I am an international tax lawyer and I advise startups that do business all over the world.
I do not have a good answer to your question. There is insufficient data upon which to make a suggestion.
However, here are my guidelines:
- if there is a US person involved in this business as an officer or owner, you will experience exquisite agony in opening a bank account abroad.
- until your net profits from non-US sources amount to $2M - $3M per year, the tax benefits are likely to be trivial.
- an hour of founder time spent thinking about tax is an hour wasted. Think about building your product. Think about getting a customer. That's much more valuable.
- as soon as you add a foreign corporation to your business structure you have probably added $10K - $20k to your overhead. Minimum.
There are exceptions to every rule. Your situation may be different. Good luck.
I find so many startups in APAC incorporating in USA, with justification that they "need" a US company to get customers, or get a better payment gateway etc. That's just focusing on the wrong problem. 1. Get enough visitors by getting the word out. 2. Convert enough trials. 3. Talk to (email) real users. 4. Get to the point where they are ready to pay. 5. If objection clearly indicates payment experience, terms of service (location of company), then consider incorporation.
By setting up subsidiary / parent company elsewhere, you are committing to too many overheads in time and money.
Why? Because otherwise all freelancers would simply register in the country with the lowest tax to dodge their national taxes. Obviously governments don't want that.
If you have the opportunity to physically relocate to another country though, then it becomes interesting to find places with lower tax rates. Countries like Singapore won't care if you're a foreigner opening a company and are never there. It's mostly about your personal tax residency what matters.
An increasingly common construction with people working remotely is a Hong Kong or Singapore company, and either no personal residency anywhere (e.g. traveling around perpetually), or a personal residency in a place with lower personal tax. Think Bulgaria or Panama.
If you're a US citizen, there's extra difficulties here. You'll be taxed for any income above $100K/y, even if you're not a US resident anymore. If you don't want to be taxed in the US, you'll have to forego your citizenship (!).
P.S. IANAL.
You can also usually move back, become a resident again and get covered again.
About 10 years ago I decided to become a one person tax expert, read a NOLO press book on incorporating, and found what I thought was a clever solution to optimizing taxes in the most favorable manner. About a year later, my accountant told me two things... 1. "I've never actually seen a client choose this tax structure" 2. "You picked the worst possible taxation vehicle for your business, which is hard to do on purpose!"
The rulings and the operation are quite different in most countries.
Since you're dealing with the state, it's also hard to protect your rights alone. If you're going it alone, I would advise talking with a friend with a law-degree. At least, that way, you could probably avoid grave errors.
And if you're being audited, or in trouble with the authorities in any way, definitely try to get some legal help.
PS: These are my own opinions, take it with a grain of salt. I just took the exam for the first semester of tax law :).
You'll find that most US companies want to deal with US companies. This isn't just preference, but is part practicality. Contracts "Governed by the laws of Panama" isn't going to fly. I've even seen companies argue over the US state specified. This can be true elsewhere, but most places are more used to dealing with US-based companies and contracts than another random country.
Related: As a foreign company you might find you're subject to provisions and laws you weren't aware. Could be privacy or even simple reporting. Knowing your own country's business requirements is hard enough, knowing another could compound that.
It's going to be a similar story if you intend taking investment. To some investors it won't matter. To many it will matter a lot. Either way, a US (esp. Delaware) company is simple for both -- and you'll probably find the investment legals are significantly cheaper.
Eventually you'll want to employ people too. Granted there are ways of doing this without a US entity, but it's not going to be pretty.
(Also what everyone else said: it's premature optimisation)
Answer: "You've had all the benefits of the internet, which you've already overpaid [1] for. Rather than switching to a better internet provider, it's time to return part of the favor."
Spot the flaw in your comment yet? It's a generic non-response that applies to every possible service and ignores the fact that the service has already been paid for.
[1] Most government spending - which he has already financed with his taxes - is merely wealth transfers to non-workers. Only a small fraction consists of the services you mention.
As to your spotted flaws: firstly, it's obvious that people start their lives with 20+ years of being as net recipients of government transfers, and while the services you consumed may have been paid for at the time, those that paid them would now like their pensions, and a new generation of children need (apparently better) education.
It's unfortunate that three-year olds are not in a position to rationally choose to rather live in Somalia, and that they therefore become part of a social contract they never actually signed – but can you come up with a better arrangement? It's very similar with parents, btw.
Funny thing though: I just now notice that I've actually always shared your opinion, in that if you actually stop consuming government services, i. e. leave the country, I'e always taken for granted that you're henceforth taxed at your new residence (strange US rules nonewithstanding).
