News

Disadvantages of IT companies: what will you have to face

Published: 24 Sep 2019

The IT industry is one of the most fast growing areas in international business. SaaS, AI, blockchain, smart contracts and electronic wallets have become an important part of the economic life of society. Unfortunately, the legislation is not changing as fast as IT industry, and the rapid jump in IT technology has led to the lag of legal regulation from the reality of IT business.

The paradox of the situation is that, despite the general gap between legislation and IT, most countries are trying to create favorable conditions for the development of IT business. At the same time, the governments of these same countries see completely different “favorable conditions”, which leads to a logical result - it is hard to find at least two countries with the same approach to the legal regulation of innovative IT technologies.

This situation plays into hands of the giants of the technology industry, who can afford to maintain a large international network of companies supported by numerous legal departments, and take advantage of all individual countries simultaneously. At the same time, this benefits often are not available to small and medium-sized IT sector players, and they have to make difficult choses: in what jurisdiction to register a business, how to protect intellectual rights, how to establish work with employees and banks, and so on.

If you are planning to launch a new startup or are already working in the IT industry, but do not have the resources of the largest international corporations, then this article is for you! We will find out about the main problems that small and medium-sized IT companies may face, their causes and ways to overcome them.

How did deoffshorization affect IT companies?

A brief background: deoffshorization is a series of global processes all around the world with the sole purpose of making businesses pay taxes at the place of their actual business, rather than registration. Deoffshorization was not a surprise and did not happen at one moment (in fact, it is only gathering speed now). Despite this, many IT companies were not ready for a new reality, and even corporations like Google and Apple could not avoid the consequences and fines.

Requirements for an economic substance, control and management of business in the country of registration, the presence of a real local office and employees are far from a complete list of conditions that should be considered today when establishing foreign companies (including IT). It is clear that IT companies can argue with the economic feasibility of renting an office, hiring or transporting employees to another country, etc. - IT does not have to be tied to some place, and can successfully work remotely. But by considering themselves ‘special’ and ignoring the established practice, the owners of IT businesses create problems for themselves. As a result of this approach, IT companies were recognized as shell companies, banks are closing their accounts, they loose any tax benefits and preferences in the country of registration and business.

So, what can IT companies do in a world where deoffshorization rules? The answer is very simple: all problems can be avoided if you plan your project in advance taking into account current requirements for foreign companies and turn to qualified specialists for help in creating foreign companies and opening bank accounts.

Where to register an IT company?

The right choice of jurisdiction for establishing an IT company is one of the critical moments for future business and it’s effective operation. To make this difficult choice, it is necessary to take into account a large number of factors - the general goals of the business, its scale and geography, acceptable tax burden, the possibility of creating and the cost of maintaining the substance, the conditions for opening and using a bank account. Of course, these are just a few factors that you need to pay attention to. The task is even more complicated by the fact that legislation and the environment are constantly changing, so only the latest information and forecasts should be taken into account, because the last year’s decisions may no longer work.

The cost of mistake when choosing a jurisdiction for establishing an IT company can be high, and even lead to the closure of the project. Many entrepreneurs believe that after reading a dozen articles on the Internet, they can easily choose the right jurisdiction and structure their business. The second common mistake will be to use a solution heard from business partners or acquaintances. Both of these approaches carry significant risks. Firstly, the Internet is filled with a lot of outdated information (if an article is more than a year old, it is already very likely outdated), and not every article on the Internet is written by practicing specialists. Secondly, by applying solutions that worked well for your friends or business partners, you do not necessarily get the desired result, because Practice shows that it is extremely difficult to find two absolutely identical IT businesses. There are many features and opportunities that this or that jurisdiction can provide, but not all of them may be applicable to your business.

If you decide to start your IT project, it is better contact the specialists, in order for you not to harm your business. SBSB will choose the best option for you according to your goals.

How can IT companies find common ground with banks?

Today, when making a business plan and planning an IT project, it is worth to pay attention to choice of a bank and proper preparation for opening a bank account. If you do not take these issues into account in advance, this can lead to the impossibility of making payments, loss of investments, undermining the reputation and unsold product.

Basically, the field of IT technology works with virtual objects, such as programs, networks, Internet sites, databases, etc. Such virtual things cannot be touched or visually seen, that is why banks cannot be 100% sure that this or that IT product exists at all. In this regard, many types of activities in the IT industry, the bank recognizes as the high-risk activities. That is why the largest foreign banks close thousands of accounts owned by IT companies, because for them it is easier to do so rather than risk to get fines from the regulator. How to avoid account closure and what to pay attention to?

In most cases, the solution to the problem may be the correct choice of the bank, the impeccable and transparent structure of the company, the availability of evidence of real business processes and competently written documents. These are just a few general recommendations to solve the problem.

