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Ask HN: Tax Haven for startups?

59 points by gilaniali 16y ago

Where is the best place to incorporate a startup when thinking about taxes? 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?

thinkcomp 16y ago
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.htm. http://www.edd.ca.gov/payroll_taxes/rates_and_withholding.ht...) 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 16y ago
  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 16y ago
    The trigger is having existed for a year, not the first dollar of revenue. http://www.taxes.ca.gov/corps.shtml http://www.taxes.ca.gov/corps.shtml
    - minouye 16y ago
      Correct--I should have clarified that one dollar is just there for context.
grandalf 16y ago
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 16y ago
  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?
  - grandalf 16y ago
    it's risky bc the IRS doesn't like it. A lot of mainstream companies do it though.
  - enduser 16y ago
    In general, investors like the businesses they invest in to be incorporated in strong, stable countries with stable governments in jurisdictions with a long history of favorable corporate case decisions. Delaware is the top choice not because it is the most favorable tax-wise, but because of the history of corporate cases tried in Delaware courts. Contrast Nevada, which has somewhat more favorable tax and privacy situations for corporations but a corrupt legal system (hello, casinos). Nobody wants to invest in Nevada corporations. If you take your startup offshore, where will the court cases happen if things go wrong?
    - grandalf 16y ago
      excellent points. This is why most firms choose Delaware.
    - JimmyL 16y ago
      Delaware has the Delaware Court of Chancery (http://en.wikipedia.org/wiki/Delaware_Court_of_Chancery http://en.wikipedia.org/wiki/Delaware_Court_of_Chancery), which is where most business-related issues are heard in the state. It's got a long and established record of well-understood precedents, professional management, and no juries. This make is much easier for corporate lawyers to figure out how a case will go, and then react accordingly. It's slightly favorable tax-wise (it's got a relatively simple code) and had a high cap on interest (which banks can no longer export, IIRC) - but mostly it's the judicial system that makes it popular.
_exec 16y ago
Try http://www.offshore-companies.co.uk 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 http://news.ycombinator.com/item?id=1801105
- trevelyan 16y ago
  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 16y ago
    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 16y ago
andrewljohnson 16y ago
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 16y ago
  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.
a-priori 16y ago
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.
- deleted 16y ago
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- jonhendry 16y ago
  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.
damien7579 16y ago
In the EU? try Cyprus...
curt 16y ago
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.
rwhitman 16y ago
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.
tzury 16y ago
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.
- elai 16y ago
  Incorporate in Singapore! Respected jurisdiction, 1st world country, one of most business friendly in the world, yet all foreign earned income not brought back into Singapore (put it in a bank account in hong kong for example) is not taxed. That 2.5 million is personal income and wealth, no matter where it's stored. America taxes it's citizen's and green card holders globally after the first $100'000 annually even if they are no longer resident. So unless you don't want to report that income and smuggle it in, which your CPA was alluding to, it would be already taxed appropriately. If it's under the corporation's name, then there will be procedures to go through. But don't let that dissuade you from saving yourself millions to hundreds of thousands of dollars in avoided taxation. The idea is to structure yourself that you don't have to lie, hide and put yourself under legal liability that you can still be in the open, they'll know how much is in your bank account and get what you want. You'd be in a much better position with your $2.5 million out of the country and then you can choose at your leisure on how to structure it vs. before the fact. I think your CPA, like most accountants, has zero experience with international taxation laws in relation to the US and whatever jurisdiction you chose and still wanted to keep your business, so he dissuaded you from doing that. Like most places though, you'll probably be taxed as a domestic corporation if your main office & management is there even if you incorporated in panama or wherever. The tactic only really works if your a multi-employee business bigger than a dozen people. You would have your head office in singapore and a loss-accruing development office in palo alto or somewhere similar if you wanted to be close to the bay area culture and pulse.
philiphodgen 16y ago
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
- _exec 16y ago
  Do you have any experience with incorporating in the BVI and similar jurisdictions? If yes I think I'll be contacting you very soon :) See my post below (http://news.ycombinator.com/item?id=1801001 http://news.ycombinator.com/item?id=1801001)
  - philiphodgen 16y ago
    I typically use either BVI or Bahamas simply because it is fast, cheap, and efficient to set up and operate companies in those two places. The Netherlands Antilles has priced itself out of the market (well, and as such it doesn't exist any more, does it?) and has also introduced a very European corporate income tax. Cayman companies are a tad pricier than BVI or Bahamas.
WildUtah 16y ago
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.
jaredhansen 16y ago
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 16y ago
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.
- iuguy 16y ago
  You left out Ireland with it's 17% Corporation Tax rate. We work very closely with some large multinationals that use Ireland to host their treasury. It's certainly somewhere I'd consider later in life. If you're in the UK it's a fairly short flight over, everything's in English and it's good for the craic too.
  - fierarul 16y ago
    Yes, forgot about Ireland. That's also a good pick but I'm not sure how long they are going to keep that low tax rate given the rumors of their economical instability. Last I looked their corporate tax rate was about 12%.
iuguy 16y ago
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 16y ago
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.
sireat 16y ago
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?

roel_v 16y ago

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.

charlesdm 16y ago
I believe Belgian corporations are not taxed on the sale of shares.
fierarul 16y ago
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 16y ago
  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 16y ago
    >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 16y ago
      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.
bigohms 16y ago
Ikea Intersystems does this particularly well