Thursday, July 23, 2015
FDI has been a massive success story in Ireland throughout the recession and now into the recovery. Ireland can lay claim to having world class financial, technology, pharmaceutical and medical device clusters which are disproportionate to our population, but is it all good news? There are nagging (and unjustified) doubts in some quarters that this is all tax driven. In others, there is a belief that setting up is an expensive and complex exercise which is the preserve of large global companies and not for those that are early stage or pre-revenue. This article aims to focus on the latter of these doubts.
Europe is not a place to dip your toe into – if you want to enter, you need to plan carefully before taking the plunge. Below are five points to assist you in that planning process:
The first point is to look at is your own business and to work out your business plan for the next three to five years. The single most important factor is to have clarity regarding your plan. This does not need to be a huge tome pulled together by expensive consultants – rather it needs to be a concise statement prepared by management identifying what the company is planning to do in Europe and in which part(s) of Europe it intends to undertake that activity. It remains remarkable how many companies set up in Europe without having a core plan (and it is no coincidence that these companies routinely have to go through costly restructuring plans when it emerges that their structure is unfit for purpose). The business plan should also look at the proposed structure for the exit of the business – a robust EU structure will add value to your exit.
If your expansion into Europe involves the usage of intellectual property already developed by your company, then a key consideration will be to understand precisely what intellectual property will be required, where it is held and what the European side of the business will be permitted to do with it. Whether that intellectual property is ultimately acquired by the European business by way of assignment or licence (or similar) is irrelevant for initial purposes, the point to consider is that a value will need to be placed on that intellectual property. Generally speaking the earlier that this is addressed the lower the value. Following the tightening up of anti-inversion laws in the US, we are seeing some US companies electing to set up new ventures in Ireland to avoid having to address complex and costly transfer pricing issues with developed intellectual property.
Once the initial plan is prepared, then the next step is to engage the right team – initially this means your local accounting and legal team. It is important that your local team has international structuring and tax experience to correctly deal with this specialist work. You will also need a legal and accounting team with a comparable skill mix in the country of your initial entry into Europe. We recommend that you engage with your US and European team on an initial conference call to scope out the work and from there to provide you with both a step plan identifying all of the steps required to undertake the entry into Europe and fixed price fee quotes. Though this work is specialist, it is capable of being broken down into costed core components – if your team cannot do this, then you may not have the right team in place.
Embrace the differences in legal systems and in particular avoid trying to simply repeat the structure which is used in the jurisdiction you are from. Looking at this from an Irish perspective, common errors made include by way of example only – assuming that shares in Irish companies can simply be “cancelled”, that contractors must be hired as it is impossible to fire employees and that intellectual property is reserved automatically in favour of the company in services rendered by independent contractors. None of these are true. So in Ireland, if you plan to provide options or shares to employees, you need to provide contractual mechanisms to revoke unvested options or legally mandate a buy back of shares. You can terminate contracts of employment without cause within one year of commencement of service (so you need to plan to carefully monitor those employees to ensure that they are meeting your requirements from the outset) and you need to think about protecting intellectual property every time you engage a contractor. So to simply “Irishise” contractual structures which you developed in your home state may be to the detriment of your Irish/European business.
Setting up legal structures in most European countries is quite a straight forward process. It is even easier to unwittingly establish a permanent establishment, regulatory or tax nexus in a European country if your entry into Europe is not planned. We have many examples of companies entering into binding contracts in various EU countries (hiring of local employees in various jurisdictions, entry of agency agreements) which have triggered local law rights, tax registrations and regulatory compliance obligations. These can be costly and complex to unwind when a more considered and defined EU structure is rolled out.
From our experience, companies that have enjoyed smooth and straightforward entry into the EU have complied with this approach and there is no reason why this needs to be regarded as a complex or expensive exercise.