11 July, 2011
Microsoft Corporation, Washington DC
This is the first event of our Digital Mission to Washington DC, we’re here at Microsoft’s brand new and very smart Innovation and Policy Centre.
Session 1: Navigating the Red Tape
Speakers: Chuck Morton – partner at Venable LLP
Susan Edlavitch – partner at Venable LLP (tax specialist)
Louise Eldridge – Finers Stephens Innocent (chair)
This session is going to be done as a Q & A.
At what stage should a business sort out methodology around software protection and process patents?
A: it really depends. What you need to make sure is that you don’t want to reveal things in a patent application that could be covered via copyright and other intellectual property rights. Morten states that the US position is very similar to the UK.
Business in each state? At what point in the business do you need to register as a company?
from a tax position businesses are subject to Federal as well as state and local taxes. Taxes vary from state to state and sometimes do not conform to the Federal system. What determines ‘doing business for tax purposes’ are made more complicated by one set of rules by the UK/TS treaty, but these can be different at a local level. Different states are trying to expand their concept of what connects you to a state (eg. New York).
A permanent establishment: the US will not tax source business income is substantial enough to give rise to a permanent establishment (ie. be taxable) – main rule of thumb: if you have a fixed office or place of business (renting is sufficient), triggers a nexus for tax purposes. Practically: you can invoice business in the US, but that doesn’t require company registration in the US, or tax payments. For example, you could sell software as a service to US businesses but not need to register as a company.
Delaware is very popular as a state to register as a company to international companies, as the environment there is very favourable to those companies. As the official state website states:
‘More than 900,000 business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 63% of the Fortune 500. Businesses choose Delaware because we provide a complete package of incorporation services including modern and flexible corporate laws, our highly-respected Court of Chancery, a business-friendly State Government, and the customer service oriented Staff of the Delaware Division of Corporations.’
However, registering in Delaware might not be the best option for your business. Tip: Think about which state you’re going to be most active, as that might be the best state for you to register.
What are the first things that companies should think about when considering expanding into the USA?
1. is there a customer need?
2. Can you run the business from the UK, or do you need to explore a partnership with someone in the US – eg. for a sales force
2. How do you document the unique entity or partnership (see below as regards Joint Ventures)
4. Consequences of either steps
5. Tax is just one of many factors
Businesses are navigating these issues all the time, so really don’t worry.
The volume of cross border activity is accelerating: as a result there’s quite an ecosystem growing (lawyers, accountants). The greatest risk is inaction, and not grabbing the opportunities. Don’t be paralysed by the red-tape.
Is a joint venture a way to go about things rather than incorporating?
Joint venturing: cross border partnerships are happening all the time. Commercially speaking, think about what your partner might bring to the partnership and the jurisdiction that you are wishing to expand. In the long term the relationship might develop into you incorporating separately, so think about your shared ethos, and how you operate. Do they compliment one another, what does everyone bring to the table?
The joint venture model, might help you speed up the process of getting active. So that’s also worth considering.
Staffing up? What do you need to be aware of?
In the US you can hire and fire more easily than in the UK. All of the considerations that you have in the UK are very similar to those in the US. The difference in the US are tax issues, and what employers and employees need to play (this changes by state, so check what difference it will make to where you set up office). Salaries tend to be higher, but holidays tend to be a lot less (around 15 days) and can include sick leave. Employee healthcare payment is a consideration and a key difference to the UK, so check that and add it into your considerations. In general, there are many experienced payroll specialists and software companies that can ease you through these issues.
Your main approach: keep it business focused