B&O Tax Ruling for Banks and Financial Institutions

In Cashmere Valley Bank vs State of Washington Department of Revenue on September 25, 2014 the Washington Supreme Court came down with a new ruling on the scope of the exclusion of B&O tax of income from interest earned on mortgages for banks and financial institutions.  The interest earned on the mortgages is not taxed as income if the mortgages are secured by a first mortgages on residential property.  Cashmere Valley Bank received income from investments it held in Real Estate Mortgage Interest Conduits (REMICs) and Collateralized Mortgage Obligations (CMOs).  The bank argues that the income they received from these investments should be excluded from the B&O tax.   The court held that REMICs and CMOs represent a right to income from mortgages, but that owners of these investments do not themselves hold the mortgages and thus are not qualified to exclude their income from these investments from the B&O Tax.  In light of this ruling, banks and financial institutions may want to review and potentially restructure their investment portfolio.

Dianna Caley 
Partner

Wong Fleming | Washington 

Startup Focus: Business Formation and Choice of Entity

Startup founders should know the advantages and disadvantages of choosing a certain entity type when forming their companies. Choice of entity involves considerations concerning business direction, liability, taxation, and investment. Startups will generally choose to form as a  C corporation, S corporation, or in some cases a limited liability company (LLC). 

C Corporation

• A C corporation is generally the most popular choice for startups. 
• C corporations can issue multiple classes of stock, which venture capitalist investors prefer. 
• C corporation income does not pass-through to the shareholders, avoiding certain distributions issues. 
• Founders can be considered as employees, avoiding self-employment taxes. 
• Taxation involves salaries, shareholder distributions, and the shareholder's income taxes. 
• There is no limit on on the type or number of shareholders. 
• A C corporation does not have to file a tax status election. 
• Shareholders are generally not subject the state income tax.

S Corporation

• An S corporation can only issue one class of stock. 
• An investor will not be taxed on the company 's income. 
• S corporations have limits on the number of shareholders, non-individual shareholders, and foreign shareholders. 
• A corporation that elects tax status as an S corporation must meet and maintain the criteria set by the IRS. 
• Corporation taxation passes through to the shareholder. 
• Shareholders are generally subject to state income tax, depending on where the S corporation conducts business. 
• In some cases, an individual's tax rate may be higher than the corporate tax rate that is assessed for a C corporation. 

Limited Liability Company 

• A limited liability company is generally the least popular choice for startups. 
• Many venture capitalists will not invest in a limited liability company unless it converts to another entity type. 
• Equity compensation is more difficult than a C corporation, due to the absence of stock classes. 
• A limited liability company's members are generally subject to self-employment taxes, and taxation is based on the share of the company, not distributions. 
• Any income not distributed can result in a basis step-up for interests in the company. 
• A company's losses, deductions, and other benefits can offset an individual tax payment. 

Ultimately, for a startup, a C corporation is generally the best choice. It is easier and more cost-effective to form a C corporation than a limited liability company or S corporation. C corporations are better choice to facilitate equity distribution, investor interest, and reinvestment of capital into the company. 

Every company's formation situation presents unique factors and we can provide you with options customized for your needs. 

For more information or if you have any questions, please contact our Corporate Practice Group. 

Worker Asbestos Exposure

In Donna Walston vs. The Boeing Company the widow of Gary Walston, a Boeing worker, was suing Boeing in a wrongful death case.  Her husband had died from asbestos exposure.  Normally, workers who are injured on the job are compensated through labor and industries, but have no right to sue their employee individually.  There is an exception however, if the employee can show that the employer intentionally injured them.  Intentional injury can be shown if the employer had “actual knowledge” that the injury would occur.

Boeing had intentionally sent Gary Walston into an area that they knew was contaminated with asbestos and that widow alleged that this constituted an intentional injury.  Boeing countered with the testimony of an expert who gave evidence that while asbestos may cause cancer it is not certain to cause cancer.  On that basis Boeing argued that they did not have “actual knowledge” that the injury would occur.  The Supreme Court looked at previous caselaw which had held that even where the employer had “substantial certainty” that the injury would occur this does not rise to the level of “actual knowledge”.   Based on this the court upheld the dismissal of the suit against Boeing.  This case underlines the difficulty which any employee has in attempting to bring an individual action against their employer.

