In venture capital, it’s natural to focus on product-market fit, burn multiple, and the next stage of financing. Thoughts about taxes tend to show up later, often at the exact moment everyone expects “the good part” to begin: the exit. But in cross-border deals, structure isn’t a back-office detail. It can be the difference between a headline outcome and disappointing after-tax results.
The cross-border tax environment has changed dramatically over the last two decades. Tax authorities are more coordinated and better equipped to track cross-border activity and enforce local rules. That matters for venture because the industry is global by nature: founders build in one country, incorporate in another, hire across time zones, and exit to a buyer situated somewhere else entirely. When business realities span borders, tax outcomes do, too.
A “Great Stock Sale” That Wasn’t
To make the point concrete, here is a story that makes investors wince.
A cybersecurity startup was founded in Israel and raised money from top U.S. venture capital (VC) funds. As part of the financing, the VCs required a Delaware C-Corp top company—the structure many investors expect. Funding closed, the company got back to building, and, years later, it sold for $300 million—all stock—to a U.S. buyer.
On paper, it looked like a straightforward stock sale. The investors believed they had a “sweet tax deal”: some tax in Israel, and the rest taxed in the U.S. at capital gains rates.
But then the Israeli Tax Authority stepped in, arguing that, in substance: this wasn’t really a stock sale, because. Economically, they sold Israeli-developed intellectual property (IP) that is owned by an Israeli permanent establishment. They recharacterized most of the exit as an Israeli IP sale.
The result was painful. That recharacterization triggered more than $60 million of Israeli tax before money was even distributed.
Our team at Roth&Co was brought in to try to help defend against the Israeli Tax Authority position, but the core problem was structural; the U.S. parent existed largely “on paper,” while the people, development, and real business activity never moved. There wasn’t much substance to use as a defense.
The lesson is not that a Delaware top company is “bad.” The lesson is that form without substance invites challenge—especially when IP is built in one place and claimed in another. This story leads directly to the first principle of cross-border tax planning in venture: intellectual property and jurisdiction.
Principle #1: IP Location, Transfer Pricing, and “Substance”
The location of IP, beyond mere legal ownership, can drive tax exposure. Tax authorities increasingly focus on where development occurs, how profits are allocated, and whether the operating reality matches the legal chart. That’s why transfer pricing and substance matter. If a company’s value is being created in one jurisdiction but the economic outcome is being booked elsewhere, it invites challenges to profit allocation, the character of payments, or the character of gain.
For VC deals, this starts early. Many funds prefer U.S. parent structures or Delaware C-Corps for governance, financing, and familiarity. But if the operational center of gravity —employees, R&D, decision-making—remains abroad, then the structure must reflect that reality, or it must be supported by real changes in how the business is run. “Parent on paper” is not a strategy.
A practical approach is thoughtful early structuring that aligns legal ownership, business activity, and documentation. That often presents as a U.S. top company with a foreign R&D center as a subsidiary, paired with consistent intercompany arrangements and a defensible narrative about where value is created and why.
Principle #2: QSBS—A U.S. Incentive That Starts on Day One
Qualified Small Business Stock (QSBS) is one of the most powerful incentives available to investors in early-stage companies. QSBS is not something you “fix” at exit. The benefit depends on how the company is structured and operated far earlier in its life cycle.
A favorable change in recent tax legislation is that the QSBS exclusion amount per taxpayer increased from $10 million to $15 million. The broader point is that QSBS can meaningfully affect after-tax IRR, but only if the company qualifies and the structure supports it.
A key misconception is that QSBS is an “exit-stage” concept; it isn’t.
The planning happens when the company is still young, often before founders believe taxes are worth thinking about. Cross-border startups, in particular, need to understand the QSBS conversation early. If the structure doesn’t support QSBS, investors may lose a major benefit they had assumed would be available.
Other Issues That Commonly Surprise Investors
Beyond IP and QSBS, several recurring cross-border topics deserve a spot on every investor’s diligence checklist:
- Treaty effects: the U.S.–Israel treaty framework can influence outcomes, and it interacts with the broader reality that the U.S. taxes worldwide income (with foreign tax credits).
- Permanent establishment (PE) risk: meaningful activity in a country can create local filing obligations and unexpected tax exposure.
- Withholding: cross-border payments can trigger withholding taxes that affect cash flow and distributions.
- Entity choice and state tax: U.S. entity structures (LPs/GPs) and state exposure can materially impact net returns.
- Founder equity decisions: for founders with U.S. involvement, early decisions (including 83(b) elections) can matter, especially if residency changes later.
Converting Great Outcomes into Great After-Tax Returns
Cross-border tax planning is not about chasing exotic strategies. It’s about aligning paper with reality early on, documenting it, and revisiting it as the company scales.
Great businesses don’t automatically produce great after-tax returns. Structure—done early and supported by substance—helps ensure a great exit stays great when the taxes are tallied.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
