Why you might not want to incorporate in the USA

Intuit spends a huge amount of money every year lobbying to make sure that tax forms are as complicated as possible: http://techcrunch.com/2013/03/27/turbotax-maker-funnels-mill...

So evil!!!

Yes the tax stuff is painful but as in your case there are reasons to keep the citizenship.

As a U.S. expat, I haven't noticed this. The forms aren't as easy as the Danish forms (which are fully automatic and done for you), but not too complex in my situation of just having a regular salaried job. I paid a CPA $200 or something to do it the first time, because I wasn't sure I would do it correctly myself. But the result was pretty readable and basically what I had thought I was supposed to do. Unnecessarily many pages, but simple enough ones.

And due to the foreign-tax credit there's no double taxation. I compute my U.S. tax obligation, subtract Danish taxes paid, and the result is always $0, since U.S. taxes are comparatively low.

Talk to your payment processor and see what they want, then do that. My guess is that they will want a U.S. business entity of some kind, with a U.S. tax ID number. Then they will want to believe :-) that this is more than a mere Post Office Box arrangement where money flows through a pipe. They'll want a physical address at a bare minimum.

Once you are convinced that your payment processor will work with you, then you set up the company in the U.S.

For tax purposes you treat this company as a processing agent. It is essentially a bookkeeper. Operate it and manage the net profit of this U.S. corporation so it shows a slight profit.

E.g., your UK corporation pays the US corporation a 3% override on payments processed. The US corporation uses this money for its overhead and whatever is left over is taxable net profit. The net profit is likely to be small so the tax cost is palatable.

Again, this is more a "make Mama happy" problem than it is a tax problem. Your criteria for a good solution are (1) payment processor happy; (2) paperwork and overhead and brain damage and distraction minimized; (3) tax cost.

I see no appetite for the wholesale dredging needed to fix the problem. To the contrary -- everyone is looking for government to help. See Tesla's experience in New Jersey yesterday, for instance.

For what it is worth, what I see in the tech community (in only a few situations at the moment, admittedly) is people opting out by renouncing U.S. citizenship and establishing their companies in more amenable climates. This is one solution.

The other solution is to not be part of the problem. Don't be one of those people who want Auntie Sam to help you win some sort of competitive advantage, and resist efforts by people (like the car dealers against Tesla) who attempt to screw things up.

And if Gov. Christie attempts to run for President, remember Tesla. Vote well.

It MAY be possible to work something out if you deal with one of the multinational banks like Citi or HSBC but don't count on it.

To keep this sleeping corporation alive:

1. File the paperwork in Delaware every year and pay the fees there.

2. File a Form 1120 (the corporate income tax return) with zero income and zero expense. Technically a corporation has to file a return even if it has zero profit. Don't forget Form 5472 (foreign shareholder of US corp) if it applies to you.

Solution from this mess? Find a US partner who can co-own this thing with you. Then you have a US-based human as an officer/director who can do the footwork to open the bank account.

Meta solution to this mess: someone can start one of these things as a service for 10,000 people like you. This carries thermonuclear risk of course, which is probably why no one has done it.

It involved getting a solid introduction to a client manager and relentlessly following him up over the course of 2 months to make it happen.

Incredibly painful when we were waiting for an account to put our investment capital into. If I had to do it again I would likely fly out - so long as I could tack on some business development in the process.

In choosing where to form a corporation you have to think about the protection that the country offers you.

My prediction is that after the USA has beaten Swiss banks into a pulp they will start marching through the Carribean. What is a tiny country going to do when Uncle Sam's minions land with a thud?

Until I know more about the specific stock option program you have, you should assume that the U.S. will want to tax you if (1) the option grant occurred while you were employed in the USA; or (2) the options vested while you were employed in the USA; or (3) both; or (4) you saw a picture of a U.S. tourist landmark on television when you were 8 years old. I'm just kidding about #4.

The date of exercise of options -- and where you are living when you exercise the options -- is usually unimportant.

Meta point. The people who REALLY care about taxation of options are the people who run the company you work for. Your employer is going to bend over backwards to sacrifice you to the Almighty Tax Gods if it is going to protect the company from potential tax liability, even if it costs you money. Just sayin'. This is what I've seen.

The hard part is knowing whether you qualify for this or not. You need to be physically out of the USA for 330/365 days in a 12 month period (not a calendar year--this is stupidly overly complicated and tricky), or be a "bona fide resident" of the other country. Look at the instructions on the form to help you here. Most people fail on this point, and this is the first vector of attack by the government to try and tax you.

