Off-shoring is usually a challenging topic for any startup, especially in Egypt. Here, we will talk about when and where to off-shore your Egyptian startup.
When to Off-Shore?
Off-Shoring is always a question that comes to the mind of any startup, especially in a country like Egypt. So, first, let’s start by stating that this should not be at the top of your list when you start operating in Egypt. This decision is mostly driven by the investor’s preference but you should be aware of the optimal country to have your startup’s holding company incorporated.
In light of the above, we will talk about the main five (5) metrics you need to assess before taking this decision as follows:
Where to Off-Shore?
First: Capital Gains Tax:
Capital gains tax is the tax applicable to the exit of any shareholder from the startup provided that he achieved a return on his investment when he later sold her shares in the startup. In this regard, Egypt does not have a tax exemption with respect to capital gains tax. On the contrary, this is the case for several other jurisdictions which provide several exemptions. This is usually something that any investor thinks about when investing in any startup.
Second: Bank Account:
We signed the transaction, we incorporated the holding company, now we need the money, right? This issue proves critical as some countries have excessive KYC requirements and in turn, have a time-consuming process before a bank account can be opened whereby the startup can receive its investment.
Any startup has to think long-term and not fixate on the incorporation fees of the holding company only, but also any annual fees (lawyer or auditing or governmental) that have to be paid to maintain the holding company. This is where Delaware can be very misleading to the startup founders as it is cheap to incorporate but very expensive to maintain with a lot of hidden fees involved.
Fourth: Economic Substance Requirements:
What does this mean? It means that some countries need the startup to prove the economic reasons behind setting up its holding company there. In other words, ADGM in the UAE requires a percentage of shareholders and directors to be UAE/GCC residents in addition to having some employees and premises there as well. It is still not very clear in ADGM how these requirements are being enforced as the law relating to this issue has been only enacted in 2020.
Fifth: Enforcement of Rights:
You are a startup and you need to implement an Employee Stock Ownership Plan (ESOP). This is a bit complicated in Egypt. The same goes for issuing different classes of shares (i.e., preferred shares) and enforcing the rights usually mentioned in any term sheet swiftly. This is the case with tag-along rights, drag-along rights, and other similar rights as well.