One of the big issues at the conference I've been at this week has been the role of jurisdictions like Delaware in the USA, where LLCs (Limited Liability Company) can be incorporated for a few hundred dollars at most that provide many of the secrecy features that tax haven jurisdictions provide. If you don't believe me look at this list from a web site selling these entities:
The Delaware PRIVACY Advantage:
Company ownership need not be disclosed to the State of Delaware.
Company ownership transfers need not be reported to the State of Delaware.
Delaware does not maintain public records of ownership.
Delaware does not maintain a publicly available database of companies' management.
The reporting and disclosure obligations imposed by the State of Delaware are minimal.
The Delaware ASSET PROTECTION Advantage:
Owners of Delaware LLCs and corporations receive limited liability protection.
Owners' assets cannot be seized as a result of the LLC or corporate liabilities.
Due to the privacy protection offered by Delaware, it is more difficult for attorneys to track business owners and owners' assets.The Delaware TAXATION Advantage:
Delaware imposes no income tax on either LLCs or S corporations.
Delaware imposes income tax on C corporations only to the extent that income is earned in the state of Delaware.
Delaware imposes a low franchise tax for small companies.
Delaware imposes no tax on capital stock or assets.
There is no sales tax in Delaware.
There are no Delaware capital shares or stock transfer taxes.
There is no state inheritance tax on stock held by nonresidents of Delaware.The Delaware CONVENIENCE & FLEXIBILITY Advantage:
Delaware is one of the least expensive states in which to form an LLC or corporation.
Delaware allows one individual to act as the shareholder, director, and hold all the executive offices.
Delaware LLCs and corporations can be headquartered anywhere in the world.
Aside from a registered agent address, owners are not required to maintain a physical address within the state.
Company records do not need to be physically located in the state of Delaware.
Stock can be transferred instantly and privately, without filing a public notice.
You do not have to be a US citizen to form a regular Delaware C corporation or LLC.
Delaware does not impose a minimum capital investment requirement for LLCs and corporations.
Delaware's Secretary of State office offers a wealth of information for managing your LLC or corporate standing.
Delaware LLCs and corporations offer generous protection (sometimes called indemnity) from personal liability.
Unlike most other states, Delaware corporations can easily be converted into LLCs and vice versa.
Delaware LLCs and corporations can be formed without coming to Delaware using an online incorporator
This is blatantly abusive. There are some 4 million of these corporations. Admittedly that's 0.016 per head of population in the USA, whereas the BVI has 33 abusive companies per head of population, suggesting that there is much more likely to be local economic use of the Delaware LLC than anything the BVI has to offer (and this is a critical difference - an abusive structure for use within a state is a domestic issue, one for use outside your state is an international concern) but however it is looked at, the existence of these entities, which can be incorporated from outside the USA, is a massive problem and a legitimate cause for complaint by those whom the USA is rightly targeting with measures such as the Stop Tax Haven Abuse Act.
And for those who complained about the fact that I have not mentioned them before - that's only because I am a little UK-centric on this site. For those who doubt my commitment to ridding OECD countries of tax haven characteristics, I suggest you look at my commitment to ridding the UK of its domicile rule before being too loud in your condemnation. What is more, that campaign has delivered some (albeit partial) results.
On the same basis I'm more than willing to lend my support to any campaign to get rid of the Delaware LLC and it's like in other US states. They have to go.
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I can understand other US States being annoyed about Delaware corporations, but not why you would worry about them internationally. As US corporations, they still have to obey the Federal Tax Code: they don’t get any relief from that.
Tim
I’m going to assume that you are writing with serious intent, but if that is the case your comment baffles me.
If a Delaware LLC is used to ensure that tax is not paid in a country other than the USA where that LLC might actually be trading precisely because the Delaware structure hides the details of the ownership, management and accounting of that entity from view so preventing accountability for tax in the country where it does really trade then of course that structure is a danger internationally.
It is a tax haven structure. These are always dfangerous to a country’s tax revenues. Don’t you agree?
Richard
But you’re subject to the US Federal Tax Code: why would anyone be quite so barmy as to try and escape corporate taxation by locating in a jurisdication with corporate income tax rates of 34-39%? Especially given the alternatives….
Tim
LLCs are ‘tax transparent’ vehicles.
They need not be subject to US taxation at all if owned by non-resident people / entities with the right ‘tick the box’ elections made
I think you need to brush up on your facts
Richard
Richard, it is only advantageous to inc in Delaware if you are doing business outside the US. Business in the US is subject to federal taxes. PE law is also v strong in the US.
RYK
Your first sentence is the point – this is tax haven activity.
The second is irrelevent, because identifying ownes of Delaware LLCs is so hard who cares if there is strong PE regulation?
The US knows this
Richard
[…] view of my recent comment on Delaware LLCs the following, issued yesterday, is […]
Nice to see you turning your eye to the USA.
Given their track record with
– Data Protection Laws
– International Court at the Hague
I suspect it will be a “mote and beam” approach
in any new laws Obama brings!
Have you seen that Brazil is set to target
Delaware as a tax haven?
