US Company Formation

It is not generally known that since the federal tax reform of 1986 (and in spite of President Clinton), the U.S. has virtually become a corporate tax haven. Consider this: The federal income tax is only 15% on corporate net-profits of up to $50,000. The tax then increases in small increments, but stops at 36% (and only if you make over $10 million per year in net profits). Nevertheless, it should be noted that this tax structure applies only to the federal income tax, and that many U.S. states have individual tax structures that can be most unfavorable for the conduct of corporate business. However, most of the states recommended by us have no corporate income, sales, value-added or inventory taxes. When you consider that a corporation in Germany, for example, must pay an income tax of over 50% plus a hefty franchise tax, then our tax rates should sound pretty attractive. For instance, if a German corporation has a net profit of DM 100,000, then the German tax officials kindly permit it to keep nearly DM 30,000. If you were to pay taxes on the same DM 100,000 through your U.S. corporation, the corporation could keep over DM 80,000 in its own pocket.

How can a European save on taxes with a U.S. corporation?

Since we cannot condone illegal activities, our recommendations should not serve the illegal evasion of taxes but rather the legal avoidance of taxes. For this, it is necessary that the U.S. corporation be a legally established company, properly registered with the state of domicile with a U.S. tax number, U.S. telephone number, U.S. street address (not P.O. Box), U.S. bank account and a U.S. board of directors. If these conditions exist, there are many interesting possibilities for tax sheltering.

If the U.S. Corporation were to own all or parts of your overseas business, the appropriate profits could be channeled through a U.S. bank and would be subject only to the lesser U.S. tax. To allow funds to flow back into your own pockets, you could pay yourself a salary or borrow money from the U.S. corporation and -since you’re certainly well acquainted with the owner- pay it back at highly favorable rates and terms.

If you already own, or wish to purchase, property like aircraft, yachts, machinery, real estate, etc., but do not wish to pay large sales or VAT taxes, or wish to remain anonymous, the corporation can serve as the purchaser and owner of these objects. If any of these items need to be registered -such as aircraft or yachts- we could register them under an additional address in a state without sales or use taxes.

If you buy and sell real estate, there is the possibility of avoiding the capital gains tax (tax on profits in the sale of real estate) and property transfer tax. For this, one sets up a U.S. holding company, i.e. a parent company, and a separate subsidiary corporation for each piece of property. The property one buys is registered in the name of the subsidiary corporation. (This is possible in Europe, even in Germany where the tax authorities, after collecting the property transfer tax, have to issue a clearance certificate (cf. BHF, decision of June 12, 1995 = RIW 1996, pp. 88.) allowing the property to be registered in the name of the corporation.) Later, when a buyer is found for the property, nothing happens in the registry at the time of the resale, since not the property, but the corporation is sold. Thus, the transaction is not subject to transfer or capital gains taxes.

Assuming that your country allows the depreciation of certain business property (machinery, cars, buildings, etc.), that property can be sold to your U.S. corporation at the depreciated price. Your U.S. corporation may then lease the objects back to you at a substantially higher price. Naturally, the corporate profits are subject to U.S. federal income tax (albeit modest), but it is also possible to depreciate these items again, while you deduct your full lease payment from your own taxes overseas.

Another possibility for shifting the tax liability to your U.S. Corporation exists by using the U.S. corporation as a supplier of your merchandise. Here you would have the corporation buy the merchandise from your regular suppliers and then sell it to your company or store at such high prices that you would make little or no profit in your domestic company and thereby avoid a good portion of the taxes in your own country. Naturally, your U.S. corporation will have to pay taxes on the profits it makes, but it will be at the much lower U.S. tax rate.

Please take note that none of the above will work, if the U.S. corporation was not set up properly for your purposes. It is not enough to simply order a corporate shell from one of the many off-shore or Delaware incorporation mills. These folks have little or no knowledge of U.S. or European law. For instance, it is not widely known that under EU law, a company is taxed at the locale where the critical business decisions are reached, regardless of where the company is registered. Since the bylaws of a regular U.S. corporation do not ordinarily reflect a mandatory geographical limitation as to where the business decisions have to be made, our competitors’ customers have to pay European taxes sooner or later. This does not happen to our clients, since the corporate documents prepared by our attorneys specifically state that the critical decisions for the activities of the corporation have to be reached within the geographical confines of the U.S. This naturally presupposes that the corporation has its company address and telephone in the U.S. If not, there might be unpleasant consequences. For example, for the German owner of a Delaware corporation, the Düsseldorf Appellate Court recently refused to recognize the corporate protection (analogous to paragraph 11, sec. 3, GmbHG, and sec.1, clause 2, AktG) and held him personally liable for activities of the corporation, because his corporation had no telephone number or address in a U.S. telephone book (OLG Düsseldorf, decision of December 15, 1994, — 6U 59/94). Such difficulties can be avoided through our telephone/fax service. As you can see, there are endless possibilities of how one may benefit tax wise from the ownership of a U.S. corporation, as long as it is set up properly. In case one also wants to avoid U.S. taxation, there is even a possibility for this by using an Antigua holding corporation (more about this interesting alternative on our brochure). Nevertheless, for any in-depth tax advice for your own particular situation, it is important that you consult with a tax attorney in your country as well as in the U.S.