CAUTION CAUTION CAUTION. I see any number of Americans abroad who work as self-employed independent contractors. Oh, hypothetically, software engineers living in Thailand and working. They successfully spend 330 days out of the USA. They use Form 2555 to eliminate income tax on their Schedule C self-employment income.

But Form 2555 _does_ _not_ _eliminate_ the self-employment tax -- the equivalent of Social Security tax for self-employed people. See Schedule SE.

Sorry for using all caps and fakey-fake underlining to emphasize this problem. It happens all the time. I saw it yesterday. You think you have no tax liability and you end up owing $16,000 for self-employment tax. Not fun. At all.

The next magic form to remember is Form 1116. This is the foreign tax credit. If you earn a dollar of income in Japan and pay Japanese income tax on it, Uncle Sam will give you credit on your U.S. tax return for the Japanese income tax you paid.

This is usually the better way for Americans abroad to go when they live in high-tax countries. This is why Americans in Europe pay many thousands of dollars to have a tax return prepared but never give Uncle Sam a nickel of tax.

If you are an American abroad working for a foreign employer, you don't have to pay U.S. Social Security. You should look at the totalization agreement between the USA and Japan to see if you can eliminate the need to contribute to the Japanese old age pension schemes since you aren't going to retire and die in Japan.

It was just a matter of filling a one-page form at the tax office. Filing tax was also very easy, I basically just went to city hall and they filed them for me.

So despite its reputation as a bureaucratic country, Japan turned out to be much better than France.

Of course, I can't help you with the U.S. side of things…

1. Just prepare the tax returns and file them. Good for regular people; the likelihood of you owing any U.S. taxes is low. You have risks of penalties (undisclosed bank accounts = FinCen 114 form filled in online -- that's the biggest one). If you are a very small potato floating in the stew pot of life, that's probably fine. You either start now and ignore the past, or you go back in time and file. Usually three years is sufficient, sometimes six.

2. Search for "Streamlined Procedure" via your favorite search engine and you'll find the IRS official "Come to Jesus" program for US taxpayers abroad who are "low risk." Like most bureaucratic endeavors to write rules controlling all humans, the procedure is contradictory. If your income tax is under $1,500 you are probably safe. If your income tax is even slightly above $1,500 in any one year, the program's FAQs say it's OK but the questionnaire you have to fill out says you are not eligible for a "no penalties, just file" solution to the problem. Find the questionnaire, look at question 2, then look at the paragraph below question 3.

3. If your situation is more complicated (higher income, or you own stock in Canadian corporations -- like your business!) etc., you need a more nuanced analysis. Here your primary risks are undisclosed financial accounts (heavy penalties for not filing FinCen Form 114, IRS Form 8938), Form 5471 (you own stock in a foreign corporation), Form 8621 (you--God Forbid!--bought regular Canadian mutual funds as an investment), or you have a Canadian tax-free account that is not an RRSP or RRIF. You need someone to tell you the best way to jump back into the pond.

4. You have gobs of money and high income. In that case you look attractive as a mugging candidate for the IRS. There's money to be made here for the government, and they like to threaten you with life-altering penalties (300% of your bank accounts is something I have seen as an opening bargaining position) and prison. You really shouldn't Come to Jesus on your own here. You need the Pope and St. Peter to guide you. :-)

The problems that The One and Only Netai (I love that, by the way) complained of in the business context apply equally in the individual context. So take care in how you choose a solution. Shoot me an email and perhaps I can connect you with someone in Canada who can help you. I will be in Toronto next Tuesday, FWIW.

If you contribute post-tax earnings its usually a very simple event. Depending on your ownership stake, you have some information reporting, i.e., Form 5471, Form 926, but that's about it. If you don't have to deal with Form 5471 because you own a very small stake in the company, you'll want to have an accountant look into PFIC reporting, especially if the foreign company is engaged in "passive" activities like renting, licensing, investing, etc.

People are scared of Form 5471, but it's really not a big deal. It's also not very expensive, in the scheme of things. If paying roughly $100-$250 for a Form 5471 is too great an expense, you probably don't have the financial leeway to be making the foreign investment in the first place.

Also, Translating accounts is not very difficult. You simply apply the appropriate exchange rate (the average rate, or the year-end spot rate, depending on whether you are translating the income statement or the balance sheet). It takes at most a few minutes if you use any sort of organized accounting system or software.

