
The jurisdiction where you want to establish the headquarters, offices and operational activities may not be the right one to manage the funds and tokens, either because of the type of entity, regulatory or tax and liability laws, among others.
That is why we usually recommend a flexible structure which can provide an optimal post-ICO management, across multiple jurisdictions. In a changing regulatory environment (there is no such thing as regulatory certainty in the crypto space) one should be flexible, agile, and not located entirely within the bounds of any one jurisdiction.
Beyond picking the right countries, there are different entity types for different purposes. For instance, a foundation may be more suitable to carry out the administration of funds and tokens than a company limited by shares.
Foundations are hybrid in nature, and benefit from the legal personality of a corporation but can be established solely for a purpose (or for the benefit of beneficiaries) like a Trust.
A Foundation has neither owners nor shareholders, and can be established as a not-for-profit entity, without beneficiaries, and only for the fulfillment of a purpose.
By not having either shareholders or beneficiaries, a Foundation can be a powerful tool for ICO tax optimization and asset protection and for providing a project with a non-profit or open source nature with a solid legal basis without conflict on ‘corporate benefit’ type issues.
In fact, Foundations have been and are traditionally used for super-wealthy to conserve, protect, plan and grow their estate.
A Foundation is managed by its council members and is responsible for protecting, managing the funds and ensuring that they are only used for the purpose for which the Foundation was established: to develop the project derived from the ICO.
Additionally, an optional protector can be assigned to oversee the actions of the council members.
However, as we have commented on several occasions, usually, a foundation is not ideal for commercial activities, so it would contract and establish legal agreements with other entities more suitable for the day-to-day business and perform work on its behalf.
Where to establish a Foundation for an ICO
Several factors may weigh on the decision of a jurisdiction, its reputation, political and economic stability, transparency, justice, market and individual freedoms, taxes, and its time of incorporation, costs and bureaucratic procedures.
And no less important, its interest in attracting blockchain projects.
A Foundation is originally a construct of civil law. Switzerland and Liechtenstein are the pioneers on this legal entity type.
Many clients ask us about Switzerland since it has been a relatively used jurisdiction to establish ICO projects, such as Ethereum and Tezos. It is also one of the most open countries worldwide for tech startups.
However, a Swiss Siftung might not be right for most projects performing an ICO.
For instance, when opening of bank accounts with Swiss banks and obtaining the approval of the supervisory authorities, the process can take considerable time.
Depending on the nature and location of the project, it may even be sometimes impossible, to open the Swiss bank account for a Foundation that will receive ICO proceeds.
In addition, Foundations in Switzerland are not automatically exempt from taxes and must request an exemption based on the facts and circumstances of the foundation, mainly its charity purpose.
Liechtenstein is a case similar to Switzerland. A jurisdiction with a high reputation in the sector, but that must qualify as a Private Asset Structure to minimize the ICO tax, otherwise may be subject to a 12.5% income tax.
Panama, Mauritius or Labuan might be more suitable, their incorporation process and management is straightforward. These jurisdictions offer tax-free entities with minimal corporate compliance.
Mauritius is another interesting jurisdiction. Its Board of Investment launched a Regulatory Sandbox License (RSL), in which blockchain startups can apply to be regulated.
Although a Foundation is originally a construct of civil law, many common law jurisdictions have created legislation to allow the establishment of foundations such as Vanuatu, Bahamas, Barbados, Isle of Man, Jersey and Guernsey, among others, which might be suitable for your project.
Or you could consider a Multiform Foundation in the tax-free jurisdiction of Nevis which can be set up as a Company Foundation, Trust Foundation, Partnership Foundation or as an ordinary Nevis Foundation.
Unlike traditional foundations, a Nevis Multiform Foundation is not restricted to function only as a foundation and is capable of fulfilling any of the aforementioned roles, which may be changed at any time in the Foundation’s life.
The assets endowed to the Nevis Multiform Foundation has no specific owner other than the Foundation. It can own property in any form, conduct business, trade, and any other commercial activity.
A Nevis Multiform Foundation is one of the most flexible structures worldwide.
As we have seen, there are several options available. At Flag Theory, we help entrepreneurs launching an ICO to design and implement the appropriate corporate structure and choose the best jurisdictions to establish it according to their specific business nature, circumstances and situation.
In the next, and last chapter of How to set up an ICO, we will talk about banking and the day-to-day business and ongoing operations post-ICO. Stay tuned.
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