But Comcast example is obviously wrong because OP clearly intents to remain living in the US – i. e. using Comcast. And my arguments above actually make the case that you should pay severance and assume your share of the debt if you leave. But, considering the US is the prime beneficiary of smart 18-year old immigrants, it's probably in your interest not to change the SQ.
Oh, and only about 30% of the gov spending is in transfers, and most of that is SS and Medicare. While you could make the case that these lazy 80-year olds should stop sulking and get a job, some of them may protest and insist that they're just getting back what they paid into the system.
Past purchases do not imply some moral obligation to make future purchases.
I'm really not sure what the rest of your rant is about - it's not really responsive to the point I'm making.
Stop spreading the nonsense that Govt is owner of the land. Its not. At best Govt/Army is protector of the land for which almost everyone happy to pay.
So no I dont have to go anywhere Its my land. The onus to figuaring out feasible payment method falls on the "mafia" or close the shop, IDGAF.
What about the rights of the parents? They are the custodians of the child's consent until they are able to make their own decisions. I.e. Their right to choose that their children not be part of some abstract contract even if they are themselves? Of course, then statists like to suggest "Well then, move to Somalia if you don't like it".
I've had this discussion, in multiple forms, starting in different spots, multiple times. It eventually gets to the Somalia suggestion (to the point of cliche), and the only logical point to make after that is: "States have taken up ALL land, including Somalia". Until you can offer people an alternative, or a logical and systematic way to get out of this weird contract of yours, then you can't possibly say that it's voluntary. Maybe even allow them to pay back all the "benefits" they have gotten, if it is even possible for such wishy-washy concept.
The problem is, you don't allow it. Even the richest persons on this world would not be "allowed" to "buy" their freedom from the "social contract". Because you use this wonderfully magical argument that says that all your wealth is owed to the "safe" society that government has provided. Convenient, yet choice and consent is magically not required.
What do you mean by buying your freedom from the social contract? The US, at least, allows people to renounce their citizenship after paying exit taxes and then they're free to choose citizenship in any country that will have them (and abide by that social contract instead).
Other than it not being practical to choose statelessness (so you have to find some country's social contract you're happy with), I don't see what is missing. It's true that you still have to follow US laws (and pay US taxes) if you want to conduct business in the US (and similarly for other countries), but those are voluntary choices, at the gain or cost of some business opportunities.
Do not, under any circumstances, even think about running a SaaS business from Europe. EU has made invoicing hell for small businesses, especially those selling SaaS. You will spend time on things like VAT number checking, verifying customer's country using their IP (yes, I know), several kinds of invoices, prices inclusive or exclusive of VAT, calculating VAT for each EU country differently (and in different currencies), reporting VAT, and lots of other silly annoyances.
And if you think this is a "solved problem using a third-party service", you haven't tried it yet.
The only disadvantage of being US-based is that the first serious lawsuit will basicaly crater your business. Otherwise, you are way ahead of your buddies in Europe (like me).
Some countries also have requirements as to invoice language, or conversion rates that you need to use for foreign currencies. In my case (Poland), I can use the European Central Bank (ECB) rates for VAT, but not for income tax further down the line, so I have to integrated with two central banks to get their rates.
Overall, there is lots of overhead. There is a disconnect between EU officials and small modern companies. Officials want to "promote innovation and entrepreneurship" while introducing heavy-handed legislation (really meant to hurt Amazon, in case of VAT MOSS).
The location of the seller is irrelevant for calculating, collecting and paying European VAT. Its applicably to any company in any country in the world.
However, for now having a company outside the EU does make it more difficult to be tracked by EU tax authorities. But its likely that at some point in the future that will change. And tax authorities fine easily.
If you use direct debit (which is also cheaper), isn't this taken care of for you are charging their bank account directly?
I currently have an LTD in Cyprus, and am shortly moving to France. On paper, it is going to be hugely advantageous to keep my LTD in Cyprus, and move income via Cyprus to France. In reality, the likelihood of hassles with the French Tax and social insurance departments is very high, so I'll be setting up shop in France. When the millions start rolling in, I'll figure out some kind of construction, if it will be worth it.
http://www.forbes.com/sites/timworstall/2015/10/15/ireland-r...
I asked my Accountant in California about Delaware LLCs. He said that if I am doing my business "in California", it's not advisable to open LLC elsewhere. Esp. if physical good are involved - like a Kickstarter product or some other physical product that is partly or wholly made in another state (i.e. other than Delaware).
https://en.wikipedia.org/wiki/International_taxation#Citizen...
* except Eritrea, although China also might want to start doing it [1]
[1] http://www.nytimes.com/2015/01/08/business/international/chi...
