Is it a good idea to incorporate your startup in a tax haven country? | Hacker News Reader

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

14 pointsideas10119 comments

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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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%.

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????

All are Delaware C Corps

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?

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.

This could be worthwhile even for the UK startups that YCombinator has funded. This is due to tax regulations that affect IT contractors and IT startups.

UK IT contractors are encouraged to incorporate for the purposes of professional liability. However, many solo contractors kept large proportions of fees in the shell company to cover lean periods while minimising tax. Tax officials took a dim view of this practice and changed the regulations. Although the regulations are intended to cover contractors, it could also affect a startup. Incorporation in Delaware would remove this limitation.

Nevada also screams shady, and all of the supposed benefits of Nevada (no data share with IRS, etc.) are BS anyway. US startups should always form their business structures in either their home state or Delaware.

Cayman Islands also screams shady

Heh, yeah, like KBR. A huge company and ... quite shady.

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.

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.

Empirically the answer seems to be no.

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.

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

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.

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

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

Commodore was incorporated in the Bahamas but it was problematic.

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!

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

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