
Ask HN: Is it ok to start a Delaware Corp solely to accept payments? - jibjab
Recently, I've seen several posts on HN* about how to start a US Company, get an EIN, an US bank account from abroad.<p>I have no intention to move to or work in the US. However, a US company and bank account would be very useful to accept creditcards worldwide, especially with new services like Stripe.com.<p>From my home country, it is very difficult to get a proper merchant account / payment gateway / business bank account etc. Now I could start a Delaware Corporation, signup for a merchant account / Stripe / whatever, and start accepting international payments.<p>The Delaware corporation's only purpose would be to accept payments. All real work would be done within my company in my home country. The Delaware Corporation would essentially be the sole reseller of my SAAS app.<p>Now what are the legal / tax implications of doing so?<p>Can I charge the US company the same amount it makes on (re)selling a monthly subscription? This would mean the US company would never make a loss or a profit. It would just be a front-end to my company in my home country, which is where I pay taxes.<p>Is this legal? Or should the US company charge something? EG 1% per transaction?<p>Are there other (legal) implications of doing this?<p>* http://myeverwrite.com/opening-a-delaware-corporation-an-incorporation-guide-for-foreigners/
http://blog.freshdesk.com/how-to-incorporate-a-us-corporation-from-outs
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wsdom
I would look into LLC's based on what your describing. Maybe even an LLP.
However I have a slight suspicion if your from a country that it is hard to
set up the accounts you described you will likely expose yourself to a lot of
liabilities and legal problems in your country. Also I think you will also
cause a serious tax headache on your part.

Maybe look and see if there are companies in the US that provide a "corporate
shell" and take care of taxes, etc and then pay you as a contractor... Only an
idea. Not even sure if this could work or is even legal.

~~~
jibjab
Thanks for you reply.

I'm not trying to evade taxes or get into legal trouble. It just looks like it
is easier to start (and maintain) a US company and get a Stripe.com account,
than it is to get a merchant account and a payment gateway over here.

Because the US company is simply reselling the subscriptions, every sale will
be passed through to my company here, so I don't really see any tax headaches.

I am simply wondering if it is legal to use a US company for this.

~~~
wsdom
I believe people use corporate shells all the time for things similar to what
you are describing. However don't take my word on that But you will still need
to pay corporate taxes here in America. Good Luck!

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gopi
Instead of creating a c-corp in US and debating how much profit to leave in US
just create a US LLC owned by your home country corp. Thus the profit just
passes to your home country corp and you will pay tax on it in your home
country.

Also with this setup you can pay all your US expenses (hosting, advertisement
etc) out of your US LLC. I am not a lawyer or CPA so discuss this suggestion
with a experienced professional

~~~
jibjab
I think you're referring to the same setup as rprasad was talking about in his
comment (<http://news.ycombinator.com/item?id=3055493>).

(If I'm correct) When a US company pays dividend to it's non US parent
company, the US charges a withholding tax of 30%. This can be less if there's
a tax treaty between the two countries.

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philiphodgen
Let's say you successfully create a Delaware corporation. It exists. It has a
US tax ID number. It has a bank account. It has a merchant account. All of the
stuff you want to do business. In other words, stipulate complete success in
achieving your business objective.

Here is what the tax part of your plan will look like:

1\. Money comes into your corporation via the merchant account.

2\. After paying expenses, you have money left over inside your Delaware
corporation.

3\. That -- to the U.S. government -- is taxable income.

Crap. So you have to pay U.S. tax on the money flowing through the merchant
account? You don't want to do that. How do you get the money out of that
Delaware corporation?

A. Dividend. No good. First you pay corporate income tax on your profits in
the Delaware corporation. Then you pay a dividend to the shareholder--you. The
default U.S. rule is that the Delaware corporation has to withhold 30% of the
dividend payment it makes to you. There are sometimes ways around this.

B. Loan to you. No good. First you pay corporate income tax on your profits in
the Delaware corporation. Then you loan it to yourself. Only marginally better
because at least you don't have the 30% withholding tax on the dividend. But
you have to pay the loan back, with interest. And the interest payment back to
the Delaware corporation is taxable income to the Delaware corporation on
which it has to pay income tax.

C. Tax-deductible expense. Aha. Now we're getting somewhere. The Delaware
corporation has a business expense that it pays. This reduces its taxable
income, thus reducing tax. E.g., $1,000 of profit in the corporation, and you
perform services for the corporation and the corporation pays you a consulting
fee of $950. Hey presto! New net profit is $1,000 - $950 = $50 profit in the
Delaware corporation. Tax liability is next to zero. Yay.

Item C is where the fun and games are. This is called transfer pricing in the
tax geek world. (Yes, in fact I do own the domain name taxgeek.com and I can't
figure out what to do with it.) In order to do this successfully you have to
navigate through complex tax rules to avoid tax withholding on that $950 you
paid yourself (analogous to the 30% withholding on that dividend). You have to
navigate through the transfer pricing rules generally.

It's awesomely hard. And expensive. The reason is simple: you're trying to
drain taxable profits out of a high tax country, thus depriving the U.S.
government of money. They are quick to call "Bullshit" on these types of
plans. So you have to do it right. And many, many other countries have their
own transfer pricing rules.

When you said "Can I charge the US company the same amount it makes on
(re)selling a monthly subscription?" you were really talking about something
that looks like transfer pricing.

Related party transactions. Meh. Hard. That's what we are talking about and
they get looked at by the government. A lot.

Advice: set up the Delaware corporation so it buys your product, marks it up,
and resells it. Leave a little profit on the table in the USA and pay tax on
it. As long as you are a small potato floating in the great crockpot of life,
you are probably going to be OK. :-)

Further advice. You MUST prevent the USA from thinking that you (from wherever
you live) are doing business directly in the USA. This is variously called a
"permanent establishment" (in treaty lingo) or other similar ideas.

Further advice. The accounting and tax return work for this is going to chew
up a lot of your profits. If you get a cheap quotation for tax return work,
run like hell. People who are competent in international tax work are rare,
therefore expensive. And the price of incompetence is usually big financial
penalties from the government -- like $10,000 at a time for not filing the
correct documents.

That is why I tell people to concentrate on running their business correctly
and not to get clever to save taxes in the international area. Set up as
simple a structure as possible to eliminate as many possibilities for error as
you can. Like they say in AA, if you don't take the first drink you don't get
drunk. If you don't set up that extra-fancy tax-saving device, you can't fuck
it up and get hit with a penalty.

