Tax considerations for early-stage capital raises

The tax consequences of a raise are set by decisions taken before the term sheet — where the holding company sits, how the instrument is characterised, and who pays what.

Founders tend to treat tax as a post-closing matter. By then the structural decisions that determine the tax outcome have already been made — usually without anyone weighing them as tax decisions at all.

Structure precedes instrument

Where the holding company sits determines the treatment of dividends, interest and eventual exit proceeds, and whether treaty relief is available. Restructuring after investors are on the register is possible but expensive, and it frequently triggers the very charge the structure was meant to manage.

Debt or equity, and why it matters

Convertible instruments occupy a middle ground that tax authorities resolve by looking at substance rather than the label on the document. Characterisation as debt raises questions of deductibility, withholding on interest and thin capitalisation; characterisation as equity raises questions on the conversion event itself. Deciding deliberately is better than discovering later.

• Withholding obligations on interest, fees and advisory costs paid offshore
• Stamp duty on the instruments and on the share transfers that follow
• Transfer pricing where the group provides services across borders
• Treatment of employee share schemes at grant, vest and exercise
• Availability of any applicable incentives and the conditions attached

Cost allocation in the term sheet

Transaction costs carry tax consequences of their own, and term sheets are often silent on who bears them gross of withholding. Silence here is a live cost. Agreeing the position at term sheet stage is cheaper than resolving it in the completion accounts.

Tax planning is a design activity. Taken after the fact, it is not planning — it is remediation.