Each IT project has its own characteristics, so we offer the opportunity of opening an account for your company in the top 100 largest and most reliable global banks in accordance with your needs. SBSB's long partnerships with banks and the high qualifications of our specialists allow us to recommend clients and open accounts for IT companies in well-known banks all around the world.

What tax problems can an IT company face?

International Internet platforms have dramatically changed entire industries, such as trade or advertising, and at the same time seriously complicated the situation for states in terms of taxing operations and profits of IT companies. Many large enterprises in the digital economy want to be out of the reach of the tax authorities and reduce their tax costs.

In turn, state regulators, tax authorities and banks actively monitor IT projects, the actual presence of companies in the country of registration, the place of their activities, as well as the transactions of such companies, annual reporting and tax payments. The most striking evidence of the special interest on taxing the activities of IT companies was the adoption of the BEPS (Base Erosion and Profits Shifting) plan by the OECD member countries in 2015, which is a set of measures aimed to prevent tax evasion. In order to strengthen control over IT companies, the OECD introduced new requirements for the substance - “substantial economic presence”, “digital presence”, “digital permanent establishment”, “virtual permanent establishment”.

With regard to the strengthening of measures to combat tax evasion, IT companies need to meet new requirements for their activities fully equipped and, taking into account significantly more complicated taxation, turn to the international tax specialists.

What new taxes await IT companies in the nearest future?

Europe

The creation of a single digital market is included by the European Commission in the list of 10 political priority areas of the European Union. Italy was the first state in Europe to introduce a digital transaction tax. The rate of tax on digital transactions is 3%. Moreover, in this case it does not matter whether the service provider is a resident or non-resident, it is essential that he provide the service more than three thousand times in a year, then he becomes a payer of this type of tax.

USA

The United States are introducing a new concept in the digital economy as part of the ongoing tax reform. Profits from IT operations will be taxed regardless of the country where such IT products are located and where revenue is generated. Thus, every IT company that operates in the US market will pay tax. This will happen in the case of the implementation of some proposals on taxation of IT activities, which are currently under discussion.

How to arrange an investment in a startup and protect your project?

An urgent problem for many entrepreneurs is proper registration of investments in the project. There are a huge number of tools, including foreign legislation, for legalizing the process of attracting investments. The most common of them are: venture capital investment, project financing, crowdfunding, equity financing, leasing. It is difficult for a person without relevant experience and knowledge to understand them by himself. Often, the product developers themselves are out of work as a result of an incorrectly made or downloaded from the Internet investment agreement.

The sooner work on making a proper investment agreement begins, the higher the chances that the idea will not only be realized, but also enter the international market with guaranteed profit.

How to protect your intellectual property rights?

The prospects and profitability of an IT project often depends on intellectual property (IP). This makes the protection of these facilities especially important. The monetary value and attractiveness for investors depends on how qualified the protection of intellectual property is built. A wide variety of countries (each with its own legislation) and IP objects lead to the fact that the task of protecting them on a global scale becomes a real challenge. The possibility of making a mistake when you independently select or implement a method of protecting IP objects is quite high.

For example, let’s consider the protection of a trademark as one of the most common objects of intellectual property. To protect your trademark from misuse, you must register it in the required classes and jurisdictions that are the target markets for your product. Moreover, for registration to be successful, you must first search for the presence of similar trademarks in order to know whether it is possible to register your mark in the planned country at all. Therefore, to register the rights to IP objects, the most reasonable solution is to turn to professionals.

It will be a mistake to consider that the protection of IP objects is limited to registration of rights. It should be a constant and organized work in several directions at once. For example, when signing contracts with employees and foreign counterparties, special attention should be paid to the choice of applicable law and the place for dispute resolution. The variety of options raises a large number of questions: which country’s legislation is most suitable for regulating the relations of the parties, which court will be able to most effectively protect your interests? It is not necessary the legislation of the native state can provide adequate protection. For example, in the CIS countries (including Russia and Ukraine), the legislation does not provide special ways to protect civil rights due to violation of the confidentiality agreement (NDA). If the contract is cross-border (concluded with a foreign partner), the terms and conditions of the applicable law and place of dispute resolution should be explicitly included in the contract and set out clearly and in detail for quick resolution of disagreements.

For making your IT project successful, you need to develop a plan and build a protection strategy. It is important to conduct a legal audit of the activities of an IT company or a fresh startup and find the best solution for the flawless implementation of an IT project. The specialists of SBSB company will help you to make the right choice and find an effective solution. We will save your IT company from any problems that may arise and help you to realize your most daring projects.

Share this page

Yuliya Barabash

Firm: SBSB Legal Service
Country: Ukraine

Practice Area: Commercial

  • Kozhemyatska Street, 20
    Kiev


Find a Global Law Expert

Awards

Since 2010, the Global Law Experts annual awards have been celebrating excellence, innovation and performance across the legal communities from around the world.