But seriously if you're based in the US and all of your employees are based in the US then pay tax in the US. The US government doesn't look kindly on tax shells and unless you've got a lot of money to spend on accountants and lawyers you're going to struggle. The US is the only country in the world that forces their citizens to pay tax on income earned (and taxed) while living overseas, so if you were thinking of relocating to a tax haven you'd end up paying more tax once your income reached a certain threshold.
And it's only going to get tougher with the new administration.
Just pay your taxes, and take joy in the fact that you're contributing to the society that you live in.
I'd be worried about the EU, even the more corporate friendly places (Ireland, Estonia) - the recent retroactive ruling on Apple's Irish taxes make the EU seem potentially third world-like unstable.
Of course, if you eventually plan to bring the money back to the US, probably incorporating in the US is your best bet.
[1] Trump is just a president signalling being a member of cultural out-group, I'm also an out-group member so I don't much car e. My reason for fearing the US is obligations exceeding ability to pay, a weak and sick culture, and also overbearing tax and regulatory authorities.
Banking service is rather poor, although they tend to reply via email in 24h. Finding an accountant that does speaks/writes English properly and reply on a timely manner can be a challenge but it's not impossible, especially in Sofia. On the other hand, in other cities you could get an accountant for 1/10th of the cost.
The major benefit is that the legislation is stable which is a big plus. Requirements for opening bank accounts are pretty loose compare to most other European states, although account expenses are considerably higher to neighbour states - but still we're talking ~ 120 USD/year. Starting a business is easy and rather straight forward. Most official documents (like company statute) come in PDF with official (reckoned by the BG state) digital signature on them. As long as you pay your taxes, mail your invoices to your accountant, etc. You're good to go even if you live in Alaska.
Interestingly, this link says that in the US: "Generally a corporation is treated as a domestic corporation if it is created or organized under the laws of the United States, any State, or the District of Columbia. No other criteria related to place of management will cause a corporation to be domestic."
https://www.oecd.org/tax/automatic-exchange/crs-implementati...
If you do decide to incorporate somewhere else, and you manage the company from the US, make sure it's a place where the tax code also doesn't care about the place of effective management.
However, if the income is US-source, aren't you always taxed on that income in the US anyway? "A foreign corporation engaged in a US trade or business is taxed at regular US corporate tax rates, but only on income from US sources that is effectively connected with that business, and at 30% on US-source income not effectively connected with that business. By contrast, US-resident corporations are taxed based on their worldwide income."
https://www.pwc.com/us/en/tax-services/publications/assets/d...
For such a company, what address would it have? Maybe where you place its headquarters has some significance too.
If you are planning to bootstrap the company then incorporate wherever you want. On the other hand, investors would be a lot more comfortable investing in a US company and clients prefer to deal with other US companies.
If you are a passthrough entity like a sole-propietorship, partnership, or S-corp, probably not. Note, this doesn't matter if you're an LLC or not because the IRS doesn't care. Basically, passthrough entities calculate all business income minus deductible expenses as personal income. Therefore, the amount is subject to federal and state income tax as well as payroll tax (FICA). Certainly, income tax is tiered and FICA caps out at $118,500, but let's assume that you're pulling in $100,000. This mostly puts you in the 25% tax bracket. We'll assume that there's also 5% of state income tax. For FICA, since you're both the employee and the employer, you pay 15.3%. All together, that means you're losing about 45% to tax off the bat. Note, this taxes apply regardless of where you register your company unless you live out of the country for 330 days a year or can claim foreign residency. Then, it gets complicated because a certain amount of income is tax free, but not over a certain amount. Anyway, if you decide to live in the U.S., that 45% or so of tax from above applies regardless of where the company is registered. The reason people register their company outside the state where they do their business, other than liability and tort concerns, is because they're trying to avoid sales or gross receipts tax. However, everyone just bills that amount to their customers anyway, so it's really a wash.
If you really want to know the implications where you live, just hire an honest accountant for an hour and ask. That's what I did. It's worth the money.
--- Edit 1 ---
Look, if you really want to save money on taxes, just make more money. That sounds silly, but it's true. Register as an S-corp. Your first $118,500 are brutal because you're paying an extra 15.3%, but after that FICA goes to 0%. Now, the top tax rate in the U.S. is 39.6%, but dividends are how people cheat that rate. Basically, an S-corp is required to pay the people who work in the company the prevailing wage for that position. However, money above that amount can be distributed to the shareholders as dividends. These are taxed at 15%. Note, you can't just underpay yourself and then claim everything as a dividend. That's illegal and you will get caught eventually. That said, the overall tax rate for someone who's running an S-corp and making $300k is almost certainly lower than someone making $100k. For example, if you can convince the IRS that the prevailing wage for your position is $120k, and you made $300k, then the first $120k gets taxed at 45% or so (see above) and the last $180k gets paid out in dividends and taxed at 15%. That's how you get your tax rate down. Note, at this point, really, just hire an honest accountant who can do the correct calculations and paperwork.
