Ask HN: Does it make sense to hold my shares in an offshore company?

5 points by chmac 11 years ago | 10 comments

I'm about to start the process of incorporating for a startup. The company itself will be in the UK or the US. However, I'm considering creating an offshore company (Honk Kong or New Zealand maybe) to own my shares. If we ever sold the company, my offshore co would make the profit, receive the funds, and then I'd be able to keep the profit offshore and only pay tax when I bring the money into whichever country I'm living in.

Does that make sense as a strategy? I'm assuming more founders would be doing this if it was a smart strategy, I'm struggling to find any info online, which leads me to think it's not common practice.

Hoping to put off any discussion of tax dodging, my goal is not to avoid paying taxes, but to choose when to pay them. I don't necessarily want to pay capital gains at the time of the sale, especially if I want to reinvest in other businesses, etc.

rlucas 11 years ago |

No. You are trading uncertain gains of tax avoidance (to cast it in the nicest possible terms) for the certain cost of complications and distraction.

You will certainly incur several thousand dollars in immediate costs for legal advice, filing fees, etc. You will have to pay a registered agent in a foreign country, etc., on an ongoing basis, which could be several hundred to a few thousand dollars per year for effectively forever.

You will also have potential issues with having to answer questions about whether you hold any financial assets offshore in the future. If you are, or become, a U.S. taxpayer, you have to disclose if you have aggregate of over $10,000 in overseas holdings. Including the holding company. You can guarantee that this makes you of much more intense interest for audit. If you lie about it, you set yourself up for penalties and possible criminal charges.

It will also just look weird to investors, company auditors, etc., if some offshore entity holds the shares instead of you. It won't be necessarily suspect, but it will be a distraction. Unless you have a substantial personal fortune already, in which case you likely already have estate-planning or tax-planning advisors and entities formed, it will just look bizzare.

In general, for a U.S. entrepreneur starting at zero and concerned about tax minimization, making sure you get long-term capital gains treatment and get your 83(b) election right is the most important. Next is trying to get Qualified Small Business Stock treatment.

brd 11 years ago |

You are tax dodging, there are ways to do so legally so I'm not pointing fingers or saying its wrong but that is what it is. Having said that, if you do choose to go down this path I'd make sure I have a really, really good accountant/lawyer to ensure that everything is legally sound and then I'd ensure that they will be available to watch international tax laws to make sure I'm not burned by the constantly shifting practices of tax sheltering.

In reality, its probably not worth the trouble. Odds are it won't matter to begin with and if it does, investors will likely not appreciate you playing games with your incorporation.

chmac 11 years ago | |

Could it also discourage potential purchasers in the event of an exit? Instead of buying shares from a company in a known jurisdiction, they'd be buying shares from a foreign jurisdiction. Might complicate the legal work, and so on. This was one reason I considered as to why it doesn't seem to be common practice.

hackerboos 11 years ago |

If you are trading in the UK and you are a director of an offshore company then HMRC will treat your UK company as the profit making entity and apply corporation tax.

If you look at Google's and Amazon's corporate structures, they are a lot more complex than a single offshore holding company.

http://www.hmrc.gov.uk/manuals/intmanual/intm208240.htm

chmac 11 years ago | |

Interesting reading, thanks for the link. Who'd have known that HMRC used such elaborate language! :-)

In this case I'm imagining only holding shares offshore, not paying dividends, etc. So not sure if that article applies fully. But it sounds like the intention of HMRC is to restrict the ability of companies to move profits offshore to avoid paying UK tax.

hackerboos 11 years ago | | |

The problem is that you'd still be liable for capital gains in the UK if you sold shares held by your holding company. Keeping profits, from a sale or create by the company offshore via a holding company won't be allowed by HMRC.

The only way to avoid it, in event of a sale, is the leave the country and become non-resident for tax purposes.

This document summarises better than me:

http://www.nabarro.com/Downloads/Offshore_tax_residence.pdf

brudgers 11 years ago |

This is the sort of thing that feels like work, but isn't. Work is harder because it requires making something of value and the risk of abject failure.

If you're really making a startup rather than a lifestyle or small business, you're tax liablity will be zero to a first approximation. And if the business is a successful startup, then you'll have fuck-you-money either way.

But tax strategies do not a successful startup make. You may not even need a corporation at this point.

Good luck.

chmac 11 years ago | |

Thanks. This might be the most compelling argument I've heard so far, that any thought on the topic simply distracts from building something people want.

chmac 11 years ago |

In Germany there's a very simple structure that's commonplace where a UG (a sort of German Ltd) owns shares in a GmbH (a real German Ltd). In that scenario, if both are incorporated at the same time, there's only tax of around 2% if the GmbH is sold.

Higher tax is due when a person withdraws money from the UG, and so on. But for reinvestment in other companies this system is ideal. Unfortunately Germany is also extremely hostile to bitcoin, and we're in the bitcoin space, so incorporating here seems like a bad idea on that front.

IanDrake 11 years ago |

Probably the place to start is with an offshore attorney on Grand Cayman that specializes in this type of setup.