Flipping HQ from India to USA using a parallel route

Flipping your company's headquarters (HQ) from India to the United States is a significant decision that requires careful planning and strategy. One option available for founders considering this move is to use a parallel structure. This approach involves establishing a US-based HQ while continuing operations in India independently. Let's take a closer look at how a parallel route works and the key considerations involved.

1. Understanding the Parallel Structure

Establishing the US Entity Without Connecting It to India

A parallel structure involves founders setting up a new HQ in the US while keeping the Indian entity as an independent company. This method does not create an ownership connection between the two entities. The US entity becomes the parent company, but the Indian operations remain separate.

This approach allows the company to establish a presence in the US without restructuring the Indian entity or completely transferring ownership. However, there are several strategic and operational considerations that come with this route.

2. Mirroring the Cap Table

Aligning Ownership Between the US and India Entities

Even though there is no direct ownership connection between the US and Indian entities, it's crucial to mirror the cap table from India in the US entity. This step ensures consistency in equity ownership, stock options, and stakeholder participation.

Founders should make sure that the cap table in India reflects similar ownership proportions and allocations when mirroring it in the US. This consistency is particularly important when raising funds, as investors will expect the same ownership structure in both locations.

3. Raising Capital in the USA

Securing Funding for the US Entity

Once the US entity is set up and the cap table is mirrored, the next step is to raise capital in the US. This process is independent of the Indian operations, and the funds raised will be used to support the growth of the US-based company.

However, since the Indian entity is not directly connected to the US parent company, investors will likely be looking at the US entity’s performance and potential rather than the Indian entity. The challenge, however, will be demonstrating the value and interdependence between the two entities.

4. IP Assignment and Sale

Transferring Intellectual Property to the US Entity

In a parallel structure, the US entity will need to acquire the intellectual property (IP) of the Indian company. Since there is no capital investment or ownership link, this requires a formal IP sale from the Indian entity to the US entity.

The valuation of the Indian company and its IP will play a crucial role in determining the price of this transfer. Depending on the agreed valuation, the sale of the IP may result in income tax liabilities for the Indian entity. Therefore, it’s essential to carefully assess the value of the IP to minimize any potential tax burdens.

5. Master Services Agreement (MSA)

Establishing an Ongoing Relationship Between Entities

To maintain operations and ensure continuity between the two companies, it’s common to enter into a Master Services Agreement (MSA). This agreement will position the Indian entity as a vendor that provides ongoing services to the US-based parent company.

Under the MSA, the Indian company can continue providing services such as product development, customer support, marketing, or any other functions relevant to the business. The US entity will pay the Indian company for these services, creating a consistent flow of business between the two.

6. Compliance and Taxation

Navigating the Tax Landscape for Parallel Structures

While this structure offers flexibility, it also introduces complexities, especially when it comes to taxation. In this setup, the Indian entity will continue to pay taxes in India, and the US entity will handle its own tax obligations in the USA.

The Indian company may need to account for taxes on the sale of IP, and depending on the structure of the services provided under the MSA, it may also have to pay taxes on revenue received from the US parent company. Meanwhile, the US entity will have its own set of corporate tax obligations, especially related to the income generated from the Indian entity.

In both countries, it’s essential to work with tax experts who understand cross-border transactions to ensure full compliance and avoid double taxation.

7. Key Considerations for the Parallel Route

Pros and Cons of the Parallel Structure

Pros:

• Independence: The Indian entity remains separate, allowing for continued operations and flexibility in both markets.
• Flexibility in Operations: Both entities can operate independently while still maintaining a business relationship through the MSA.
• Less Disruption: The parallel structure allows the company to expand into the US without having to fully re-structure the Indian operations.

Cons:

• Complexity: This structure may lead to complex management and compliance challenges due to the need to maintain two independent entities with separate financials and tax obligations.
• Potential Tax Burdens: The sale of IP and payments under the MSA may result in additional tax liabilities in both countries.

Conclusion

Flipping your HQ from India to the USA using a parallel route offers a unique opportunity to expand into the US market while maintaining the integrity of your Indian operations. By incorporating the US entity as a separate but connected parent company and establishing strong legal agreements, you can position your company for growth in both regions.

While this structure offers flexibility and reduces the need for a complete restructuring, it’s important to navigate the complexities of taxation, IP transfer, and legal compliance. Careful planning and collaboration with experts in both India and the USA will ensure that the parallel route is executed efficiently and effectively.