
Ask HN: Tax Haven for startups? - gilaniali
Where is the best place to incorporate a startup when thinking about taxes?<p>Given how a tech startup isn't really tied to a physical location, (Servers are rented, there is no brick store, founders can work from anywhere), where should one officially register the company?
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philiphodgen
This is what I do in my day job. (International tax lawyer).

1\. If you're in the USA the game is to escape State income tax. You are
pretending that your business operates out of a Post Office Box in Las Vegas
and therefore you shouldn't pay income tax in California (for example)? Good
luck. It's a dead loser.

Don't waste your time. Especially when you're a startup and have no profits to
speak of anyway.

2\. Again if you're in the USA, on the merits of using Delaware or Nevada
compared to your own state to form a corporation or LLC . . . .

Forming your company in Delaware or Nevada and operating your business in
California (for example) just adds overhead to your business. Unless there is
a compelling reason to do otherwise, use the corporate law for where you are.
Keep it simple. Look at Google. They started as a California corporation and
later reincorporated in Delaware.

3\. Onward to your second paragraph. Again if you are in the USA and you want
to think about taxation of your business, think about where the humans are.
That will give you a clue on how the business will be taxed. Pretend you are
selling equipment leasing deals over the phone and making a commission on each
deal you made. Who would want to tax you? Yep -- the state where your ass sits
while yapping on the phone. There's nothing mystical/magical about tech stuff.

There are plenty of things you can do tax-wise that are cool. E.g., I have a
guy who has a California corporation that makes money this way and he sits in
the Caribbean and the first $192K of net profit every year is tax-free (half
to him, half to his wife who is on salary). No State income tax to him because
he's not living in California. Yeah, the 1.5% S corporation tax applies. He's
living well.

4\. Throw me a few more details and I'll give you more concrete suggestions.

/Phil

~~~
gilaniali
Fantastic Answer. Heres a few more what-ifs.

When I said tech startup, i meant companies developing web applications that
people pay for. So for example, if people use DropBox or Basecamp, and there
is no guy making a commission, then you can only tax the company in which ever
state it is in?

Also, what about incorporating abroad but having your customers in the US?

~~~
philiphodgen
First part. If your company has a single place of business and you're selling
all over the USA, then the only State that will tax your profit is the state
where you have your office. That's a good first principle.

There are tons of exceptions. California thinks that if you come to a trade
show for "too many days" in a year that is enough to cause presence for
taxation for a non-California business. Every state tries to find some weasel-
ass way to hook you and claim the right to tax your business. So be careful.

When you're thinking about doing business multinationally, the first thing to
remember is that the U.S. tax law in the international tax world is written
with two basic assumptions in mind:

1\. All companies are of the size of Mitsubishi or larger, and operated by
humans.

2\. All humans are Colombian drug lords or worse.

You think I kid. No. The towering lunacy that is Washington DC has no bounds.

So when thinking about doing business across a border your PRIMARY concern
should be paperwork costs, accounting costs, and brain damage. Your accounting
costs and risks for accidentally f-ing something up will go up by an order of
magnitude.

That aside, let me answer your question.

The variables in this equation are (a) the citizenship of the owners of the
company; (b) the place of incorporation of the company; (c) the place of
operation (might be multiple) of the company; (d) the source of the revenue
(where are the customers?); and (e) the type of revenue (royalty, sale of a
thing, etc.).

Starting from the simplest proposition. If the shareholders are U.S. people, a
non-U.S. corporation will not affect US taxation at all unless it is a real
live operating company incorporated in the place it is operating. If you're
incorporated in Bermuda, for instance, you better have offices and bodies
there doing the work. Otherwise the company is treated as a giant hose
depositing net profit into the pockets of the shareholders.

For the Google fanatics: "controlled foreign corporation" and "Subpart F"
income.

Now specifically on to your situation. When does it make sense to think of
offshore corporations? You're a U.S. person starting a company and developing
IP. You'll be exploiting that IP for fun and profit all over the world,
eventually. If the amount of profit you're deriving from non-U.S. sources is
big enough, you can create a system to defer (but not eliminate forever) the
U.S. tax until you bring the profit home to your pockets.

I wouldn't bother until you have a couple million a year of profit from
non-U.S. sources. The overhead is too big.