--- Edit 2 ---
Note, I talked about being an S-corp above. However, even if you register your company out of the country, it doesn't matter. Americans must file their taxes every year regardless of where they live. If you are a bonified foreign resident, then the first $100,800 is tax exempt, but we still have to file this number. We also have to file what bank accounts have foreign assets over $10k at any time during the year. So, basically, when you file your taxes, the IRS doesn't care where your company is registered at all. You're going to pay your income tax and FICA, which is going to be in the 40% range if not more. Quite simply, if you're self employed, you're paying 15.3% in FICA. If you try to cheat this and your employer didn't pay the other half, the IRS will still want its money and you'll get caught. Even if you setup a foreign bank account with a foreign business, if a company pays you more that $600, they're probably going to file a 1099 in order to deduct that expense from their taxes, which means that the IRS knows about your income. Further, if you try to wire the money into the U.S. from your foreign bank, that goes through a check as well. Really, the IRS wants to get paid and they will one way or another.
It's not that illegal action can't hide money. Certainly, it can. However, it's difficult to hide money or reduce tax liability unless you have a lot of money to pay someone with a lot of know how to do it for you. At that point, just be happy that you're rich.
I lived a few years in Norway and have my company registered out there as well. I paid less in taxes there and got more in services. Other than culture, it's literally easier to start and run a company is many socialist countries. Simply, the taxes are lower; the services are higher; and the risk is lower because there's a safety net to fall back onto. That said, cultural does count for a lot and American culture is supportive of taking a risk as a small business. The U.S. is also the home to some of the world's largest companies, so opportunities to make contacts and contracts here can be higher.
Health care insurance costs although should be tax deductible, and there are things like FSAs and HSAs that help make health costs even more tax deductible. Are you talking about the costs for paying other things in health care costs, like the $XXs per doctor visit and so on?
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America is ironically a high tax nation, but these things usually reduce tax and COL:
1. The mortgage interest tax deduction. That is easily a +$20k/yr tax deduction right there. There are other small tax deductions that can remove a few thousands here and there.
2. States like Washington or Nevada that have no state income tax.
3. Almost everything is significantly cheaper to buy in the USA
4. Sales tax / VAT is %0-%10 vs the common ~%20 that is common in the EU. Because the US is a mismanged mess governmentally, buying something online from another state is a common sales tax dodge.
5. Pay is significantly higher in the USA for software professionals. I once read it doesn't matter how much you spend, but really how much you make and that can make up for the tax rates.
The best way to measure this is probably government spending/GDP (https://en.wikipedia.org/wiki/Government_spending#As_a_perce...) which is about 46% for Germanys and 43% for the US, although you could argue that healthcare should be included in those numbers.
Because tax brackets are progressive, it really does not make any sense to add the percentages up like that. No one making $100k/year is paying $45k/year in taxes.
> Your first $118,500 are brutal because you're paying an extra 15.3%, but after that FICA goes to 0%.
Only the Social Security tax (12.4%) tops out at $118,500, the Medicare tax (2.9%) does not have a cap, so you're still paying 2.9%, not 0%.
> However, money above that amount can be distributed to the shareholders as dividends. These are taxed at 15%.
This is grossly incorrect. S-corp profits are taxed as ordinary income (regardless of whether they are distributed to the shareholder or not).
> For example, if you can convince the IRS that the prevailing wage for your position is $120k, and you made $300k, then the first $120k gets taxed at 45% or so (see above) and the last $180k gets paid out in dividends and taxed at 15%.
No, the last $180k is taxed at ordinary income rates (which would be 33% given the example numbers). Do you actually operate an S-corp?
Let me see if I can push out better numbers. From here:
http://taxfoundation.org/article/2017-tax-brackets
https://www.tax-brackets.org/newmexicotaxtable
$100k income generates $20981.75 federal income tax. FICA is paid on the full amount, so $15300. In my state, the top income tax rate is 4.9%, but with graduation, $4620.50. All together, that's $40902.25, or about 41%. That's not that far off the 45% estimate from above, but it is lower. I still contend that taxes on small businesses are still absurdly high.
Income: $100,000
Self-employment tax on $100,000: $14,130
Taxable income: $100,000 - $6,300 (standard deduction) - $4,050 (personal exemption) - $7,065 (1/2 SE tax) = $82,585
Federal income tax on $82,585 = $16,418
Total federal income tax and self-employment tax: $30,548
[1]: http://www.locationindependent.co.uk/nomad-guide-to-incorpor...