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“You pretty much want to be a Delaware company - and here’s why”

Idan Nester, Partner at Sidley Austin LLP, discusses some of the tax benefits behind moving Israeli IP overseas - drawing on a famous example from Google and Waze

In collaboration with LeumiTech USA | 15:05  26.05.2021

Speaking at Expanding your Startup to the U.S. series being organized by Calcalist and LeumiTech USA, Idan Nester, Partner at Sidley Austin LLP, shared some insights into how Israeli companies can benefit from moving their IP overseas to avoid a drop in purchase price if they’re seeking to be acquired.

“If you’re planning on fundraising from venture capital in the U.S., and your market is the U.S… and if you’re in the crypto space or gaming, then you pretty much want to be a Delaware company,” Nester said. The native Israeli has been working in Silicon Valley since 2008 and his law firm has 20 offices around the world.

Nester drew on the story of Google’s acquisition of Waze to explain how companies sometimes struggle with added taxes of exporting IP out of Israel - something that can be avoided if the target company already has a presence in the buyer’s market. “It’s a great acquisition and a great day for Israeli startups and Israeli IP and innovation. But what Google does immediately thereafter is that they transfer the IP out of Israel. Why they do it is for reasons beyond Israeli taxation - they rely on multinational tax structures.”

According to Nester, The Israeli Tax Authority (ITA) takes the position that the export is another sale, which results in additional tax. “When you buy a company for $1.1 billion and you’re trying to move the IP out, you’re hit with another $250 million in tax,” he explained. Google paid it - reluctantly - but the entire industry learned a lesson after that.

“Now, this issue is being negotiated as part of the purchase price,” he continued. “More informed buyers will go to the target company and say ‘look, we’re going to be incurring another 23-24-25% tax here... Let’s split the difference. You as a company just experienced an 11% drop in your purchase price. Beware of that: having IP in Israel is an issue.”

You can discover more reasons to become a Delaware company in the video above.
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