Dateline: Belgrade, Serbia
What is the best country to incorporate? If you are doing business in a high-tax country, you may have considered incorporating offshore in order to reduce your taxes, but weren’t sure which was the best jurisdiction to register a business.
If you’ve searched the internet, you’ve no doubt seen offers to incorporate a new company in the British Virgin Islands, or Panama, or Hong Kong, or even The Gambia. In each case, some “lawyer” or corporate service provider in that country was ready to sell you a shiny object that may or may not have solved your problem.
The reality is, there is no best country to incorporate overseas. There is no perfect zero-tax country for online business where everything will magically fall into place.
I always say that the guy who sells Panama companies will sell YOU a Panama company if you let him, promising that his solution will work for everyone like a bag of magic beans.
The reality is that the best offshore company jurisdiction for you is different than for anyone else. Everything from your citizenship to what you sell will determine which option is the best for you, yet most people continue to treat one of their most important tax-saving assets like the decision between Fuji and Granny Smith apples at the grocery store.
Before you form an offshore company, you need to ask yourself some questions to determine the best structure for you. This type of diagnosis will ensure that your structure is fully compliant with the laws everywhere you operate and where you live.
How to Choose the Best Offshore Company
Sadly, there are a lot of guys on the internet who charge low rates for off-the-shelf offshore companies with no customization, no support, and no help maintaining tax compliance. These guys do the old bait-and-switch, offering a cheap price on – for example – a Seychelles company, but then suggest that you incorporate several companies and a trust for good measure.
In reality, the simplest structures are often the best, especially if you are a US citizen with offshore reporting requirements.
Just as it isn’t advisable to go to the doctor seeking a medication you self-prescribed in advance from WebMD, doing a little diagnostic work before figuring out your best offshore company jurisdiction is advisable as well if you want the structure to actually work. If you don’t want your new company to work, ignore this article and throw your money at the incorporation service charging $7 less than the next one.
1. Where do you live?
Where you live is one of the most important parts of where to form an offshore company. Merely earning income in a foreign company while living in a high-tax country will NOT help you save taxes, thanks to factors like tax residency, offshore income exclusions, and CFC rules.
The saying goes that in our modern area of transparency, “moving your ass is more important than moving your assets”.
While there are ways to reduce but not eliminate taxes by offshoring your business but not yourself, this will involve far more careful planning (and possibly higher audit risk).
Furthermore, living in some countries may make you ineligible for forming a company there, or at least accessing offshore tax benefits.
Knowing where you live, where you want to live, and the type of lifestyle you want to lead is actually important when forming an offshore company because of the different tax systems around the world. While you may have a zero-tax company in Seychelles, your residence in Belgium may cause you to pay corporate tax there instead.
Understanding how residential taxation and territorial taxation rules work plays a role in where to incorporate offshore.
2. Which country or countries are you a citizen of?
This largely applies to US citizens, but can also apply to European citizens as well. It usually starts when someone researches “best places to incorporate offshore” and ends up on the phone with a firm on an island like Nevis or the Seychelles.
What many offshore promoters will fail to tell you is that just because your income isn’t taxed where the company lives, it may be taxed where you live or where you are a citizen. For example, many US citizens are left with the idea that merely not repatriating money to the United States means it is not taxed. Nothing could be further from the truth.
Furthermore, US citizens, in particular, should ensure that their offshore company has the ability to open foreign bank accounts. A company without a bank account is of little use, and many island companies are now being shut out by main banks in the developed world.
Just last year, Latvia closed the door to all BVI companies, for example. While a Bulgarian can get an account at many Caribbean banks, many of those same banks generally refuse to accept US citizens, meaning your company may have trouble getting a bank account. That is why I say that onshore is the new offshore; you must move beyond considering only tiny islands to incorporate.
3. Where do your customers live?
Where your customers live is not necessarily an issue; in fact, one of the errors I often see offshore newbies making is that they assume that they must incorporate where their customers are. It is worth considering where your customers are located, but it may not affect where to incorporate.
If you own a frozen yogurt stand, where your customers live is important because it’s also where your business lives. It is hard to argue that a business physically planted in London shouldn’t pay tax in London.
However, for location independent and internet businesses, your customers may be irrelevant. If you sell all around the world, then you will likely have your choice of a whole range of venues. If you sell into primarily one country, you may need to ensure that your structure is compliant with that country.
However, there are ways to create an offshore structure that allows you to sell into one country without paying tax there. The issue is determining where your “nexus” is, and how each country your customers live in deems your activities there.
On a totally separate issue, if your customers are American companies who are uncomfortable wiring money to a Belize bank account, then a Belize company may not be the best idea even if it is acceptable from a tax perspective.
