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In the ever-globalizing startup ecosystem, structuring your company for growth and investment is critical. One increasingly popular strategy among German startups is adopting a dual-layer structure, commonly known as the “US Flip” or “Delaware Flip.” This blog post outlines the fundamentals, advantages, and considerations for employing this model.
What Is a Delaware Flip?
The Delaware Flip involves restructuring a German startup by establishing a U.S.-based holding company, typically a Delaware corporation (HoldCo), which then holds shares of the German operational company (OpCo). This structure can be set up during the early stages of the business or through a share swap for existing companies.
Advantages of the Delaware Flip
1. Access to U.S. Investors
- The U.S. venture capital market is significantly larger and more mature than Europe's, offering deeper sectoral expertise and funding opportunities.
- The incorporation process itself is straight forward, Delaware has a well-respected and established corporate court system as well as business-friendly tax, legal and regulation policies.
- Many U.S. accelerators, like Y Combinator, require a U.S.-based entity as a prerequisite for participation.
2. Higher Valuations and Better Exit Opportunities
- U.S. investors often value start-ups with a 'Silicon Valley story' more favorably.
- The presence of active private equity players and robust stock markets like NASDAQ provides better exit pathways.
3. Employee Stock Options
- Delaware corporations can offer Employee Stock Option Plans (ESOPs) that align with U.S. tax advantages, making them more appealing to top talent globally.
Challenges and Costs
1. Increased Complexity
- Managing a dual structure requires understanding two legal systems and handling the governance of both entities.
- U.S. corporate governance concepts, such as Boards and Officers, differ significantly from those of a German GmbH.
2. Tax Implications
- Setting up this structure can trigger tax events, such as the realization of hidden reserves.
- Double taxation risks need to be managed carefully, requiring expert tax advice.
- Dual resident corporations come with tax exposure in two jurisdictions that need to be managed or avoided byimplementing a so-called No-PE structure (i.e. avoiding a permanent establishment).
3. Higher Administrative Costs
- Maintaining compliance in two jurisdictions and higher legal fees are unavoidable but can be mitigated through proper planning.
When Does a Delaware Flip Make Sense?
The Delaware Flip is particularly advantageous for startups:
- Planning to raise funds from U.S.-based investors.
- With a business model targeting the U.S. market.
- Looking to enhance their valuation through international positioning.
- Conversely, if a startup primarily operates in Europe and does not plan to tap into U.S. capital markets, the additional complexity might not justify the benefits.
How to Get Started
1. Assess Your Needs:
- Consult with internationally experienced tax advisors and legal experts to determine if the flip aligns with your long-term goals.
2. Prepare for the Flip:
- Set up the Delaware corporation (HoldCo).
- Establish a share swap agreement to incorporate the German entity under the U.S. holding structure.
- Ensure compliance with both U.S. and German tax regulations.
3. Plan for the Future:
- Consider ongoing corporate governance and operational costsand align them with your growth strategy.
Conclusion
While the Delaware Flip offers numerous advantages, it is not a one-size-fits-all solution. German start-ups must carefully weigh the benefits against the added complexity and costs. With the right guidance, this strategy can unlock unparalleled opportunities for growth and investment on the global stage.
For more details and professional advice tailored to your startup, contact us at INSIGHT TAX.
