Startups Stack Exchange Archive

Collaboration between connected companies

• posted by: John Munroe on 2016-03-03
• tagged: taxes, finance
• score: 2

Suppose two companies A and B are separate but closely connected, e.g., controlled and owned by the same sole-director, collaborate in a new product where

• A is responsible for procurement, manufacturing, logistics, etc.
• B takes care of customer support and marketing.
• Director is not a citizen of B’s jurisdiction
• Director lives and controls B in A’s jurisdiction.

So B is customer facing. Since A and B are closely connected, if A so happens to be resident in a tax-favourable jurisdiction, B could take a minimal “fee” for providing the CS and branding services and “shifts” profits to A.

The fair value of B’s services would be relatively low compared to the services A provides (manufacturing, logistics, etc.). So, even with the arm’s length principle, B could still “shift” most of the profits away - correct?

Any thought appreciated.

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