How To Choose Where To Locate Your Company

    I promised to write some thoughts on how to select a location for your company. This is not a scientific or detailed analysis but my personal framework; how I try to conduct this process and also how I have  done it in practice.

    First, it is not about one location but many. You need to consider your company’s structure. You can have the holding company, head office, R&D unit, sales offices, etc in different places. For each of these you can take into account several different factors, e.g., taxes, costs, salary levels, local support, customers, funding, needed resources etc. But as an entrepreneur you can also factor in your personal preferences and how the location will affect your quality of life.

    I cannot analyze all the factors relevant to all the different types of companies here; I will just give a few examples. Each individual or the founders together can have a holding company that owns an operative company. Taxation is one important matter to consider for the location of the holding company. Some offshore locations have very low taxes but they can easily raise some negative issues, such as credibility. However, there are also European locations (e.g. the Netherlands, Luxembourg, Switzerland, Estonia, Cyprus) that have quite friendly tax systems as well as Singapore and Hong Kong in Asia.

    Tax is also relevant when deciding on the location of the head office but there are also other matters to consider, including funding and potential exit opportunities. The level of operations you have at the head office also affects the location of the holding company when it comes to cost level (including salaries and other typical local benefits like health insurance and pension schemes), and personal taxation. Some governments are also willing to support local companies. Sometimes it is also better to have the head office in a well known location that has an internationally known legal system. The location of your customers can also be relevant, but is not normally a major issue for the head office. The USA is still an attractive head office location for many high growth businesses and especially for tech companies, because their funding and exit market often works better than in other countries. The USA is not a tax paradise, but it can also offer some attractive taxation regimes for companies that only derive revenues outside the US. Typically companies in the US are incorporated in Delaware, but you can do it in other states too, and there are some differences between the states (e.g. regarding legislation and taxes). The UK is also a well known location, and its common law legal system makes some agreements (e.g. funding) easier to handle (I don’t say agreements are shorter or easier to make, but there are a lot of lawyers, cases, and practices to make agreements and solve conflicts). In Asia there are English speaking jurisdictions such as Singapore and Hong Kong that use British common law, and their governments also try to support companies there. Ireland is well known for its public funding opportunities. Some places in the former Eastern Europe offer attractive taxes and also competent people but the local legislation and funding market can be an issue.

    You can also have a separate R&D company. Available labour and public funding are important factors to consider when deciding on the location of an R&D company. For example, Finland, Ireland, Spain and Singapore offer public funding for R&D work. Typically there are some restrictions on this kind of money, e.g. it should create jobs in the country in question and in some cases the IPR should stay in the same country. IPR is often a complex issue with a local R&D company. For example, investors would like to have IPR in the head office company, when they invest in it. There are different kinds of models for handling this, but it is important to remember that IPR is also linked to taxes. If you transfer the IPR inside your group, it can trigger taxes.

    Typically sales offices are set up only when needed. A customer can require a local company or hiring local sales and support resources can require a local company. Typically it is better to make a sales contract for the head office company, and use a local sales office only to manage local resources and costs. In principle you can optimize your taxation using your sales offices, but it can be too complex and not really relevant for a smaller company.

    As I mentioned this was not a full analysis of all options, just some examples. It is useful to clarify the situation properly in the early phases, because it can be difficult to change the model and locations. For example, if you incorporate a company in Finland, and would like to move it later to another country, it can trigger you capital gains taxes based on an estimated (by the tax office) value of the company, not on actual capital gains. When you move your companies, always transfer IPR or make agreements between different companies in your group (e.g. if you have an R&D company in Finland that sells work to the head office company in the US), it is better to talk with tax experts. It can help you to avoid nasty surprises.

    This might sound complex and expensive but that is not really the case. In many countries you can find local companies that help you incorporate a company (e.g. in the UK and US the costs are less than €1,000, or if you do it yourself much less) and source some local services (e.g. accounting, tax filing, and some basic legal services). And often other people who have done it earlier are also willing to help and share experiences. For example, LinkedIn is a good place to ask questions and get help.

    I want to give some personal examples that hopefully illustrate the points mentioned above:

    1. I was co-founder of a Finnish company. The company wanted to get funding from US investors and the technology and timing were good. However, getting a US investor to invest outside the US is difficult. They have no resources to manage the investment in Finland and sometimes they are also suspicious of the legal system with regards to investment agreements and labor laws (e.g. how a company can fire people). Then we took a local investor and at the same time planned to move the head office for the next funding rounds but there were potential capital gain tax issues involved in moving to the US. The move could have triggered a capital gains tax for the founders since company’s value was now higher than when they made the original investment. So then we considered the UK, and were close to that. Some tax experts said it would be doable. Fortunately, I talked with some people who told me that the move itself can be okay, but if any shareholder moves outside Finland, this can trigger capital gain taxes for them. And actually I and another person planned to move at that point. The lawyers also said that this law is illegal, because it is against EU rules, but there is no decision from the EU court. The Netherlands had a similar law but they had to change it after the EU court’s decision. Sadly Finland still has it so the company is still located in Finland and has investors from Finland and Sweden.

    2. I was co-founder of another company working in media and advertising services. After much deliberation, we decided to set up the company in Delaware in the US. The main reasons were the advertising market, potential investors, and also the exit market. The UK was another strong candidate, especially because it is an important center for the media and advertising businesses but the funding market and appreciation of the value of technology is better in the US. We founded the company ourselves using one company from the Internet. Then we hired a local company to manage it and take care of the accounting and legal duties. This company is actually Israeli, and this has been done for many Israeli startups. We also had to register to the company in New Jersey when we wanted to have virtual office there. The total set-up costs were about $2,000, and the minimum annual costs were about the same (the more activities you have, the more costs it generates). We also set up an R&D company in Finland, and a sales office in the UK.

    3. My third example is an Internet service company. In this case we considered potential markets and some regulation issues. Our conclusion was that Singapore and Hong Kong were the best locations. We also considered many other options like Estonia, Gibraltar, and off-shore locations that are used for internet services. We ultimately came to the conclusion that Singapore are Hong Kong are much more reliable places, they offer support to new startups, have better access to Chinese markets and their taxes are attractive. For example, Singapore has no capital gains tax and has a  flat rate income tax, while Hong Kong has no VAT. The total costs to set up a company were between $3,000 and $5,000 and the annual costs (e.g. accounting and tax declaration) are about the same.

    If I were to make a short checklist of factors to consider when selecting a location for your company, it would look something like this:

    • Company structure
    • Required resources (especially people)
    • Taxes (company, founders, employees)
    • Costs of setting up and maintaining the company
    • Salary levels and other mandatory or typical voluntary employee benefits
    • Local support (public funding, other services)
    • Key markets for your products
    • Available funding
    • Regulation (if relevant for the service or products in question)
    • Personal situation and quality of life

    Most probably I was not able to answer to all of your questions but I hope this gives you a sense of what options you have and how to proceed. Lastly, I would encourage all Finnish entrepreneurs to find co-founders or key team members from other countries. It can bring a lot of value to your company.