~~~
jibjab
That's a great reply. Thank you. Maybe you could save comments like these and
put them on taxgeek.com :-).

I'm not trying to evade taxes. I'm European, and I pay taxes here. Still, even
in Europe getting a Merchant Account is difficult. I'm simply looking at this
because the cost (money/time) of starting and maintaining a Delaware Company
might be less than the cost of setting up a Merchant Account over here.

Without US company:

1\. Europe company sells subscription for 20/month

2a. Taxable income in Europe

2b. No taxable income in the US

With US company:

1\. Sell subscription through a US company for $20/month

2\. US company receives $18 (Merchant Account keeps 2)

3\. US Company buys subscription at Europe company for $18

4a. Taxable income in Europe

4b. No taxable income in the US

Am I really "draining taxable income" if in the other scenario there wouldn't
be any US taxable income either??

Is this what you recommend:

1\. Sell subscription through a US company for $20/month

2\. US company receives $18 (Merchant Account keeps 2)

3\. US Company buys subscription at Europe company for $17

4\. Profit of $1 per subscription per month

5\. Business expenses (including accounting & tax return)

6a. (eg) 5% of total revenues is now taxable income in US

6b. (eg) 95% of total revenues is taxable income in Europe

Of course I would need a good accountant, but things still look pretty simple
to me... The only thing I need to calculate business income / expenses is how
many subscriptions were active during a month. Please do understand the cost
(time/money) of getting a Merchant Account over here. I like to keep things
simple too, and it might just be the US route is simpler.

~~~
philiphodgen
Until your revenues are huge I think your idea is fine. Keep as simple as
possible. Leave a bit of profit in the Delaware company. Keep your paperwork
straight.

This is pragmatism, pure and simple:

\- you are making sales (yay)

\- if you get audited the challenge will be on the basis of the price that
your European company gets from the Delaware company. The worst case outcome
probably isn't too bad.

\- Unless you are making tens of millions, your Delaware corporation will be a
tiny taxpayer among all of the corporations in the USA. Low profile. Clean
paperwork. Don't attract attention etc. :-)

\- one last thing. Look at the treaty between your country and the USA.
Sometimes there are odd little things you can use to pull business profits out
of the USA easily and without tax. Or less tax anyway.

If you don't make a sale you don't have a tax problem. So first make a sale.

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md1515
Seems like you already know this, but speak to a professional even if it costs
a little bit. You don't want your company closed down, clients stripped, and
you at the top of some U.S tax fraud list.

Best of luck

EDIT: Looks like Mr. Hodgen IS a professional. That's why we love HN!

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rprasad
Dividend withholding depends on your home country, so the actual amount that
the company would be required to withhold is between 0% and 30% (inclusive).

Really, the best idea if you want to do something like this would involve two
companies: a foreign (non-US) parent company that does the actual business
operations, and a domestic US company that solely handles US-based payment
processing. Dividends from the US company to the parent company can be exempt
from withholding (i.e, exempt from US double-taxation), depending on the home
country of the foreign company. This sort of structure avoids much of the
transfer pricing mess mentioned above, _and_ the self-employment taxes that
consultant fees would incur.

Jibjab, you should talk to a tax lawyer or tax professional to help you
structure your business and business activities to minimize your overall
financial costs (taxes, operating expenses, and otherwise). The money you
spend on business planning will pay for itself. I am a tax lawyer, as is Mr.
Hodgen. I believe Mr. Hodgen is located in Pasadena, California. My office is
in Century City (Los Angeles, California), but my firm has offices worldwide.

 _Circular 230 Notice: Pursuant to US law, the above communication is not
intended to be actionable tax advice. It is intended as general information
for speaking to a lawyer or other tax professional about the issues related to
your specific circumstances._

~~~
jibjab
Thank you for your answer.

I understand I have to talk to a professional. Asking on a place like HN
however, allow me to be better prepared when I eventually do so.

