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4 minutes

US vs India: Where do you set up?

Summary

Deciding where to set up your company is crucial. A host of factors come into play, including the company's purpose, customers, talent, and taxes. While setting up abroad may seem tax-wise in some cases, having a subsidiary elsewhere with the main office in India has merits in others, such as in the Indian IT industry. Prioritise the essence of your business, rather than tax benefits, when choosing a location.

US vs India: Where do you set up?

Deciding where to set up your company is crucial. A host of factors come into play, including the company's purpose, customers, talent, and taxes. While setting up abroad may seem tax-wise in some cases, having a subsidiary elsewhere with the main office in India has merits in others, such as in the Indian IT industry. Prioritise the essence of your business, rather than tax benefits, when choosing a location.

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Country: 
Crossborder
Date: 
March 12, 2024
Reading Time:
4 minutes
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Companies across the world are racing towards being global. Indian companies are no exception. They are at the forefront of breaking age-old barriers. Dev wrote two excellent articles here and here exhibiting how Indian startups can be truly Limitless. 

When founders start thinking about global companies, after they have thought their idea through, the slightly unglamorous part of setting up a company takes root. The decisions the founders make at that stage can slow down or even change the way they do business. 

If founders make the right decisions for their companies upfront, it will help them achieve their ambition faster. So, where do you begin?

Through this piece, we’ll clear myths and try to chalk out how founders should pick their company’s country of domicile. 

Is it better to set up your company in the US or Singapore, not in India?

We hear this a lot. 

The single most important question founders need to ask is what is the business solving for? If it is truly a cross-border or international use case, then go ahead and set it up overseas. 

Let’s break this down a little more. Founders should ask themselves if the nature of their business will serve customers across geographies. For example, are we selling to an international audience or a predominantly Indian one? If the answer is that their customers will be majorly in the US or Southeast Asia or other geographies, they should look at setting up in the international jurisdiction that best fits their customer density. 

“Remember, tax is an outcome of your business. In some significant situations, taxation can be one factor that founders can use to decide to set up in a non-Indian jurisdiction, but it should not be the leading criterion.”

Another important factor to consider in this decision is “substance”, or how you will rationally justify the incorporation of the company in a foreign jurisdiction. Will it be an artificial structure or will it be core to how the business is conducted? Consider where the senior talent is going to be based. If most of the key leaders of the organisation—CEO, CMO, CBO, Head of Product or Design, or engineering leader—are all going to be largely based internationally, for example in the US, then it’s a no-brainer to set up the headquarters there. This usually goes in line with the majority customer base, so that it’s far easier for founders and their teams to interact with their customers.

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Gallery 01 photo.Gallery 01 photo.

Can I set up a company in India and have a subsidiary in the US or another geography to be served?

Traditional Indian IT companies are a great example of having done this well. They set up Indian headquarters and then set up subsidiaries in the geographies they expanded to. However, their nature of work differs from what most startups are building today. Indian IT companies were historically service-based and solving for cost efficiencies with volume and scale, while entrepreneurs today are building products/ applications/ softwares that compete with the best in the world and often solve global problems.

And today, with the pandemic making borders more fluid, we have a wider acceptance of working from anywhere. It is perfectly valid for founders to ask if the domicile of their company even matters as long as they have a billing entity that can handle compliances in the geography where they’re doing business. 

As we recover from the pandemic, there is a higher propensity for facetime. So where should their “real” headquarters be?

The answer lies, as we stated above, in where the customer is based or where senior leadership is located. If the business requires the Founder, CEO, CTO, or the CMO of the company to have more direct touch points with customers, then it is better to be domiciled in the customer's geography. That explains why most of the SaaS coming out of India are being built in India but are domiciled in the US.

“Some businesses may be very sure of their market from the get-go, but some may want to test the product and its viability in different markets. Besides, there are uncertainties in the market at any given time that businesses have to factor in.”

A logical question here is how can every business know if their product will work well in geography outside India? They can’t. Some may be very sure of their market from the get-go, but some businesses may want to test the product and its viability in different markets. Besides, there are uncertainties in the market at any given time that businesses have to factor in. 

In these cases, it is better to avoid the enormous cost, effort, and regulatory compliances in building a company outside of India. It would do well for the business to set up in India, run for six to twelve months, and start testing out its model. And if, after this time, they feel that the US or another geography is a better fit, they can work with advisors to find legitimate ways to restructure the organisation.

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Gallery 02 photo.Gallery 02 photo.
Gallery 02 photo.Gallery 02 photo.Gallery 02 photo.

Since India is a high-tax country, I’d better set up in another location

The important thing to understand is that tax is an outcome of your business. In some significant situations, taxation can be one factor that founders can use to decide to set up in a non-Indian jurisdiction, but it shouldn’t be the leading criterion. Globally, tax authorities have implemented anti-avoidance rules that allow them to lift the corporate veil and look for structures that are artificial, i.e. without substance, and have been set up purely for optimising taxes. 

There are fewer challenges in raising capital in the US compared to India. We get better valuations in the US and can also list abroad.

This may be partially correct. India has over 100 unicorns now, and they have been able to raise money from a diverse set of investors. India is an emerging market that global capital investors are interested in. There’s no denying that there are still some specific pools of capital that are only available in the US and not India, but by and large, we have seen increasing trends of capital inflows into India.

Besides, simply having a company incorporated in the US will not be the only factor influencing its access to capital. Global investors will look at factors such as IP, talent pool, customer base, and network in order to determine whether it truly is a US company.

Valuations and foreign listings are interesting subjects that are probably evolving. Indian-domiciled companies cannot list on foreign exchanges. Not in a straightforward manner, anyway. They have to first list in India and then use the ADR/GDR route to list abroad. This, coupled with a belief that valuations are higher in international markets, has led a number of startups to create a foreign domicile. However, in 2021, we saw, pretty much for the first time, several tech-based Indian startups raising a material amount of capital from public markets at encouragingly high valuations. 

A number of these companies were attractive to global investors as they were unique models for the Indian market and had market dominance in their respective industries. As a result, they could raise at high valuations, even better than comparable multiples of their US peers. While this is a growing space, due to the recent Indian IPO experience, we should not rule out a reverse trend that is expected to emerge, where startups that had set up a foreign domicile may now start restructuring their operations to launch IPOs on Indian stock exchanges. 

Simply setting up a company in the US because someone else also did it shouldn’t be your north star in making this decision. 

The bottomline is that you should know your business, and your customers, your market and your demand well before making the leap. It is greatly encouraging to see more and more new businesses being built in India to serve the world. This is why these questions need to be asked and understood better. And the more Indian founders know, the better they will be able to make smart decisions for their companies, for their employees, and for their customers. In the next leg of this conversation, we will look at how treasury management becomes an important part of the business once you’ve decided where you want to be based. 

#businessinUSA #businessinindia #indiavsusa

All views and thoughts expressed herein are the personal opinion of the author and should not be construed as any advice, financial or otherwise. Any reliance placed on this content must be at your sole prerogative and basis your own independent judgement.