Tax Considerations When Incorporating Abroad
For better or worse, corporate inversion transactions and other tax avoidance tactics can minimize the tax burden on companies that incorporate abroad. Although there are plenty of critics, tax considerations when incorporating abroad make it a viable option for many American companies.
There are a lot of reasons why a U.S.-based company might choose to incorporate outside of the country.
Everyday, legitimate American firms pursue foreign incorporation for asset protection, corporate anonymity, reduced regulatory requirements, and other benefits.
Yet one of the most common reasons U.S. businesses incorporate abroad is for the tax benefits. As the tax burden on U.S. corporations has increased, more and more American companies have been willing to risk the possibility of negative PR exposure in order to take advantage of the tax shelters and strategies that are available to businesses who incorporate in foreign jurisdictions.
Foreign incorporation isn't a bed of roses - the tax benefits of foreign corporation have come under the scrutiny of both the government and the business community. But for certain companies, the tax considerations when incorporating abroad make offshore relocation worthy of a closer look.
How does foreign incorporation work?
There are three ways American companies can tap into the tax benefits of foreign incorporation:
- 1. Initial Incorporation. Some companies choose to incorporate offshore from the outset. While this eliminates the need for fancy legal footwork later, it adds another wrinkle to the incorporation process at a time when business owners should be focusing on other things, i.e. strategic planning, startup funding, branding, overcoming barriers to entry, etc.
- 2. Reincorporation. Parent corporations sometimes elect to switch to another corporate jurisdiction as a way of managing U.S. tax requirements. By effectively transferring their corporate status to a foreign tax haven, these companies can continue to do business in the U.S. while receiving offshore tax benefits.
- 3. Inversion. Another technique employed by U.S. companies is to establish a subsidiary in a foreign jurisdiction. Parent companies and subsidiaries often switch roles - if not legally, then at least in practice. Called inversion, this strategy allows revenues to be funneled through the foreign subsidiary as a way to manage U.S. tax liabilities.
What are the benefits of offshore incorporation?
Offshore incorporation has the effect of sheltering foreign operations and the income they produce from taxation. In an inversion scenario, the only revenues that are taxed are those that enter the U.S. in the form of dividends. Critics argue that companies who benefit from intangible benefits like access to skilled American labor and technologies should pay tax, and Congress continues to enact legislation that limits tax evasion by foreign incorporated firms. It goes without saying that you should consult with competent legal counsel before you initiate the process of incorporating abroad.
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