Zero To Hero: Building a Brand Series
Business Incorporation 101: Part 2
Taxation & Overseas Incorporation
In last week’s blog post, we had a brief introduction on the best legal practices and an overview on US incorporation. Today, we will go into more detail on how to manage your business effectively and also explore some of the best countries where to incorporate.
P.S. This guide is only meant as a resource. While a lot of research has gone into proving helpful and accurate information – We are not lawyers. Before incorporating your business, especially in countries outside of yours, always consult with a qualified professional specialized in international laws & taxation.
The Ultimate Double Taxation Guide
Most E-commerce sellers come from a wide range of countries and sell in a wide range of markets. The most common ones are:
US residents selling in the US, EU & Asia
Europeans selling in the EU & USA
Individuals who either come from other parts of the world and sell in the US/EU
US/European residents who sell in other markets & countries outside Amazon
Most sellers normally pick one market, for example, the US, and start selling there. This is easy because when it comes to tax, you have to deal with:
US Taxation(sales tax, customs, import duties etc.)
Personal Income Tax based on your country of residence
Naturally, as you your business grows, you need to expand into other markets. This is where things get complicated as each country has it’s own tax laws & systems. In particular, when it comes to international tax, double taxation comes into effect.
What is Double Taxation?
Double Taxation is commonly referred to when income taxes are paid TWICE on the same source of income. It normally occurs when income is taxed at both at personal and corporate levels. There are two types of Double Taxation:
1. Juridical
This is when one source of income is taxed by two or more countries. For example, you’re a German resident who sells goods on Amazon US and you get taxed by both US and German authorities on the same income.
2. Economic
This happens when more than one person is taxed on the same income. This often happens when a company has multiple members/shareholders and the same income is taxed on that income(instead of redistributed amongst each member and personal tax is paid).
Important
Double Taxation is often a unintended consequence of international tax legislations. Countries and tax authorities try to avoid double taxation as much as possible and systems are in place to avoid you or your company paying twice on the same income.
International Double Taxation
International businesses are often faced with issues of double taxation. Income may be taxed in the country where it is earned, and then taxed again when it is repatriated in the business’ home country. In some cases, the total tax rate is so high, it makes international business too expensive to pursue.
To avoid these issues, countries around the world have signed hundreds of treaties for the avoidance of double taxation, often based on models provided by the Organization for Economic Cooperation and Development (OECD). In these treaties, signatory nations agree to limit their taxation of international business in an effort to augment trade between the two countries and avoid double taxation.
What is a Double Tax Treaty? Does my country have one?
Many countries around the world have signed agreements or treaties between them as a means to avoid double taxation. These are based on models provided by the Organisation for Economic Cooperation and Development(OECD). This is a life-saver for business owners as they often have issues of the income being taxed in the country where it is earned and then taxed once again once it’s moved to the owner/s home country(or residence).
To find out if your country of tax residency has a double taxation treaty with the country you do business in, check on both countries tax authority website. You can also search on Google by typing: “Country” + “ Double Tax Treaty” – replace the country field with the country you do business in(example: USA).
How can I avoid Double Taxation?
To avoid double taxation, there are two ways:
1. Speak with your accountant/CPA so they file for taxes correctly on your behalf.
2. Have a limited liability company(or the equivalent) – Limited companies have the ability to pass on their profits to their owners and pay personal income tax on the earnings.
The Advantage of Having a US LLC
As we saw last week, having a limited liability company in the US has a lot of benefits. However, perhaps the biggest benefit of all is the ability to make the LLC a disregarded entity. This means that any profits the LLC makes, get passed onto the member/s – so basically the LLC in itself never gets taxed, only it’s owners. This is perfect for those who are non-US residents and are part of a double taxation treaty with the US, as you can get taxed on your personal income in your tax residency.
Keep in mind that you still have to file a tax return with the IRS at the end of each financial tax year(normally April). This is a great benefit and when you form your LLC, is something you should definitely discuss with your CPA.
Tax regulations can be very confusing, unless you have experience in handling taxes on your own, always consult your CPA, accountant or tax authorities first. Double taxation can be avoided if there is a structure in place.
