

Is it a good idea to incorporate your startup in a tax haven country? - ideas101

I understand that there are many tax implications before and after your company is acquired. So isn't a good idea to form a legal company in a country like cayman island to begin with and save tons on taxes?
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rms
It quickly becomes illegal to incorporate in the Cayman Islands if you're
really a US company incorporated in the Cayman Islands to not pay US taxes.

Cayman Islands also screams shady. Google and Microsoft both have Irish
subsidiaries to save on taxes. I'm sure doing that legally is incredibly
complicated and expensive. When you get that big, it will be worth it to hire
someone to help you save on taxes. For now, a Delaware C-Corp or LLC is good
enough. Nevada if you really want to save 1%.

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ideas101
thanks ... i used cayman island just as an example but there are many others -
i think it won't be that profitable else all YC companies would have been
taking advantage of this. Do you know where all YC companies are
incorporated????

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rms
All are Delaware C Corps

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kingnothing
If you're a Delaware corp, but you live and operate in, say, California, don't
you also have to be incorporated to do business in California and pay taxes on
whatever income is received there?

Or is the whole point that we're doing business "on the internet" so that
doesn't apply?

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xirium
SGI was originally incorporated as a California corporation in November 1981,
and reincorporated as a Delaware corporation in January 1990. --
<http://en.wikipedia.org/wiki/Silicon_Graphics>

I presume that you pay lawyers in Delaware to use their office address as your
official headquarters and then your California office becomes a satellite
office. The fee for this service could be expensive but it would be tax
effective.

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Shooter
NO!

Do NOT incorporate in another country if you are a US citizen if your only
reason for doing so is to to save on taxes. All foreign-derived income is
taxable if you are a US citizen (with VERY few, VERY specific exceptions), so
incorporating in a tax haven to save on taxes isn't tax avoidance, it's tax
evasion. Avoidance is legal, evasion is illegal.

Setting up a foreign subsidiary should be the only reason you should
incorporate in a foreign country if you're a US citizen, and even then only
with professional help. There are relatively few tax 'loopholes' that involve
tax haven countries anymore, and even they are rather borderline legally and
rather complicated. (If you sell physical goods, for example, there are some
transfer pricing structures that can save you a bit - but it's only worth it
at a certain level of business.)

As rms noted, if you ever get big enough for this to really be a concern it
will be easy to find advisors to help you out. Even then, I would advise
caution. All of your tax attorney time should be spent maximizing your US
deductions,etc. - NOT looking for tax haven gimmicks. Better yet, focus your
time on finding new customers and revenue streams. I personally wasted far too
much time worrying about tax shelters and similar things when I was younger
and I regret it. My time would have been much better spent working on my
business. I don't like to see anyone else make the same mistakes.

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darklighter3
I am not a tax lawyer but the issue of foreign taxation is more complicated
than 'organize in the caymans and save lots on taxes'. You're still going to
have to pay taxes for any business that you do domestically. If you have
income domestically you pay income taxes domestically. If you have domestic
sales you pay domestic sales taxes. If you have international sales there are
all sorts of complicated rules about where those sales must be recognized.
Most of the large corps that use this technique are doing it to shield foreign
income from US taxation. They can park it offshore and reinvest it
internationally without US taxes. Once you bring it back to the states you
have to pay income taxes on it (I think you get a credit for foreign tax
paid). So if you need your foreign revenue to pay the domestic bills you're
going to get hit. Also I believe that a couple of years ago Congress made it
more difficult to do this sort of thing after it started impacting tax
receipts.

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pg
Empirically the answer seems to be no.

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daniel-cussen
I've thought about this...there are a lot of countries that will charge you
little or no taxes, and some countries that will let you hire anyone you want
(I find freedom in hiring more important than reducing tax exposure), but I
don't know how many countries have both these things. Also, tax haven
countries are sometimes very expensive places. Dubai, Montecarlo, Bermuda, and
so forth. All insane. Even if you're not headquartered there, you might have
the expense hit you in some form or another. The expense might be more
damaging than paying taxes in US.

There's probably a reason only a few industries see their companies
incorporate in tax havens (mostly insurers and financiers). The government
might insist on having you fill out many phone-books worth of forms, pay
special taxes, abide by certain restrictions, and so on. It might be outright
illegal. A lot of companies got established in Delaware because this presents
advantages; if they're not incorporating in a tax haven, I doubt it's because
they're lazy.

On the other hand, one strategy I haven't heard being used, but have found
nothing wrong with (so far) is going IPO with Nasdaq Portal. It costs like
$8000 and makes stock available to investors with 100M or more in liquid
assets, termed Qualified Institutional Investors. I haven't heard of anyone
doing it, and I might be glossing over a huge downside to going public like
this. In any case, you get to sell stock, and you avoid the Sarbanes-Oxley
compliance fee of ~3 million dollars a year.

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ideas101
your right - there r many scared of Sarbanes-Oxley - its too complicated and
complex - its just a lobby to make money.

~~~
cdr
I know I'm not the first person to mention this - please take the time to
correctly spell, capitalize, and punctuate your comments. It makes it even
more difficult to take you seriously otherwise.

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samwise
There is more room than people may think. IF you have dual citizenship and
spend less then 30 days in the US you could be taxed a lower rate depending on
the country. As long as you pump up your salaries and leave the company at the
near break even point. Most loopholes need alot of exp to find.

all of this only becomes an issue when you have real revenue, by then you
should be able to hire decent representation

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ralph
South African Mark Shuttleworth's Canonical Ltd., you know, that does a lot of
work on Ubuntu, is registered in the Isle of Man, a UK tax haven.
<http://en.wikipedia.org/wiki/Isle_of_man>

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xirium
Commodore was incorporated in the Bahamas but it was problematic.

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gsiener
As someone planning to launch an ecommerce site from a Bahamian company, I can
confirm that it's very problematic. Good luck trying to get an internet
merchant account!

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aneesh
Markets are relatively efficient - if this was a good idea, people would be
doing it. They're not.

