Where to start your Cryptocurrency Business
Flag Theory Weekly Letter – Thursday April 25th 2018
The cryptocurrency and blockchain space will see increased regulation and government oversight as tokenizing assets is a trend that will not go away. All types of financial incumbents will begin to tokenize. There will also be simultaneous lobbying of governments by incumbent players to regulate the space.
For countries which get it wrong, they are trying to stop a technology which is permissionless, censorship-proof and inevitable. For countries that get it right, this is an opportunity to create value and boost their economies and will see jurisdictional arbitrage.
For instance, Puerto Rico is opening up to the crypto industry to diversify its economy and its regulators have officially expressed interest in this regard.
Although this Caribbean island is immersed in a series of challenges, officially bankrupt with a decade of recession and $120 billion public debt and recent Maria and Irma hurricane devastation, it presents very interesting opportunities for entrepreneurs and investors.
Puerto Rico could become the next blockchain hub and there are several renowned companies that have moved to the island attracted by its tax incentives.
Properly structuring your tax residence, dividend payments, interest payouts and certain capital gains of assets acquired (including cryptocurrencies), AFTER you move to Puerto Rico, may be tax free.
In addition, Puerto Rico provides tax exemptions and tax credits to companies that export services which can be subject to a corporate tax as low as 4%.
This could be especially attractive to Americans since Puerto Rico is their only option to escape from their citizenship based taxation.
In any case, one would have to physically move to Puerto Rico which generally involves spending at least 183 days a year on the island and having a close connection with the territory, for example with the possession of a property, a lease, a bank account, a driver’s license, etc.
In addition, the offshore banking sector of Puerto Rico, which is the second largest in the Caribbean after the Cayman Islands, is considerably open to businesses dealing with cryptocurrencies.
You can even start your own bank. Puerto Rico might be one of the easiest and cheapest jurisdictions worldwide to obtain an international banking license. International banks may also apply for the aforementioned tax exemptions (4% corporation tax).
Another jurisdiction that is seeing an influx of crypto companies, especially cryptocurrency funds and ICOs, is the Cayman Islands.
The Cayman Islands have traditionally been the jurisdiction go-to for offshore investment funds and captive reinsurance companies. On one hand, there are no direct taxes and on the other, as a British protectorate, it is one of the most stable and compliant “offshore” financial centers with a very solid financial system.
The Caymans offer a considerably flexible legal framework to allow blockchain companies to flourish without the need to enact new laws. In addition to several corporate structures such as the LLC (which came into force in 2016) or the Foundation Company (in force since August 2017), an hybrid between a corporation and a foundation, which in combination with a STAR Trust can be a powerful vehicle for a token issuance.
That being said, a properly planned legal structure is absolutely indispensable to obtain banking in the islands.
Banks will want to see a pristine legal structure, including licenses, approvals and compliance with laws and regulations, addressing issues such as the type of token you are issuing, whether it is security or utility, and the proper KYC process on your token purchasers.
Mauritius is another jurisdiction to consider for companies innovating in the blockchain space.
Mauritius is commonly referred to as “Ethereum Island” and is becoming an international hub for blockchain startups.
In addition to operate with a 0% corporate income tax, the Mauritius board of investment has publicly announced its willingness to attract blockchain startups launching a Regulatory Sandbox License (RSL).
The RSL provides companies and startups with the opportunity to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers, but with regulatory supervision.
This Sandbox framework makes Mauritius one of the most attractive jurisdictions for blockchain entities that are seeking to be regulated.
Changing latitudes, Belarus effected Decree No. 8, which legalizes several commercial activities related to cryptocurrencies for companies that are incorporated as residents in the High Technology Park of Belarus (HTP). These companies will enjoy an exemption from corporation tax until 2023, in addition to exemptions from visas and work permits for foreign workers hired.
Malta has launched the Malta Digital Innovation Authority for the enactment of regulating brokerages, exchanges, asset managers and traders and promotes providing legal security in the space of cryptocurrencies and the blockchain.
In addition, although its corporate standard tax rate is 35%, companies operating internationally can reduce their effective tax at rates between 5% and 10% through a tax credits and refunds system for individuals and corporate shareholders.
The government’s willingness to attract blockchain companies is already paying off as the first and third exchange by trading volume, Binance and OKex have already officially announced that they will establish headquarters on the European island.
If you have a considerably high budget and you are looking for a prestigious jurisdiction to incorporate, Luxembourg, Switzerland and Japan may be interesting options, where you can get some legal coverage but not without going through considerable hoops.
However, Switzerland, Luxembourg, and especially Japan are jurisdictions with a much higher tax burden than others mentioned above.
Other jurisdictions such as Estonia, Isle of Man, Gibraltar, Luxembourg or Singapore are other usual suspects when it comes to establishing crypto ventures. We will review them in upcoming letters.
Finally, in a space as uncertain as the cryptocurrency and the blockchain, we strongly suggest seeking legal advice to establish the appropriate legal structure according to your unique circumstances.
Whether you are launching an exchange, a cryptocurrency fund, a Bitcoin mining company, an ICO or simply accepting cryptocurrencies as payment method, at Flag Theory, we assemble teams to help with all of the legal, tax, compliance and banking issues you need to be aware of for both your company and its officers. You can contact us here and request a free 30-minute consultation call. We are happy to assist you.
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