For a non-US owner with a non-US corporation, it is fairly easy to eliminate
the US income tax bite on sales:

1\. Don't have an office here (Google fans look up "permanent establishment"
as a general clue).

2\. The sale "occurs" outside the USA. (When ownership changes hands, that's
when you look for where the profit was earned. E.g., you're buying toys from a
factory in China. If you own them on the wharf in China, the guy selling them
earned his profit in China. If you own them as soon as the container hits the
deck at Long Beach, CA, then the guy selling them to you earned his profit in
USA and he's cryin' and singin' the blues.)

~~~
gregholmberg
>> I wouldn't bother until you have a couple million a year of profit from
non-U.S. sources. The overhead is too big. <<

Is the cost of setting up these entities falling? Rising?

~~~
philiphodgen
The cost of entities is static.

The cost of professional services is the issue. The government lards on more
and more stuff you have to do, and the penalties for mis-steps in
international tax are huge. That is where the costs come in.

------
a-priori
Mostly, I think this discussion is an exercise in premature optimization. If
you don't have significant income, you're also not going to pay large sums in
taxes, so it doesn't matter. If you do have significant revenue, you can
afford to hire an accountant/corporate lawyer to work this out for you. As far
as I know it's not a big deal to relocate later.

~~~
jonhendry
And you're probably just setting yourself up to get robbed, anyway, by some
offshore crook - who'd be hard to go after once they took your money, because
they likely know all about offshore shell company games and tangled layers of
ownership.

Really, wait until the company has enough money that it can get dependable
advice and representation.

------
jaredhansen
The best place to incorporate a startup is Delaware - and the reason doesn't
have anything to do with taxes.

Assuming you're using the most common definition of "startup" (as distinct
from "small business" or something like that), you want to use Delaware
because it's what your potential investors' lawyers will already be familiar
with - and the tax benefits, to the extent that they exist, of incorporating
somewhere else are just not going to outweigh the added barrier to fundraising
that you're going to create by going with some kind of funky tax haven.

Beyond just fundraising, Delaware really is still the industry standard, and
in general you can set up a very solid corporate structure that will last you
right through fundraising, bringing on your first employees, later employees,
scaling, and all the way to sale/IPO without having to waste a lot of headache
and lawyer fees later on because you're trying to customize all of this stuff
for whatever jurisdiction you chose for tax reasons.

For any given startup, a marginally higher tax rate is a REALLY good problem
to have. I wouldn't worry about taxes at this point -- worry instead that your
startup will die before it ever makes enough money to be taxed in the first
place (e.g., because you couldn't get funding because investors didn't want to
bother with trying to understand your convoluted tax-minimization structure).

------
fierarul
Within Europe the choices would be for me: Bulgaria, Cyprus, Jersey or
Luxembourg.

Bulgaria has a 10% rate on corporate profit and then 5% on dividends. This
makes it quite appealing but the language isn't that nice and not sure if
corruption isn't a problem there.

Cyprus is presumably also a good pick but I don't know much about it except
the fact that the language is Greek so I wouldn't feel comfortable signing
papers in something like that. Learning the language seems hard and using a
translator for everything seems a bit of a hassle. Just as with Bulgaria, it
might be worth it tax-wise but ignoring the language problem.

Jersey would be the ideal pick, they have a 0-10% tax rate there and it's all
English but it seems that the island is more of a Gentlemen's club for big
financial firms.

What I'm actually looking quite seriously nowadays for my own company is
Luxembourg. They have a big tax rate of about 25% but they wave about 80% of
it for intellectual property gains, giving you about 5% actual tax rate. Of
course, you still have the 25% on the dividends.

I still haven't analyzed this enough as I still don't know what the total
annual cost would be (accounting, rent, etc), but Luxembourg is looking quite
good so far.

What we need is an actual index for startup friendly countries. There are all
these statistics and lists but they all take into account big companies where
you might need to hire locally or get some permits, etc. I've noticed no
actual index for sofware startups which need basically low-cost, hands off
(ie. as little involvement as possible) and preferably low-taxed entities. It
might very well be a magical unicorn :-) and if you are American you won't
gain much anyhow due to your fiscal system - that is if you ever want to pay
any dividends.

