Drawbacks of Foreign Incorporation
The prospect of foreign incorporation is an attractive lure for many business owners. Are the benefits of incorporating abroad real? Sure -- but there are also several drawbacks of foreign incorporation that need to be explored before you take your company offshore.
Business isn't getting any easier these days and companies need every advantage they can get in order to remain profitable.
As a result, more and more American businesses are warming up to the idea of foreign corporation.
Without a doubt, incorporating abroad does have advantages for American firms. Asset protection, corporate anonymity, and a significantly reduced tax burden are just a few of the reasons why U.S. businesses choose to incorporate in a foreign jurisdiction.
However, incorporating offshore isn't completely painless. There are also some drawbacks of foreign incorporation that can severely impact your company.
- Legislative restrictions. Some foreign jurisdictions have enacted anti-tax haven legislation that restricts the activities of offshore corporations. Additionally, legislation passed by Congress in 2004 lets the U.S. government treat post-inversion foreign-incorporated parent companies as domestic corporations for tax purposes, effectively negating the tax advantage for many corporations.
- Business restrictions. The limitations placed on expatriated corporations vary from one foreign jurisdiction to the next. Yet it's not uncommon for foreign jurisdictions to restrict business activity within the country. It's not that you can't engage in business activity–you'll just be subject to a higher level of regulatory and licensing requirements if you do.
- Due diligence. If the corporation is sold, a foreign incorporation complicates the process. Tracking down and verifying offshore assets can be tricky, and you will find that establishing reputable assets (e.g. bank accounts) requires many more steps than it does for a business that is incorporated in the U.S.
- Probate. When a shareholder dies, the estate needs to be admitted to probate in the U.S. and the foreign jurisdiction. The result is an added layer of costs, delays, and outright inconveniences that most shareholders would rather avoid.
- Perception. The biggest drawback of foreign incorporation is probably the stigma that's attached to offshore activities. Like it or not, offshore corporations are often a shelter for illegal activities like fraud, money laundering, tax invasion, and even the financing of terrorist activities. Illegal activities aside, many American consumers also view offshore incorporation as an unpatriotic act. At a minimum, the decision to incorporate in a foreign jurisdiction should be paired with a preventative PR campaign.
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