Ask HN: Is it ok to start a Delaware Corp solely to accept payments?

[jibjab]

Recently, I've seen several posts on HN* about how to start a US Company, get an EIN, an US bank account from abroad.

I have no intention to move to or work in the US. However, a US company and bank account would be very useful to accept creditcards worldwide, especially with new services like Stripe.com.

From my home country, it is very difficult to get a proper merchant account / payment gateway / business bank account etc. Now I could start a Delaware Corporation, signup for a merchant account / Stripe / whatever, and start accepting international payments.

The Delaware corporation's only purpose would be to accept payments. All real work would be done within my company in my home country. The Delaware Corporation would essentially be the sole reseller of my SAAS app.

Now what are the legal / tax implications of doing so?

Can I charge the US company the same amount it makes on (re)selling a monthly subscription? This would mean the US company would never make a loss or a profit. It would just be a front-end to my company in my home country, which is where I pay taxes.

Is this legal? Or should the US company charge something? EG 1% per transaction?

Are there other (legal) implications of doing this?

* http://myeverwrite.com/opening-a-delaware-corporation-an-incorporation-guide-for-foreigners/ http://blog.freshdesk.com/how-to-incorporate-a-us-corporation-from-outs

[wsdom]

I would look into LLC's based on what your describing. Maybe even an LLP. However I have a slight suspicion if your from a country that it is hard to set up the accounts you described you will likely expose yourself to a lot of liabilities and legal problems in your country. Also I think you will also cause a serious tax headache on your part.

Maybe look and see if there are companies in the US that provide a "corporate shell" and take care of taxes, etc and then pay you as a contractor... Only an idea. Not even sure if this could work or is even legal.

[jibjab]

Thanks for you reply.

I'm not trying to evade taxes or get into legal trouble. It just looks like it is easier to start (and maintain) a US company and get a Stripe.com account, than it is to get a merchant account and a payment gateway over here.

Because the US company is simply reselling the subscriptions, every sale will be passed through to my company here, so I don't really see any tax headaches.

I am simply wondering if it is legal to use a US company for this.

[wsdom]

I believe people use corporate shells all the time for things similar to what you are describing. However don't take my word on that But you will still need to pay corporate taxes here in America. Good Luck!

[gopi]

Instead of creating a c-corp in US and debating how much profit to leave in US just create a US LLC owned by your home country corp. Thus the profit just passes to your home country corp and you will pay tax on it in your home country.

Also with this setup you can pay all your US expenses (hosting, advertisement etc) out of your US LLC. I am not a lawyer or CPA so discuss this suggestion with a experienced professional

[jibjab]

I think you're referring to the same setup as rprasad was talking about in his comment (http://news.ycombinator.com/item?id=3055493).

(If I'm correct) When a US company pays dividend to it's non US parent company, the US charges a withholding tax of 30%. This can be less if there's a tax treaty between the two countries.

[philiphodgen]

Let's say you successfully create a Delaware corporation. It exists. It has a US tax ID number. It has a bank account. It has a merchant account. All of the stuff you want to do business. In other words, stipulate complete success in achieving your business objective.

Here is what the tax part of your plan will look like:

1. Money comes into your corporation via the merchant account.

2. After paying expenses, you have money left over inside your Delaware corporation.

3. That -- to the U.S. government -- is taxable income.

Crap. So you have to pay U.S. tax on the money flowing through the merchant account? You don't want to do that. How do you get the money out of that Delaware corporation?

A. Dividend. No good. First you pay corporate income tax on your profits in the Delaware corporation. Then you pay a dividend to the shareholder--you. The default U.S. rule is that the Delaware corporation has to withhold 30% of the dividend payment it makes to you. There are sometimes ways around this.

B. Loan to you. No good. First you pay corporate income tax on your profits in the Delaware corporation. Then you loan it to yourself. Only marginally better because at least you don't have the 30% withholding tax on the dividend. But you have to pay the loan back, with interest. And the interest payment back to the Delaware corporation is taxable income to the Delaware corporation on which it has to pay income tax.

C. Tax-deductible expense. Aha. Now we're getting somewhere. The Delaware corporation has a business expense that it pays. This reduces its taxable income, thus reducing tax. E.g., $1,000 of profit in the corporation, and you perform services for the corporation and the corporation pays you a consulting fee of $950. Hey presto! New net profit is $1,000 - $950 = $50 profit in the Delaware corporation. Tax liability is next to zero. Yay.

Item C is where the fun and games are. This is called transfer pricing in the tax geek world. (Yes, in fact I do own the domain name taxgeek.com and I can't figure out what to do with it.) In order to do this successfully you have to navigate through complex tax rules to avoid tax withholding on that $950 you paid yourself (analogous to the 30% withholding on that dividend). You have to navigate through the transfer pricing rules generally.

It's awesomely hard. And expensive. The reason is simple: you're trying to drain taxable profits out of a high tax country, thus depriving the U.S. government of money. They are quick to call "Bullshit" on these types of plans. So you have to do it right. And many, many other countries have their own transfer pricing rules.

When you said "Can I charge the US company the same amount it makes on (re)selling a monthly subscription?" you were really talking about something that looks like transfer pricing.