Will the EU follow suit?
Tony
I am addressing the EU Parliament next week. I will be referring to Delaware.
Richard
“There are some 4 million of these corporations. Admittedly that’s 0.016 per head of population in the USA”
Delaware as a US state is a jurisdiction in its own right and it only has a population of about 850,000 people (including children), so that means there are 4-5 companies per head of population. You have to ask yourself why people are incorporating outside their own state. I have serious doubts that these corporations are primarily used by residents of other US states, but as is made clear by the rest of your article nobody can actually know what they are being used for.
Richard,
The first thing that baffles me is your stance on taxation in general. There are millions of people, who live very far from the UK and have nothing to you with you, your life, or the direction of the country you reside… yet you make broad remarks about what other countries should and shouldn’t be able to do.
I doubt very highly whether their legislative bodies care for what Richard Murphy, or any of the other 5 billion people they don’t know nor care about, have to say about about how a state 5,000 miles away from them chooses to do business.
Secondly, the Delaware LLC is a corporate vehicle just like any other. The same CFC rules apply to the owners. So what if Delaware doesn’t require its managers to be disclosed?
You forget that a corporation is a CHOICE. If someone wants to knock off the government for tax, they could call themselves John Doe Inc. and charge people money all day long. No books, no records, no filing, no public names, no tax payments. That a state or country (which has no connection to the UK at all, btw) has no requirement that appeases one individual or the government who contracts him, is simply not their problem.
Besides which, you’re just plain wrong about a Delaware LLC. Its only transparent in the sense that taxation is “pass-thru” and no owners are filed with the Secretary of State. If a foreign government were to suspect any tax-related mischief, all they would need to do is bring about a case in the US (where tax evasion is a crime) and a court would haul in the owners. Their identities and records would be turned over in 5 minutes.
If you have any real beef with offshore companies, it should be the likes of the REAL havens that charge $50 a year and let you do whatever you want.
But they, they wouldn’t give a stuff about you either.
Thankfully, I’m not a resident of either country, so people like you have no effect on me whatsoever. Thank God for that.
Mr Knight
Much of what you write is factually wrong
More important – read this site – 55 governments are backing what I and others do in this area
And we expect that to include the US sometime soon
I guess that’s a definition of them not giving a stuff
But not a very good one
Richard
What exactly have I written that’s ‘factually wrong’?
I’ve been using LLCs since the vehicle was first introduced, and I have many businesses in many countries that benefit from them.
Where they’re advantageous is preventing unnecessary snoops (dare I say, such as yourself) from proclaiming rights to other peoples’ property, or how much they ought to be paying to some other entity for no reason other than they were told to.
They most certainly do not prevent any government from discovering the real owners. I know from experience working with law professionals and several clients that a court can very easily probe an audit the structure if business is done in the United States, and thus, filing is required.
If not, as I’ve mentioned, there’s no distinction between a Delaware LLC and say, owning a company in a Caribbean island or any one of the number of countries that will eagerly cater to legitimately structured foreign companies.
Your attitude is dangerous and very, very naive, economically. I have to wonder what your motivation is for such zealotry against this so-called ‘tax justice’ you proclaim. Is your interest strictly financial in an advisory capacity to governments, or were you stung badly yourself and wish to enact revenge on the rest of the world or what?
In my case, a Delaware LLC provides a US presence, which is a benefit to my market. I do not trade in the United States. I am not a resident of a country that taxes my income or my corporate activities, so it doesn’t really matter to me either way.
My question to you, Mr. Murphy, is why should people like me have to cower to the demands of someone like you? This attitude of yours strikes me akin to religious zealotry. Maybe we should burn every non-Christian at the stake whilst we’re at it?
I have to question your motivation… what’s in it for you? Appeasing the governments you work for so you get a pay check?
Of COURSE they agree it’s an abuse. Any excuse to squeeze something more out of it. But once again, consider the people who DON’T live in the countries you reside in or work for… this ‘get rid of it because it’s not fair on us!’ stance is destructive and entirely selfish.
Let’s start with one thing that is factually wrong: the the IRS know the owners of the Delaware LLC
That’s not what I hear
Richard
In response to the last comment, the IRS will know who the owners of the Delware LLC are, if the LLC has applied for an Employer Identification Number which is needed to open a US bank account.
One purpose of a LLC is to separate ownership from management and to provide a vehicle to hold intellectual property etc.
If someone is attacking you with a frivolous lawsuit (and there are lot of these in the Western world) you don’t want to be sued personally.
For example in the UK one small cafe called “The Tea Box” was sued for trademark infringement by a chain of coffee shops in Germany called KaffeeZitiem (or something like that). You may notice that the two companies have totally different names. Regardless of the fact the lawsuit was stupid, it took 18 months to resolve. So basically you want to conduct business via a LLC and not personally to prevent you from being sued personally.
But will the IRS share the information with other jurisdictions who may suspect the Delaware LLC is being used for a tax avoidance (or even evasion!) scheme? Do the new TIEAs require a request for disclosure?