In the event you’re taxed twice on the same income, this can always be refunded back. However, it’s a long and bureaucratic process which can greatly reduce your cash flow and delays to your business.
Other Limited companies in other countries have the same structures as a US LLC, so make sure you’re aware of the tax laws before incorporating in a jurisdiction where there is no Double Taxation Treaty!
Offshore Incorporations
There is a common misconception surrounding foreign incorporations being labelled as tax havens. This is all depends on where you incorporate and how you declare tax – I would always recommend declaring your offshore company with the tax authorities back home. A good idea is to incorporate either:
Where the majority of your business operations will be
The country of residency
Countries which have a very good legal, banking, and taxation systems – such as Singapore and Hong Kong.
Let’s look at some of the best offshore incorporation structures and what they offer.
British Virgin Islands(BVI)
Warning: BVI has been recently in the news due to tax evasion. Currently, these jurisdictions are at a greater scrutiny from tax authorities in the US and Europe. Should you still want to incorporate here, consult with the tax authorities back home and make sure you declare your registered offshore companies to comply with the law.
Other jurisdictions under the public eye are Bahamas, Panama & Barbados.
The BVI are an idyllic paradise islands located in the Caribbean Islands known for it’s super-rich expat community & low tax rates. Here is a complete overview of BVI incorporation:
Main Features
Company documents are widely accepted by major international banks.
Fairly low yearly renewal fees.
Information about the owners, directors and shareholders is not public.
No property purchase restrictions in the BVI & freedom of doing business in any country.
Anyone can register a company in the BVI
Companies incorporated in other jurisdictions can be moved in the BVI
Requirements
Must have a registered address inside the BVI, main address can be in any country. For this, you can easily use an agent or law firm to act as a registered agent.
Minimum member requirements are 1 shareholder and 1 director.
Capital
BVI companies have to issue a minimum amount of shares on their behalf. The maximum authorized capital for 50,000 shares($1 value for each share) is subject to a government fee of $350.
Tax Rates
BVI companies pay zero tax for all it’s members, directors, officers & shareholders. This is what makes the BVI an attractive option.
Annual Fees
Each BVI company must pay the annual renewal fee of around $800 – 1000$. The fee mostly depends if you’re filing for renewal on your own or using a service.
Public Records
Names of the directors, officers and shareholders are not filed with the BVI Register of Companies, not included in the Memorandum and Articles of Incorporation and not available for the public.
There are no accounting and audit requirements for BVI companies.
Time-frames of Incorporation
5 to 8 business day from making the Apostille & documents. Most third-party incorporation services can register you in 1-2 business days upon receiving all documentation.
Overall Costs
$1200 Incorporation Fees & $800-$1000 yearly renewal. This doesn’t include any share capital for the company.
Estonia E-Residency
The Estonian E-residency program is not quite an incorporation – However, it’s specifically designed to act as a digital identity. This is perfect for location independent entrepreneur who need a “base” in a European country. The E-residency is not a residency program, however, you can register an Estonian company which is also very attractive.
Features
Digitally sign documents and contracts.
Document verification and encryption
Form an Estonian company online. You need an Estonian address & bank account(which you have to fly in Estonia to open).
Merchant Accounts available
Tax Filing can be done online. However, tax residency must be established first.
In addition to this, people who enroll in the e-residency scheme will receive a smart ID which provides:
Document encryption & authentication
Digital signing of documents
Digital Identification
This scheme is truly unique as it provides a way to shift taxes & documentation entirely online. As more people are working from home or becoming digital nomads, having an online ID which provide top security features is a must. The E-residency only costs around €100 and the process is done entirely online.
Singapore
Singapore is perhaps one of the best places to incorporate since it’s very entrepreneur-friendly and a strong financial centre of Asia and worldwide. The main attractive thing about Singapore is that it’s own government pushes for new entrepreneur to register their companies there. This makes the process more streamlined and you get a lot of help. The government website also provides a lot of information.
A limited company in Singapore is called a Private Limited Company and each registered company must bear the suffix Pte Ltd in all official documentation.