Dianna Caley 
Partner

Wong Fleming | Washington 

Setting Up a Free Zone Entity

In our previous post, we discussed how a corporation can go about doing business in the Middle East, specifically in the United Arab Emirates. This week we will discuss how a corporation can set up an entity within the Trade Free Zone. The main benefit of a free zone entity is that it can be wholly owned by a foreigner.

Free zone entities are also granted certain ancillary financial benefits. A free zone entity will generally take one of the following three forms: a branch or representative office of a foreign company, a free zone company, or a free zone establishment. There is no minimum capital requirement for a branch or representative office, while in most free zones, a free zone establishment and a free zone company (UAE laws make a distinction between free zone establishment and a free zone company) are typically required to have a minimum capital of around AED 500,000, but the precise requirements vary from free zone to free zone. A free zone establishment may be owned by a single individual or company, whereas a free zone company typically requires two or more owners.

The key limitation of a free zone entity is that it is generally permitted to conduct business
solely within its relevant free zone and is limited to performing solely those activities
specified in its license. A free zone entity must typically hold one of the following
licenses issued by the relevant free zone authority: (i) trading license; (ii) service license;
(iii) manufacturing/industrial license. In order for a free zone entity to engage legally in
sales within the UAE (and outside of the relevant free zone), the entity will generally
have to retain a commercial agent or distributor. However, free zone entities with service
licenses have been known to provide services outside of their free zone.

Procedures
An independent Free Zone Authority governs each free zone and is responsible for issuing FTZ operating licenses and assisting companies with establishing their business in the FTZ. Investors can either register a new company in the form of a Free Zone Establishment (FZE) -- a limited liability company governed by the rules and regulations of the Free Zone in which it is established -- or simply establish a branch or representative office of their existing company based within the UAE or abroad.

The procedures for establishing a business in a Free Trade Zone are usually very straightforward and can be generally completed quickly, especially if there are no environmental issues involved. Individual Free Zones may have specific requirements, but general steps are:

• Questionnaire from the relevant Free Zone Authority which will assist in assessing a company's requirements.
• License application, planning documents, and a consumer request for electricity.
• Provisional approval and lease agreement.
• Meetings with the authority to finalize details of the project.

Licenses
Once a legal presence has been established in the Free Zone, the business will need to lease premises or land and acquire an operating license from the FZA. Different types of licenses apply in the different types of free zone, however, it is important to understand that companies with trade and industrial licenses can only conduct business within the Free Zone or abroad. To sell products in the UAE, a UAE official agent is required, and a joint venture needs to be formed.

When not to choose a Free Zone
There are a few scenarios in which a prospective company might not want to choose to do business in a Free Zone, and should instead opt for a regular joint partnership. These are if a company:

• Practices a regulated profession.
• Requires a lot of visas or warehouse/office space.
• Plans a long presence in the UAE and wants to reach a wider portion of the UAE market.
• Has a particular UAE company or individual with which to go into partnership.

Shahzad Qadri

Partner

Wong Fleming | Washington 

Washington State Condominium Owners May Have Less Restrictions

Division One of the Washington Appellate courts may have just increased the number of rental units on the market in the Seattle/Bellevue area.  The division came down with a decision of interest to both condo owners and condo associations.  The case was Centre Pointe Condo Association vs. Fillmore and it may have a big impact on whether or not condominium association rules restricting the use of the unit are valid.  In this case the condominium association had passed an amendment with multiple restrictions on the “use” of the condominiums including a prohibition on renting the units.  The court held that under the Washington Condominium Act this type of prohibition requires a vote of 90% of the current owners in favor of the restriction.  Condominium associations should be reviewing any amendments to the rules and covenants they have made that impact on the use of the unit.  Condominium owners who have been restricted from renting their unit should review the rules of the association and if the use restriction was a later amendment or addition to the original covenants then check to make sure 90% of the owners voted for it.  If they didn’t then you may be able to rent that unit.

Dianna Caley 
Partner

Wong Fleming | Washington