You can transfer IP into the USA but once you have done that all of the profit generated from that IP worldwide will be subject to US tax.

And if you ever want to transfer the IP out of the USA it will be treated as a sale.

The worst I ever saw was one of those online poker sites. To move out of the USA they had to move their IP to a new foreign corporation.

The appraised value of the domain name was $6,000,000. That's a $6,000,000 income item. Pay tax on that at 34%, baby.

For day-to-day business operations you will have the normal level of business brain damage. Complexity is a mathematical constant.

Second is where your customers are. This is both a tax question (you want to pay less tax) and a business question (you want to collect more money more easily).

If you need Stripe or its equivalent, you dance to the tune they play. Organize in the USA and bend to their will.

If your customers are in the USA you have to look at whether you have "U.S. source income" -- a defined technical jargon-y concept. If so, it doesn't matter where or what you (or your company) happen to be. The U.S. wants tax.

You have to look at brain damage, complexity, and cost. Don't focus so much on financial cost when thinking about your business structure. Think about opportunity cost. An hour spent thinking about this is an hour you did not spend writing books or marketing them.

Until the stakes are high -- several million a year of revenue -- don't get too complicated. Yeah Apple 'n Google do fun stuff. But they have billions of dollars and you (and I) don't. :-)

Keep it simple. Don't optimize for tax too early. You'll make more in building your business fast than you will spending the same amount of time and thinking on tax strategies.

The level of paperwork and pain you will face depends on (1) where you are "doing business" (and that is a nuanced phrase); (2) what type of business you are doing; and (3) the humans who are doing the work -- U.S. residents or nonresidents.

The problems arise from the multiple government entities that have the ability to impose tax on a business. From the top:

- income tax from the Federal government, (most) State governments, and (a few) cities.

- various employment taxes to fund government retirement benefits, unemployment relief, medical care for the elderly, etc. etc. This is Federal and State. Solve that problem by handing the whole f-ing problem off to a company that specifies in payroll services. Hint: despite marketing promises to the contrary, all payroll services are alike, except for the ones that steal your money. Buy services from an established, reputable payroll services company.

- sales tax. There are a maddening number of jurisdictions nationwide that impose sales tax at a maddeningly different set of rates. Some things are taxed in one place and not in another. My experience with the California bureaucracy that administers this tax is that they are the second-lowest level of Dante's hell. (The lowest level of hell is reserved for the employment tax bureaucracy).

- City business licenses. It never ceases to astonish me how stupid local governments can be. The City of Los Angeles imposes a tax on the privilege of running a business within the City limits. It is a percentage of gross revenue, FFS. Yet adjacent cities (I'm in one--Pasadena) charges a vastly smaller tax, based on number of employees. A business can save tens of thousands of dollars simply by putting its offices in the correct place. Then the City of Los Angeles has budget woes and wonders why. Oh, well. The immediately former Mayor has his name in big-ass letters in the international terminal at LAX. C-o-r-r-u-p-t-i-o-n. But I do not judge. And I am not bitter. :-)

Having said all of that, it IS possible to create an outpost in the United States and keep the paperwork and tax burden semi-sane. Assuming your business generates some kind of software, I would do the following:

1. Choose your base of operations in the USA on purely business grounds. Where are your potential employees? Where are your potential customers. Let's say it's California.

2. Next, examine carefully the different municipal governments in your target area to see which cities have the best city business license set-ups. You might find that these places are popular and rent is expensive. Go figure.

3. Next set up the business entity you need. If your company in Canada is a corporation, you almost certainly will use a corporation in the USA. (Hint: ignore everyone who tells you about LLCs. CRA treats U.S. LLCs as corporations for tax purposes. Just set up a corporation). First preference is to set up the corporation in the State where you are actually doing business. It saves you money and paperwork. Success in business is all about avoiding paperwork.

4. The U.S. corporation should probably be owned by your Canadian corporation.

5. Staffing the U.S. corporation with employees. If you are coming across the border you will need a visa. Look at the TN visa or the L-1A visa categories as the easiest way to be here, work, and live. If you are hiring locals, you don't need a visa for them, obviously.

