Company A is based in the United Kingdom. It has been selling software to businesses for several years through a mail-order catalog and a small direct sales team.
It has set up a British website allowing the purchase and delivery of software to homes and businesses.
This site has started generating significant orders from outside the United Kingdom, from around the world.
Company A’s Internet host, Netsource Ltd, which manages most of the site’s administration, has informed them that some of their competitors have started selling their software in digital format. They strongly recommend doing the same.
Netsource also points out that digital distribution probably represents the future of software distribution. Company A should therefore prepare to relocate all its activities eventually.
The company’s auditors, MacFarlane & Roberts (MFR), a medium-sized accounting and consulting firm specializing in IT and e-commerce, are consulted for their opinion; they agree that substantial savings can be made on packaging, warehousing, shipping and handling in Great Britain.
They also suggest an offshore establishment of the new activity developed on online sales. They recommend the Cayman Islands, where they have a branch.
Netsource fears that the Cayman Islands do not have sufficiently advanced telecommunications facilities to handle the high bandwidth requirements of complex software downloads. They are reassured by MFR on this point.
MFR believes that, in this case, the activities in the Cayman Islands should be constituted as a separate entity, in order to minimize any risk of British tax complications.
Company A shares this view and its shareholders decide to incorporate SoftDown Ltd in the Cayman Islands with MFR’s help.
MFR also recommends an Internet service provider in the Cayman Islands with adequate facilities to host SoftDown’s dedicated server.
Netsource is tasked with supervising the technical aspects of setting up and operating the website, with Company A initially not envisioning installing either an office or staff there.
Company A distributes the project responsibilities as follows:
MFR (Caymans) Ltd will be responsible for incorporating SoftDown Ltd, a tax-exempt company in the Cayman Islands (it will not pay taxes, but relatively low annual fees) and opening bank accounts, establishing merchant identifiers for credit cards and authorization procedures.
Company A will handle the negotiation of license contracts and technical specifications with software suppliers; reduced prices will be agreed for digital products; Licensing will follow standard procedures.
Netsource and its Internet service provider in the Cayman Islands will handle the installation of the server and systems (front-end catalog and ordering functionalities with secure multi-currency payment processing solution; software database and distribution system). They will also take care of installing the software in the database.
MFR points out that SoftDown Ltd, as a company based in the Cayman Islands, will not have to charge VAT in the EU, nor sales taxes in the United States.
