Every European founder who's considered leaving their Delaware C Corp has hit the same wall: the exit tax. Horror stories about PhonePe's billion-dollar bill or Razorpay's restructuring costs make it sound impossible.
But those were massive companies. For an early-stage European startup with a US holding shell and EU operations, the numbers are very different. Here's what you actually need to know.
Two paths, very different tax bills
There are two ways to unflip: full liquidation or parent swap. The tax implications are dramatically different.
Full liquidation means dissolving the Delaware C Corp entirely. The IRS treats this as a deemed sale of all assets at fair market value under IRC Sections 331 and 336 [1]. The company pays 21% federal corporate tax on all appreciated assets. Then shareholders pay 15–23.8% capital gains on the liquidating distribution. Combined effective rate: 40–50%.
For most startups, this path makes no sense.
The parent swap keeps the US entity alive as a subsidiary under a new EU holding company. No corporate dissolution, no corporate-level tax. The only tax event is the share exchange — and it only hits US-resident shareholders.
What the share exchange actually costs
When shareholders swap Delaware shares for EU parent shares, IRC Section 367(a) treats it as a taxable exchange [2]. But crucially, this only applies to US persons.
EU-resident founders and investors generally owe nothing on the exchange. Their home country typically doesn't tax a share-for-share swap where economic ownership doesn't change.
For US-resident shareholders, the tax is capital gains — 15% for long-term (held over one year), up to 23.8% including the net investment income tax. The gain is fair market value minus cost basis.
Here's the maths for a typical scenario. Say a US angel invested $200K at your seed round for shares now worth $500K at fair market value. Their taxable gain is $300K. At 23.8%, that's $71,400 in tax.
Compare that to a full liquidation where the company itself would also pay 21% on all appreciated assets before anything reaches shareholders.
The Gain Recognition Agreement: defer for five years
US shareholders owning 5% or more of the company can file a Gain Recognition Agreement (GRA) under Treasury Regulation 1.367(a)-8 [3]. This defers the Section 367(a) tax for five years, as long as the shares aren't sold during that period.
If the shareholder holds through the full five years, the gain is recognised at that point — but the deferral buys time and potentially better tax planning.
For founders with significant holdings, this is a critical tool.
The anti-inversion rule: Section 7874
Before the share exchange happens, you need to clear the anti-inversion statute. IRC Section 7874 [4] says if former shareholders of the US company own 80%+ of a new foreign parent, the IRS treats the foreign entity as domestic — defeating the purpose.
The escape: the substantial business activities exception [5]. If your new EU parent's country has 25%+ of group employees, compensation, tangible assets, and income, Section 7874 doesn't apply.
For a European startup where the team, customers, and operations are overwhelmingly in one EU country, this is a formality. You just need to incorporate the new parent where your business actually is.
Ongoing costs after the unflip
The Delaware entity stays alive as a subsidiary. That means:
- Delaware franchise tax: $400/year minimum, potentially more depending on shares and assets
- US federal tax filing: Form 1120 for the subsidiary, reporting any US-source income
- Dividend withholding: when the US sub pays dividends to the EU parent, withholding applies — typically 5–15% depending on the tax treaty between the US and your EU country
These are manageable costs, especially compared to running the full US corporate overhead as a parent entity.
What determines the total bill
The three biggest variables:
- Company valuation at time of exchange — this is the single biggest factor. Pre-revenue, the 367(a) tax is minimal. Post-Series B, it's substantial.
- Shareholder residency split — EU-resident shareholders generally pay nothing. The more of your cap table is EU-based, the smaller the total tax bill.
- Available treaty benefits — US tax treaties with EU countries reduce withholding rates and may provide other benefits. The Netherlands, Ireland, and Sweden all have favourable treaties.
The bottom line
For a typical early-stage European startup — sub-$10M valuation, majority EU-resident cap table, operations concentrated in one EU country — the realistic exit tax for an unflip is a fraction of what full liquidation would cost. Often under $100K total, sometimes significantly less.
The window gets more expensive as you raise. Every funding round increases fair market value and the 367(a) toll charge. If you're considering an unflip, earlier is cheaper. That's not a sales pitch — it's just how the tax code works.