~~~
roel_v
There are many companies specializing in optimizing this sort of operations.
Usually it's best to set up a tree of companies, each with a specific tax to
minimize or other special goal. Because of a few rulings by the European Court
of Justice, citizens of the EU can set up companies anywhere they want and
transfer profits from one to the other. Like you say, usually the last step
(if you want to keep it within Europe) is Cyprus because of the low corporate
profit tax. You'll probably also need a company in the country you work in
though, local tax authorities often require it, and you'll need it for the VAT
number.

I don't know about Luxembourg, but Belgium and the Netherlands also have
special tariffs for high tech products. You'll want to look for specialized
council though, most 'regular' accounts have no idea.

Thirdly, several countries like Panama have no corporate tax at all as long as
you don't live there. Depending on what your life goals are, it may be an idea
to build up a retirement account there. Again it is highly dependent on the
circumstances.

~~~
fierarul
I think companies specializing in this sort of operations are outside the
reach of a normal startup. If you are big enough for that kind of services,
you can just pay your accountant and/or lawyer to fix this. Having more than
one company might also make the administrative overhead too big (you need two
accountants, two registered offices where you pay some form of rent, etc).

I didn't knew Belgium and Netherlands have some special treatment for high
tech products -- I'll look into it.

Regarding Panama, I have no information about them, but I'd personally keep
things within Europe.

~~~
roel_v
The outfits that I know are highly efficient - you can get such a 'tree' of 3
companies (for the 'Cyprus route', a reasonably well-known construct)
including registration fees, rental of po box (you don't a physical presence
in all countries you're registered in) for 5000 euros (excluding any share
capital you may have to put up upfront). Not something you'd do on the first
day of incorporation, but hopefully after a year this amount of money
shouldn't be a problem any more. Don't try to organize all of this yourself -
pay the intermediary a bit, they have offices across the EU with specialists
who do this every day. You need someone who will provide you with exactly one
point of contact that takes all the work out of your hands.

Re: 'just pay your accountant or lawyer', not to pounce on you but this is
incredibly naive. Accountants and lawyers who spend 95% of their time doing
mundane things like the books of the carpenter down the road are not qualified
for this type of work. Any high-tech company owes it to itself to find highly
specialized professionals, who will pay themselves back manyfold, even if you
think they're expensive. (heck they are expensive. most charge 150 euro and
hour or more, plus office overhead). Still when you're a real company (i.e.
not doing 10k a year in iFart apps) it can be money well spent.

~~~
fierarul
>Re: 'just pay your accountant or lawyer', not to pounce on you but this is
incredibly naive

It was more of a joke, I was mostly trying to underline that I imagine this to
be only for big companies.

Do these guys have a website ?

Anyhow, just the cost of the incorporation isn't the major criteria. I'm
looking more at the total cost for such a thing: the total administrative
costs over a year plus the total taxes must be well bellow what one would pay
locally otherwise it's not worth the trouble.

As most expenses (accountant, rent) are rather fixed costs, this means that
the whole thing becomes feasible only for companies that exceed a given
income/profit.

~~~
roel_v
A couple of famous ones are www.hjc.nl (although when I just googled them it
seems that they are under bankruptcy since a few months, I'm not sure what's
going on there) and www.quaedvlieg-juristen.nl . Generally companies like this
say it becomes interesting at profits of 50k and up. Of course it depends, I
mean if a founder needs to pay himself a salary that's going to be taxed
locally (at least in part). It's very casuistic, but I don't agree that it
only pays for huge companies; as soon as a company has a few employees and
does business globally (quite easy for software), it becomes worthwhile to at
least look into it.

------
_exec
Try <http://www.offshore-companies.co.uk>

They take care of incorporating your company in different jurisdictions for a
(relatively) cheap price. I'm incorporating in the British Virgin Islands with
them next week. They can also introduce you to various banks around the world
and help you with registration.