6. F-ing payroll taxes. Hire a giant-ass payroll services company. I have used one after another and they have all f'd up my payroll at one point or another. F-ing Intuit's f-ing QuickBooks Payroll is the worst. "Oh, we really can't track that $120,000 and can't really tell you where it went." But I am not bitter. Really. Not much, anyway. :-)

7. Hyper hyper critical for you coming across the border and working here: payroll taxes. You have to contribute to the U.S. Social Security system with your taxes even though you will never get a penny of benefits here. There is a treaty with Canada. Look for "totalization agreement" in your favorite search engine. You can eliminate U.S. Social Security taxes for 5 years using that method.

8. Your business SHOULD -- for certain definitions of "should" -- pay income tax to the Federal government and the State of California. If you have a sufficiently high level of business activities in other states, they will want to impose income tax on your profits, too. Strive to avoid those activities in the other states. That's where you need guidance.

I hope that helps. My email is in my profile.

You--because you are a US citizen--will have a metric shit-ton of paperwork to file every year. E.g., if you don't file Form 5471, it is an automatic $10,000 penalty, then you shovel snow uphill in Hell in the summertime to see of you can get the penalty removed.

The second--and bigger--problem is that when you transfer ownership of IP from your US corporation to the new foreign corporation, that is treated as a sale and you pay tax on it.

So. You wrote some software all by yourself. Now you're up and operating and generating revenue. What's the software worth? (Well, who the F knows, right?) Hire an appraiser to get a random person's opinion, just to keep the IRS mollified. That person's random opinion is that your software is worth $2,000,000. Guess what? You "bought" that IP at $0 and just "sold" it at $2,000,000 and have to pay tax on that profit.

Internal Revenue Code Section 367(a).

That's why in these circumstances it is better (for tax purposes) to start an IP-heavy company outside the US and license the right to use the IP in the USA to a US corporation. Don't do a startup in the USA then expand outwards.

First, you have to fill out personal taxes every year for foreign income, regardless of whether you live in the US or not. All income globally is treated in the eyes of the IRS as income.

Second, you have to declare FBAR if you hold foreign accounts of over $10,000.

Third, you have to "open your books" for any foreign corporations you are the director (or have ownership) of. Check IRS forms 5471 and 5472.

Yaaa! Land of the free!

Source: American with a business in the UK, lived and worked in the UK. Not a lawyer, or an accountant.

If you want to do it without a big pile of capital, the easiest route is probably to get a job offer from a company that will sponsor you as a skilled immigrant, and live/work for enough years to qualify to apply for citizenship (as well as doing whatever else might be required, such as passing a language exam). Sweden is one of the easier countries, with about a 9-year path to citizenship (4 years to permanent residency, plus 5 years to citizenship), no exams. Period can be shortened if you live with a significant other who's a Swedish citizen.

If you want to be self-employed and run your own business, this route is generally much harder, especially if you aren't moving with an already-successful business. Many countries assume by default that "self-employed immigrant" means "doesn't have a job or want to get one" and/or "probably will sell drugs for a living", and treat the category more skeptically. But you can go self-employed once you get permanent residency.

There are many locations in the United States that are more business friendly than Chicago (or Los Angeles, for that matter). I would suggest that if you need to be in the Chicago area you look at other municipalities other than the City of Chicago itself.

But if you have made a decision that you need to have your business offices in Illinois, set up an Illinois corporation. Don't bother with Delaware unless there is an overwhelming business need for this.

Basicly any type of vehicle becomes twice as expensive

No, not vehicles used for business. The high taxes are on personal cars.

Ironically, there's virtually no place better to be "poor" than in Denmark, because while poor people pay taxes, too, wages (and welfare) are so high that they end up living a better life than in other countries.

Taxes on the rich are a different story, though, because while the tax rates on the rich may compare to those in the US, it seems to me (and I might be wrong here) that, through tax deductions and various other things, rich Americans often end up paying relatively low taxes. And that would be hard to accomplish in Denmark.

European software startups that need a huge infusion of capital tend to move some of their business to Silicon Valley while sometimes maintaining a development department back home (e.g., Unity is now headquartered in San Francisco while having its chief development department in Copenhagen, AFAIK).

Two caveats though:

- You DO need to get a good accountant to get advice on international VAT charges as they are complex (I suggest bypassing them by using a company like FastSpring that manages them on your behalf).

- Small business owners should have the same social welfare security net as everyone else (I think this might be changing).

I agree with you on the inbred gombeens and cute hoors, but thankfully there seems to be less of them in the tech sector :)

Moving would have opportunity, yeah! And a lot of it. But I'm not willing to trade my standard of living to go somewhere that I'll pay just as much tax as here, with far higher chance of penalties due to mistakes, and with a far worse social safety net (health wise) to cover me (as I won't be poor, Medicaid, etc) than I have here.

