Structuring for success — Part 3 of 3

Blueprint for success

In this final post in the series we will share some best practices we have observed over the last eight years of providing debt financing to app and game studios across the world. We’ll also share our insights on how to achieve success on the global stage regardless of where you’re based in the world.

Whilst there are many different flavors of possible structures, the most common is to establish an entity in a jurisdiction with a commercial environment more conducive to doing business internationally. This will act as the main corporate entity which publishes the app/game and contractually faces the app stores and advertising networks.

Let’s start with some high-level criteria we should be aiming for when thinking about how we want to structure our operations. For clarity we’ll refer to “domestic” jurisdiction where the key team and development activities are located, and “offshore” as the jurisdiction where the new publishing entity is set up to contractually face the app stores and ad networks.

The studio may then also look to incorporate a local entity domestically which handles locally incurred costs such as salaries, payroll taxes, office costs etc. This entity effectively becomes an operational satellite of the main publishing entity. In today’s increasingly remote first world, having an office is less of a priority, so it may be that the team ends up contracting directly with the offshore entity, and makes their own tax arrangements wherever they live and are tax residents.

There are two primary IP ownership scenarios to consider:

IP owned by offshore entity

It’s important to have the contractual relationship clearly documented to make the ownership clear from day one. Contractually the domestic entity should have either a development or consulting agreement with the offshore entity, to make sure that the ownership of IP can be clearly proven through documentation and payments.

IP owned by domestic entity

This scenario can also help a studio take advantage of domestic tax breaks for the creation of IP and operation of the studio, even though they only earn publishing royalties back from the offshore publishing entity.

It’s important to consider if any withholding taxes (WHT) must be applied by the offshore entity on royalty payments. Some countries, for example Malta, offer 0% withholding tax (WHT) on IP-based royalty payments. If IP is to be owned domestically, this is important to get right.

The worldwide tax summaries, published by global accounting firm PWC, are extremely comprehensive and provide a very useful resource for founders considering different jurisdictions in which to domicile, helping articulate different countries tax treatment of royalties, dividends, interest payments, etc.

Where to establish your offshore jurisdiction

It really comes down to your own research to make sure all the boxes can be ticked for your specific situation. It’s important to seek the right advice from lawyers, accountants and formation agents to make sure that the structure you set up is going to meet all of your needs and comply with local laws in both jurisdictions.

SPV publishing entities

KYC and due diligence process

From the banking side, compliance checks will include usual KYC checks, but also understanding where inbound payments are originating from, and outbound payments are made to, as well as an understanding of the overall business model to comply with anti-money laundering (AML) regulations. In addition, they will run PEP, OFAC, and other international sanctions checks.

The platforms rely to some extent on the financial institutions doing the diligence on companies, before providing bank accounts. That said, they will also do their own checks before providing credit facilities for user acquisition, including evidencing ability to pay from bank statements, tax returns, etc.

Operational considerations

It’s also worth highlighting that in terms of best practice, studios should look to employ a clean room accounting approach to their UA/monetization, segregating them away from the day-to-day operating costs of the company. This makes it significantly easier to track the effectiveness of the user acquisition machine over time, as funds are not co-mingled with operating capital.

To read more on clean room accounting, please check out this post.

Summary

Having someone that can help you on the ground is essential, whether this be lawyers, accountants, or company formation agents. It makes the process much easier if whoever you engage to help has experience working with app or gaming companies, so they are already aware of the operating model and the potential challenges faced. Talk to other founders and companies who have been through this journey as recommendations in this space are golden.

Creating the right structure and operating it diligently will help you set up for success and enable you to achieve success on a global stage, regardless of where you and your team are physically based.

To go back and read part 1 on domicile and location, click here.
To read part 2 on accessing capital, click here.

Thank you for enjoying this series with us!

Disclaimer: Nothing in this post is intended to constitute legal or tax advice. You should always seek advice from professionals operating in jurisdictions you are considering and make sure that all local laws are complied with and all taxes are paid in a timely way to the relevant authorities.

This article was originally posted on pollen.vc/blog.

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CEO & Founder at Pollen VC - London, we provide devs early access to revenues earned from the app stores so they can rapidly reinvest https://pollen.vc

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Martin Macmillan

CEO & Founder at Pollen VC - London, we provide devs early access to revenues earned from the app stores so they can rapidly reinvest https://pollen.vc