Lastly, some countries – namely those offering IBCs, or international business companies – forbid you from selling to people in their country as part of enjoying a zero-tax rate. Belize corporations are taxed at normal income tax rates, but Belize IBCs favored by offshore businesses pay zero tax… so long as they don’t do business within Belize. So make sure you don’t have any Belizean or Gambian customers before you set up shop.
4. Where do your employees live?
Where your company does work is an important factor in where to incorporate. That’s because one of the key aspects of business taxation is where the work is being performed.
You can set up as many offshore companies as you want, but if your work is being done in the United States, you’ll almost surely owe United States tax. The same goes for your employees and independent contractors. You can hire US citizens to work for you, but if they are doing their work from US soil, you will likely have an issue.
The same goes for some offshore jurisdictions. Some Hong Kong companies may qualify for an offshore tax election, but if you or your employees are performing the work from Hong Kong, you will be asked to pay corporate tax there. That means that you should consider where you and your employees live, will do work, will meet clients, and will sign contracts before incorporating.
5. How do you collect money?
If you receive money through wire transfers, your search for the best country to incorporate offshore will be easier. Even though many of the island jurisdictions come with a dwindling list of banks that accept their companies, you will likely still be able to find some bank to accept you, albeit perhaps not the most stable, easy to deal with, or fee-fee one.
The bigger issue is if you need a merchant account to accept credit cards, or a PayPal account, or other customer conveniences. Most offshore companies are relegated to high-risk merchant providers with poor ease of operations, slow settlement times, and high fees.
For example, even though Hong Kong companies can get merchant accounts of tepid quality, they are only available to local businesses paying tax. Stripe is now in Hong Kong, but they also require a site visit in most cases, meaning you’ll be taxed if you use them.
Traditional offshore companies in places like Mauritius or Labuan or Nevis have little infrastructure for merchant accounts, and PayPal accounts in foreign countries often come with far more restrictions on withdrawing cash. As a result, you may need to consider a simple two-part offshore company structure in order to accept credit cards.
6. How do you personally get paid?
How do you take money from your company? This is potentially an issue when determining where to incorporate overseas, because it may be important for your home country and offshore company tax systems to “match up”.
Recently, I worked with someone who was living and working in Hong Kong using a Hong Kong company. As many company owners there do, he took dividends in lieu of a large salary because Hong Kong allows its company owners to do that.
However, this gentleman was also a US citizen, and although he qualified for the Foreign Earned Income Exclusion to exempt about $102,000 per year in earnings, a dividend – especially from a Hong Kong company – is not “earned income” nor tax-advantaged in any way.
Basically, he was doing the smart thing in Hong Kong, but a rather unwise thing based on his US citizenship. When forming an offshore company, it is important to understand how it will interact with other obligations you have. If your systems are too different, it could create complications. The last thing you want is to have pieces of your puzzle with directly opposite objectives.
7. Do you sell services or physical or digital products?
If you sell services, you should carefully consider where the services you sell are being performed, and for who they are being performed. If you are selling digital products, then you may likely claim that you are to be taxed where the products are dreamed up and produced.
In both of these cases, “offshore” may be the answer to both, and you may be able to pay zero tax.
However, if you sell digital products, you may be subject to GST, VAT, or sales tax. In other cases, physical products are subject to tax, and in other cases still, services may be subject to VAT.
For example, Australia now demands payment of GST by any business who sells more than about $50,000 in digital products per year there ( ”Netflix tax”). On a larger scale, the European Union has created a VAT MOSS system that requires anyone selling digital products to Europeans to go to great lengths to determine which VAT rate to collect and remit.
While VAT or GST obligations may not change your best country to incorporate, it’s worth factoring in. In some cases, entrepreneurs trying to be smart incorporated offshore only to realize that incorporating onshore would have actually been cheaper after all of the compliance costs.
8. Where are your products located?
If you are fulfilling physical products, you may or may not need to take their location into consideration. The type of warehouse you use and your relationship with the manufacturer may both be potential issues.
For example, I recently worked with someone who manufactures his own personal care products. His tax strategy involved taking into account the manufacture, storage, and logistics in the country where the products were made. In his case, it was worth paying a little tax in order to maintain his manufacturing advantage while reducing tax on everything else.
However, if you are an Amazon FBA seller, Shopify seller, or drop shipper, you likely have a different scenario in which you don’t touch the products but still need to consider the supply chain in determining your offshore structure.
Again, merely selling into a country may not necessitate paying tax there, just as storing products in a warehouse in the United States or Europe does not guarantee you will pay tax there either. However, if you are shipping and storing physical goods, it is important to consider the logistics and countries involved to make sure you don’t get a surprise later.