Start-Up Location
Start-ups face a daunting task to raise money and just gain traction in this ever changing world. These issues are compounded for countries that do not have developed ecosystems. Start-ups that find themselves facing these issues are more prone to scaling slowly and sometimes even having an early death. The onus is then on the start-up to seek better opportunities or a more favourable working environment. The power of technology has increased the fluidity that start-ups can operate within and one does not necessarily have to reside in a city to operate from there. Whilst leaving your city can be scary for a founder because of the dynamics of it all, it may just pay off in the long run.
For all of the talk of Africa being the next frontier for start-ups and technology, the continent is still a very risky investment destination. Investors don’t like risk and therefore they shun Africa and take their funds elsewhere. This is especially true of European and American investors. African investors will invest in Africa but they do not have adequate capital to move the needle and their funding criteria is very stringent for an early stage business. Foreign capital especially from countries like the USA can move the needle and have a less stringent selection criteria if the idea is good enough. This makes courting them for funding more attractive to the start-up.
A major issue for an investor outside of Africa is that the start-up is not that attractive to the investor if it is not based in certain parts of Africa. Investors want to invest in start-ups that are located in countries or cities that provide stability, working ecosystems and rule of law amongst other things. At the end of the day they also have to protect their investment and give it the best opportunity to grow.
For this reason I will highlight locations where start-ups can register their businesses and the benefits that these locations provide.
1. Delaware — American VCs encourage founders to register in Delaware because of the benefits that accrue from this location. Most American start-ups find themselves incorporated in Delaware because it has the most well developed set of laws and legal opinions on corporate governance and shareholder rights. This is a safeguard in the case of corporate disputes, they can be resolved timeously and with minimal delays.
More than half of public and Fortune 500 companies are incorporated in Delaware due to the legal and tax benefits of the jurisdiction. This is an example of the benefits that a start-up could attain just by registering in Delaware.
Advantages of Incorporating in Delaware:
· Delaware’s business law is one of the most flexible in the USA.
· For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (but there is a franchise tax).
· Taxation requirements are often favourable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
· There is no personal income tax for non-residents.
· Shareholders, directors and officers of a corporation or members or managers of an LLC don’t need to be Delaware residents.
· Stock shares owned by persons outside Delaware are not subject to Delaware taxes.
2. Mauritius — Africa as a continent is not the best to register a start-up but if one is to do it, then Mauritius is the ideal place because a Mauritian Company offers a start-up the following benefits:
· Tax Incentives/Fiscal benefits (Low Tax rates of 0% — 3%) — this is very attractive to any new business and will help keep costs down
· Good banking options
· Company records are not available to the public. — This allows a start-up to build the business without scrutiny from the outside.
Mauritius has a developed economy and ranks 20th in “Ease of Doing Business” worldwide and this means that a start-up can be registered within a few days.
Mauritius acts as the main financial hub for investment into Africa and the jurisdiction is approved by the EU and white-listed by the OECD. It does not feature on any black list. This is key to attracting investment from European and American investors into your start-up.
And besides the virtually non-existent corporate tax, there are no withholding tax on dividends, interest, and royalties paid outside of Mauritius. And if this is not enough, you do not have to worry about estate tax, capital gains tax inheritance, or wealth tax.
Basically Mauritius is a tax haven in Africa and investors would be willing to place their funds into a start-up located here due to the large tax breaks that they will accrue.
3. Amsterdam — Holland has one of the lowest tax rates in Europe: starting from 20% and there is also no value added tax (VAT) for transactions between member states of the EU. The Dutch offer the largest number of treaties for double tax avoidance worldwide and Dutch companies have an amazing and well-known reputation in global (e-)commerce. Dutch cities are promoting innovation and promote the growth of start-ups.
Registering your start-up in Amsterdam provides an outstanding and innovative international business atmosphere.
The Benefits of Registering in Amsterdam:
· The Netherlands welcomes foreign entrepreneurs and investors by offering a very stable legal and political climate as well as superb international relations
· The World Economic Forum ranked the Netherlands the 5th most competitive and innovative country in the world.
· When considering Holland for your start-up, you are basically also considering the whole European Union. The Netherlands is part of the EU and this provides you with endless possibilities and opportunities:
The European Single Market allows you to freely import and export services and goods throughout the EU.
The Netherlands is a stable core member of the EU, which will make your company look solid and dependable too. (This ticks boxes for investors)
Because of this trade mentality and strong infrastructural position, the Netherlands are currently holding the 20th position of largest economy in the world
The Netherlands is loved by an infinite amount of wealthy investors due to the mild tax rates. If you compare the Netherlands with Belgium you can see the stark difference in tax rates. This is enough to entice wealthy Angels to put their money in this jurisdiction.
Belgium 29%
Netherlands 20–25%
There is more positive news coming: by 2021 the tax rates for profits under 200.000 euros will be reduced from the current 20% to a mere 16%. Profits over 200.000 euros are currently taxed at 25%, but this number will be reduced to 21%. The government aims to attract even more foreign investors this way, by providing a strong investment climate. This makes right now probably the ideal time to start a business in the Netherlands!
All three locations highlighted above provide different benefits to start-ups but in most cases they revolve around taxes, especially paying lower taxes. The less of a tax burden that an investor has to pay then the more likely they are to put their money in that region of the world. Globalisation has made the world smaller and therefore start-ups should take advantage of this and play the game to give themselves greater leverage.
