2(A). Potential International Structures (No Longer Viable)

Potential International Structure

Many Crypto companies would like to avoid taxation altogether by selling their tokens through a foreign corporation.  If the original technologist is neither a US citizen nor a US resident, this should be relatively easy to do.  A foreign corporation that does not do business in the US should not be subject to US tax on the sale of Tokens or the operation of a business (although it may still be subject to US securities law rules on the sale of tokens or other interests).

Where the original technologist is a US Person or a US corporation, however, it is much more difficult and often impossible.

US tax law makes it very hard to transfer intellectual property to a foreign corporation.  There is no reason why intellectual property exists in any specific location – and the US does not want taxpayers to deduct all the costs of development (including the development of failures) and then generate revenue through a foreign corporation where the US cannot impose taxes. 

There are at least two different rules that would apply here. 

The first is IRC section 482, which says, “In the case of any transfer (or license) of intangible property . . .  [between related parties], the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.”  So even if a US person “sells” the Crypto IP to a related foreign corporation for its current fair market value, the foreign corporation will be deemed to pay a royalty back to the US person “commensurate with income” which effectively eliminates the ability of the foreign corporation to earn income free of US tax.

There is one way around 482, which is to enter into a “cost sharing agreement”.  In a cost sharing agreement, the foreign entity and the US entity agree to jointly develop IP (sharing the costs in proportion to the projected revenue).  And in this one case, the US party can allow the foreign party to “buy in” to existing US property.  However, even where a cost sharing arrangement successfully causes the foreign entity to own the foreign rights to the Crypto IP (and the related tokens) – which implies that the cost sharing arrangement was set up when there were still material expenses of development left to be incurred – there is still a problem. 

Which brings into play the second rule that likely applies here.  The US does not have the right to require a foreign corporation that doesn’t do business in the US to pay US taxes.  Instead, what it does is it “deems” that foreign corporation to pay annual dividends to its US Shareholders out of certain income under what is called “Subpart F”.  More specifically, Subpart F provides that a foreign corporation, more than 50% of the vote or value of its equity is owned by US people who each own more than 10% of the voting power of the equity (“US Shareholders”), is a “Controlled Foreign Corporation” (a “CFC”) – and CFCs are deemed to distribute all their “Subpart F” income to their US Shareholders.  Subpart F income is generally (and I am really simplifying here), either income from transactions with affiliates or “foreign personal holding company” income (capital gains, rents, royalties, dividends, interest, etc.).  While it is not clear how income from the sale of Tokens will be treated, I believe there is a material risk that the IRS will treat it as Subpart F income – in which event the benefit of causing a foreign corporation to own the IP is effectively eliminated (or at least the risk that it is so eliminated is material).

The one situation I have seen where I believe that a US Crypto Company could benefit from setting up a foreign affiliate and entering into a cost sharing arrangement (which incidentally involves significant legal, accounting and valuation expenses), is where the Crypto Currency is an integral part of a service business (e.g., they have elements of prepaid gift cards).  In that event, the income from selling Tokens is effectively a presale of services to be provided in the future, and if the income from those services is sourced outside the US (i.e., the related services were not being performed in the US and any related goods were not produced in the US), a foreign company would generally not be subject to US tax on that income, nor would its US Shareholders have imputed dividend income (they would only have dividend income when the profits are actually distributed).

However, the vast majority of Crypto Companies I have seen do not operate in this fashion and so the creation of a foreign vehicle would be an uncertain strategy.


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