Ask HN: Tax Haven for startups?

[gilaniali]

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?

[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

[elai]

If I'm a Canadian who lives outside of america but wants to have an office in the bay area so I can hire local bay area people and have people be close to the area for meetings and what not. The head office isn't in america and the bay area office just pays developers to make software and hold business meetings. I and other staff possibly are in the head office in singapore, labuan, panama or wherever else. Will there US be taxation of the corporations profits then?

[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?

[chegra]

Which Caribbean island? I'm from Antigua; I think we are suppose to be a tax haven

[elai]

'think about taxation of your business, think about where the humans are'. What a succinct way to put it.

[_exec]

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)

[SkyMarshal]

Love your profile: "No f-ing Facebook." :D

[zackattack]

> Look at Google. They started as a California corporation and later reincorporated in Delaware.

Why did Google later reincorporate in Delaware?

Also, thanks for posting in this thread.

[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.

[StavrosK]

Cyprus might be a tax haven, but the accountants will get you. We got a bill for 2,000 euros from our accountant for filing some papers or something. We had, quite literally, three jobs in the past year, totalling 3,000 euros, and the accountant wanted 2/3rds of that to file those three invoices.

I am not sure if you can file taxes without an accountant, but be prepared to pay through the nose for one. Both our lawyer and our accountant also gave us bad advice, like telling us we needed to register for VAT (we didn't), just to get more money out of us. A year later, the company owes the lawyer and accountant more than it ever made, without us ever seeing a single cent.

[_b8r0]

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.

[ablutop]

I am in the same process as you and also thinking of Luxembourg. Alternatively have you considered Switzerland (and some specific cantons like Zug ) in your research ?

[_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.

[travisp]

For an American-operated startup, in what way does this actually save you money? Assuming you don't withhold information and lie, the IRS and your state will still tax you on pretty much all of your income anyway.

[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?

[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...) 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.

[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.

[elai]

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.

[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.

[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.

[_b8r0]

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?

[gwright]

Do you have a link to details regarding the long-term capital gains exemption?

[rprasad]

http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_0... for the underlying law, or some other source if you want something that's been updated since the Small Business Jobs Act of 2010 was passed.