Now, you can deal with all those things. There are ways to manage, mitigate or avoid them. I'm well aware of that. But frankly, I shouldn't have to...

Non-government solutions to Europeans is unfathomable.

Whether you are an American who moved to a treaty country, or a treaty country resident who moved to the US, it is not likely that you'll have to pay a lot of US taxes if at all. (The treaties I am familiar with are quite reasonable). However, unless you are a tax professional yourself, you are going to be "taxed" by a professional to prepare all those papers that you must file.

I know someone who moved to the US, and whose tax filing on one year topped 150 pages of "informational data" despite not having to pay one cent.

I have never met a person who is in any way familiar with the US tax code who thinks it is makes any sense or is reasonable. Only people who never had to really deal with it think so.

Luxembourg and Lichtenstein will gladly take you money, though ;-)

http://www.letemps.ch/Page/Uuid/0a130fdc-238a-11e3-8a42-a451...

I'm not sure what the cause and what is the result here, but it explains why Americans don't usually see this problem.

However, I just switched on my home VPN and the links disappeared. Time to talk to someone in netops, methinks.

> reading on an iPad, so the risk of system infection is negligible.

Blog Admin needs to check his site.

EDIT: Ah... it's a WordPress site, 'nuff said.

> Tourists are already turned off from coming to the US because of the TSA issues.

I'd love to agree with you, but there's that pesky reality that disagrees with your claim:

http://cityroom.blogs.nytimes.com/2012/12/31/a-record-year-f...

>Even countries like the UK with it's constituent nations and territories work hard at having a uniform and efficient system for businesses to do what they need to do.

Population UK: 63mm Population USA 310mm

and support your claim that the territories work hard at having an efficient system for businesses.

> Having a "Just deal with it" attitude will also drive away business.

The paperwork really isn't hard. What makes you think that filling out some tax forms is keeping people from opening up shop in America?

But also, consider that Australia with 22M people compares with New York State, and is e.g. only 60% of the population of California. And inside a state, taxation is much more uniform.

(New York State is a good example if YOUR point, as New York City, Yonkers and a couple other cities have additional weird taxes you have to be aware of)

- Paperwork and fees/taxes in each state an employee works in. - Securing a work visa to enter and work in the US.

But, it sounds like, if we were to swap places and Nitai lived in the US, trying to start a business in Europe, he'd be faced with

- Paperwork and fees/taxes paid to each country his employees worked. - Securing a work visa to enter and work in the EU.

Depending on the country American Nitai wanted to live/work in, the visa may be easier/harder than the US visa, I'd imagine. But I'm not sure that the kinds of difficulties would be much different.

You're putting up a lot of strawmen here.

Example: "He will pay his taxes in Denmark, Germany, Switzerland or wherever he freely chooses to live. In Europe, you can live in whichever country you like. Most countries here seem happy to receive taxes."

In the US, you can freely live in whichever state you want. It's rhetorically dishonest to compare the United States to a single country in the EU.

--

I'm sorry that your experience was a poor one. Indeed, US laws are different, and if you went into the experience expecting it not to be different, that would certainly have been a shock. I make no claim our system is better than Denmark's (you shouldn't imply all of the EU is the same as Denmark, by the way). But it's a disingenuous platform to decry the US because you received inadequate counsel on setting up a US business or failed in your due diligence...

I'm sure, however, the pro-European camp of your readership will feel quite satisfied with the tone and subject matter of your post.

No, Denmark. If you want paperwork, there's plenty to be had here in Italy!

We have federal laws and state laws to accommodate regional preferences.

None of that was being a jerk.

I'm in a dark corner on the planet on this...

How? I just have a hard time imagining how a place with dozens of languages and cultures (I think that cultures with very different languages are likely to be very different from each other) and all of that can be less varied than a place like the US.

T-Mobile barely exists out of the city itself, and yeah, speeds are abysmal. $50 for a sim card too...

Anecdotally I went to the Swedish countryside in january; where I got 16Mb/s over 3g. (and it was free because: EU roaming is free on my carrier)

Second, yes, you're right, but no need to be a pedant, the meaning original commenter employed is widely accepted and understood.

For example, Qatar is a third-world and it's pretty well developed. Turkey is a first-world and yet it's an under-developed country.