EDIT: See comment below by curt: <http://news.ycombinator.com/item?id=1801105>

~~~
trevelyan
I am incorporated in the BVI as well. It is a generally excellent. Just be
aware of the difficulty of setting up credit card processing if your company
is incorporated there. The people who will deal with you are the same sorts of
people who deal with overseas gambling, etc.. It is much more expensive.

Hong Kong offers an excellent alternative where it is much easier to setup
payment systems, or even incorporate Paypal. Slightly more expensive per year
as you need to pay for a local address and an annual audit. The accountant who
sets up your company should be able to take care of both.

~~~
_exec
Could you recommend a credit card processor? and how 'expensive' are they
usually?

Right now we are using PayPal Website Payments Pro with my 'other' startup and
it works like a charm (incorporated in the US with a US bank account / US
paypal).

Also, how did you incorporate in the BVI? Any recommendations?

As for HK, you're right, however I'm not keen on incorporating anywhere near
China for business reasons. If it wasn't for that I'd have incorporated there
in no time, especially since HSBC allows you to open a bank account there,
which means PayPal access + easy credit card processing (you do need to go
there and meet the bank representative in person though, a one time thing).

..and oh yeah, I must add that the main problem with tax havens such as the
BVI is that you will most probably run into problems with PayPal. You could
incorporate / open a bank account in Luxembourg or Switzerland (see website
above), but that will cost you $250,000 and $500,000 minimum deposits,
respectively.

~~~
rdl
If you're US citizens doing this, and >50% of the foreign corp is owned by US
citizens, the company is a "controlled foreign corporation" and effectively
treated by the IRS as a domestic corporation. If you don't report, you might
not get caught, but then if you do get caught, you're approximately doomed.

------
grandalf
If you want to raise funding, Delaware is considered the least likely to add
any hair to your deal.

There are jurisdictions with lower fees, though. If you really want to avoid
taxes why not just incorporate in an offshore tax haven?

~~~
hugh3
_If you really want to avoid taxes why not just incorporate in an offshore tax
haven?_

If this is advantageous, why do I hardly ever hear of it happening?

~~~
peterb
Most people/companies are discrete about tax avoidance. Personally I like
paying taxes, it buys civilization.

~~~
grandalf
If you consider that most of the money collected in taxes is paying for shady
military operations in the middle east, I'd say taxes _destroy_ civilization.

~~~
sbov
20% of federal expenditures are for defense. The oft-sited 50% is
discretionary budget, which doesn't include things such as social security,
welfare, etc.

~~~
grandalf
Not to nitpick, but:

\- 20% is still the biggest single item in the budget.

\- Many military-related expenses are not being paid for at present and will
need to be paid for with future taxes.

------
thinkcomp
Assuming you're in the United States, this is really only an issue on a state-
by-state basis. To avoid paying duplicate corporate franchise tax and
registered agent fees, you should just incorporate in the state where you are
physically located. However, if you have other considerations (like raising
funding), this may not work.

Depending on the state you incorporate in and the number of shares outstanding
you have, there may be fees on a per-share basis that you should check into.

Payroll taxes vary from place to place, but there's not much you can do about
it--you have to pay them for the state where you're located. California
currently has four types of payroll taxes: income tax withholding,
unemployment insurance, the employment training tax (ETT) and state disability
insurance (SDI). (See
[http://www.edd.ca.gov/payroll_taxes/rates_and_withholding.ht...](http://www.edd.ca.gov/payroll_taxes/rates_and_withholding.htm.))
You can deduct SDI you've paid for the year on your 1040.

The type of corporation matters, too. The California corporate franchise tax
rate for S corporations is 1.5%. For C corporations it's 8.84%. This only
matters for startups that actually are bringing in revenue--otherwise you just
have to pay the $800 minimum--but if you are actually making money it's a
pretty big difference.

I'm not a CPA, just for the record.

~~~
minouye
Very good info and relevant to LLCs as well (the franchise tax also applies to
LLCs). This means that even if you only make a dollar in revenue, you'll be
paying at least $800 to the great state of California each year. For smaller
operations, California is killer.

~~~
prodigal_erik
The trigger is having existed for a year, not the first dollar of revenue.
<http://www.taxes.ca.gov/corps.shtml>

~~~
minouye
Correct--I should have clarified that one dollar is just there for context.

------
andrewljohnson
It doesn't matter where you incorporate... you pay taxes where you operate.

Moreover, the bigger deal, on a state by state basis, is personal income tax.

California is about 10%, and they have a $1000/year franchise tax to run a
business.

Nevada has no state income tax and no franchise tax.