Related party transactions. Meh. Hard. That's what we are talking about and they get looked at by the government. A lot.

Advice: set up the Delaware corporation so it buys your product, marks it up, and resells it. Leave a little profit on the table in the USA and pay tax on it. As long as you are a small potato floating in the great crockpot of life, you are probably going to be OK. :-)

Further advice. You MUST prevent the USA from thinking that you (from wherever you live) are doing business directly in the USA. This is variously called a "permanent establishment" (in treaty lingo) or other similar ideas.

Further advice. The accounting and tax return work for this is going to chew up a lot of your profits. If you get a cheap quotation for tax return work, run like hell. People who are competent in international tax work are rare, therefore expensive. And the price of incompetence is usually big financial penalties from the government -- like $10,000 at a time for not filing the correct documents.

That is why I tell people to concentrate on running their business correctly and not to get clever to save taxes in the international area. Set up as simple a structure as possible to eliminate as many possibilities for error as you can. Like they say in AA, if you don't take the first drink you don't get drunk. If you don't set up that extra-fancy tax-saving device, you can't fuck it up and get hit with a penalty.

[jibjab]

That's a great reply. Thank you. Maybe you could save comments like these and put them on taxgeek.com :-).

I'm not trying to evade taxes. I'm European, and I pay taxes here. Still, even in Europe getting a Merchant Account is difficult. I'm simply looking at this because the cost (money/time) of starting and maintaining a Delaware Company might be less than the cost of setting up a Merchant Account over here.

Without US company:

1. Europe company sells subscription for 20/month

2a. Taxable income in Europe

2b. No taxable income in the US

With US company:

1. Sell subscription through a US company for $20/month

2. US company receives $18 (Merchant Account keeps 2)

3. US Company buys subscription at Europe company for $18

4a. Taxable income in Europe

4b. No taxable income in the US

Am I really "draining taxable income" if in the other scenario there wouldn't be any US taxable income either??

Is this what you recommend:

1. Sell subscription through a US company for $20/month

2. US company receives $18 (Merchant Account keeps 2)

3. US Company buys subscription at Europe company for $17

4. Profit of $1 per subscription per month

5. Business expenses (including accounting & tax return)

6a. (eg) 5% of total revenues is now taxable income in US

6b. (eg) 95% of total revenues is taxable income in Europe

Of course I would need a good accountant, but things still look pretty simple to me... The only thing I need to calculate business income / expenses is how many subscriptions were active during a month. Please do understand the cost (time/money) of getting a Merchant Account over here. I like to keep things simple too, and it might just be the US route is simpler.

[philiphodgen]

Until your revenues are huge I think your idea is fine. Keep as simple as possible. Leave a bit of profit in the Delaware company. Keep your paperwork straight.

This is pragmatism, pure and simple:

- you are making sales (yay)

- if you get audited the challenge will be on the basis of the price that your European company gets from the Delaware company. The worst case outcome probably isn't too bad.

- Unless you are making tens of millions, your Delaware corporation will be a tiny taxpayer among all of the corporations in the USA. Low profile. Clean paperwork. Don't attract attention etc. :-)

- one last thing. Look at the treaty between your country and the USA. Sometimes there are odd little things you can use to pull business profits out of the USA easily and without tax. Or less tax anyway.

If you don't make a sale you don't have a tax problem. So first make a sale.

[JoshTriplett]

> Am I really "draining taxable income" if in the other scenario there wouldn't be any US taxable income either??

If you're going to get involved in the complexities of a country's tax system, never make the mistake of attempting to apply rational logic to it. That's a quick way to get into trouble.

[md1515]

Seems like you already know this, but speak to a professional even if it costs a little bit. You don't want your company closed down, clients stripped, and you at the top of some U.S tax fraud list.

Best of luck

EDIT: Looks like Mr. Hodgen IS a professional. That's why we love HN!

[rprasad]

Dividend withholding depends on your home country, so the actual amount that the company would be required to withhold is between 0% and 30% (inclusive).

Really, the best idea if you want to do something like this would involve two companies: a foreign (non-US) parent company that does the actual business operations, and a domestic US company that solely handles US-based payment processing. Dividends from the US company to the parent company can be exempt from withholding (i.e, exempt from US double-taxation), depending on the home country of the foreign company. This sort of structure avoids much of the transfer pricing mess mentioned above, and the self-employment taxes that consultant fees would incur.

Jibjab, you should talk to a tax lawyer or tax professional to help you structure your business and business activities to minimize your overall financial costs (taxes, operating expenses, and otherwise). The money you spend on business planning will pay for itself. I am a tax lawyer, as is Mr. Hodgen. I believe Mr. Hodgen is located in Pasadena, California. My office is in Century City (Los Angeles, California), but my firm has offices worldwide.

Circular 230 Notice: Pursuant to US law, the above communication is not intended to be actionable tax advice. It is intended as general information for speaking to a lawyer or other tax professional about the issues related to your specific circumstances.

[jibjab]

Thank you for your answer.

I understand I have to talk to a professional. Asking on a place like HN however, allow me to be better prepared when I eventually do so.