~~~
bhickey
You do need to pay $200 for a business license and appoint a registered agent.
It looks like the going rate for one of those is $50/mo.

------
curt
It really depends on the business. For example if you have a technology that
you license you can get a corp in the US for business. Then have an entity in
the Caribbean that acts as a holding company for the technology. All profits
are passed through to the overseas company as licensing fees for the
technology. You then don't pay taxes until the funds are brought back to the
United States so you can invest anywhere else in the world tax free. If you're
looking to do something like this you really need a good tax attorney. But as
I said it drastically varies by the technology, industry, and customer.
According to the law there MUST be a business reason for the transfer of funds
other than to avoid taxes: ie licensing.

------
sireat
I wonder how it would work for EU citizens.

Let's assume you are in one of the higher tax countries, such as Denmark.

You incorporate your SaaS company in Ireland, place servers in Netherlands,
pay yourself a reasonable salary(pay Danish taxes on that), pay Irish
corporate tax on gross profits after that.

Now, your company still has some retained earnings in its account.

Are those earnings free to move around the world (ie buy colocation in
Germany, hire programmers in Ukraine, buy real estate in Caymans, stocks in
US), as long as the expense is justifiable, or perhaps there is no need for
justifications at all, just buy anything at all?

I realize I am mixing assets and expenses in my examples.

If at some point I decide to sell the whole company to someone, I pay capital
gains taxes(or income taxes), but not before then, that is the main goal.

In other words, how do the corporate assets and individual assets work when
one is the sole owner of the corporation?

------
tzury
There are many options for that. Despite all problems and difficulties you
will face, saying, you have grown up and need to get a company that will
provide you services on a contract basis, many will not even answer you email
if they'll see your company is registered in Virgin Islands or god knows
where.

But more than all, say you have made it, and it was a great success, and in
your bank account there are 2.5 million dollars. Now you live in NYC and wish
to buy a house with this money. How would you bring this money into the US?
Would you make a wire transfer to your seller? He would then have to go to
authorities and explain those 2.5M. Will you go cash it and carry it on your
body while flying back home, does this make sense?

This is what my CPA have told me when I suggested to open up a company in
Cyprus few weeks before I signed a big contract.

~~~
tdfx
Why would you be using (what I'm assuming is) a $2.5 million distribution from
your business to buy a house? It seems like the better route would be to keep
your business and its cash offshore and pay yourself a salary which would be
taxed by the US.

~~~
tzury
It does not matter how you are withdrawing the money, in a salary form or
dividend, it will be taxed anyway, given that what is the point of all that
operation, if by the end of the day you are paying taxes for that income.

------
damien7579
In the EU? try Cyprus...

------
rwhitman
I've heard that South Dakota actually has the most favorable business tax laws
in the country.

But the standard state to incorporate in is Delaware, even if its not
necessarily the lowest taxes anymore, its still the state most investors,
lawyers and tax pros are accustomed to.

But don't forget, you still have to pay taxes where you operate. So even if
you incorporate in Delaware you still have to pay taxes where your home office
is.

------
iuguy
Don't. You can only really be taxed on two things: Profit and Income. You can
mitigate the second through some fairly uncreative accounting and expenses
(depending on benefit in kind rules) and until you're making much of the
former any extra administrative overhead is just going to take you away from
it.

You can always reincorporate when you're cash rich.

------
MrFlibble
Unless you are already making a sh#t-ton of money, I'd just start the company
in the States. It seems a bit "cart before horse" to spend all the time &
money to offshore if you have no revenues yet.

------
WildUtah
Form a startup corporation in the USA now, keep it running for five years or
more and sell it. End of 2010 startups are 100% exempt from federal long term
capital gains taxes.

Build and run your company in Wyoming. There's no state income tax for
corporations or people. Maybe you can teach wolves and cows to write Ruby.
Forget Java; Wyoming's climate is too cold for monkeys.

~~~
SkyMarshal
Are companies formed after 2010 ineligible for that exemption?

~~~
WildUtah
I believe a substantial exemption continues after 31 December, but the 100%
exemption is only for end of 2010 stock.