Features and Benefits
The Pte Ltd is a separate legal entity in Singapore. This means that the company liabilities are completely separate from it’s members and shareholders(ie You)
Singapore’s Pte Ltd. outlives the lives of its shareholders. Meaning the company stays active even if the owners pass away.
Registering a company in Singapore will give you a credible image and makes it attractive for business and investors.
When registering the company you have the option to pass the company to a new ownership if the need arises. This is a great feature as you can easily pass company ownership to investors and buyers in the event of an exit.
The first 300,000 SGD earned are eligible to a government tax credit of 50-100%, for incomes over 300k SGD, the corporate tax rate is 17%.
If the profit is already taxed on an income level, the Singapore PTE Ltd. Frees you from any capital gains.
If you’re not a resident of Singapore(ie a foreigner), you MUST appoint at least 1 local director – which can be either a Singaporean/a citizen or PR. However, if you want to shift operations to Singapore, you can obtain an EntrePass visa – Singapore’s employment pass.
Registration Process and Requirements
The entrepreneur must choose a unique business name for the business, preferably with an available domain name. A name check can be done and reserved also.
A Singapore Limited Company can have a minimum share value of 1 SGD, there is no maximum capital share value. The company can have a maximum of 50 shareholders.
Company must have a real address in Singapore and the local person appointed as director must be 18 years or older.
You must appoint a local secretary no later than 6 months from the date of formation.
Some private limited companies will require enlisting auditory services. This can be checked before applying for registration.
Some sectors of the economy require government approval before incorporating. Some of these sectors are finance, banking and insurance.
If you’re planning to set up the Singapore Limited Company as an offshore company, you must use a third-party service to file the application process. Foreigners are not allowed to file for registration for there own. Singapore has a visa-free policy of up to 90 days for most nationalities and you don’t need any special permits to form the company.
Hong Kong Company
Hong Kong has long been considered a financial Mecca of Asia and it’s actually the place I would recommend to register an offshore company. Their banking system is excellent and it’s a very entrepreneurial country. The process is getting a bit more difficult, however, with the proper guidance, the incorporation process is fairly straightforward.
The most common type of business entity registered in Hong Kong is a private limited liability company. Limited liability companies are a separate legal entity for its owners compared to structures such as sole proprietorship. Anyone above the age of 18 can set up a company in Hong Kong.
I will list all the process and requirements for registering a HK Limited Company. Due to the complexity of the process and tighter regulations, it is recommended you engage a professional firm to handle the process.
Requirements for HK Companies
Company name – The name must be unique and needs to be approved before proceeding with incorporation.
Directors – Unlike Singapore, directors can be from anywhere in the world. You must appoint at least 1 company director and there is no requirement for the director to be a nominee shareholder in the company. Directors must be of at least 18 years of age and board meetings can be held anywhere in the world.
Shareholders – HK Limited companies allow a minimum of 1 and a maximum of 50 shareholders. There is no residency requirement of the shareholders and a single individual can own 100% of the business. Nominee shareholders can also be appointed and shares can easily be redistributed and sold.
Company Secretary – The appointment of a company secretary is mandatory. The company secretary must be a resident in Hong Kong or have it’s official office/place of business in HK. The company secretary must be a different person in the case of a sole director or shareholder. The role of a company secretary is to maintain the company books and ensure compliance with the laws of Hong Kong.
Share Capital – The general norm is to have 1 share per owner, the currency of shares can be in any major currency and if transferring shares they are subject to a stamp duty.
Registered Address – To be able to register the company, you need to have a registered Hong Kong address. This must be an actual address and not a P.O. Box..
Public Information – Information about the company and it’s members is available to the public in compliance with Government laws. If you wish to keep details and names hidden, you can consult with a professional firm.
Taxation – Profits tax is set at 16.5% for profits made in Hong Kong. Only profits and income earned in Hong Kong are subject to the tax as HK has a territorial taxation policy – Meaning profits made outside Hong Kong aren’t subject to tax. There is no capital gains tax & withholding dividend taxation.
Compliance – It is mandatory for companies to maintain accounts. Accounts must be audited annually by a Certified Public Accountant in Hong Kong. Companies must also file an annual renewal fee and must hold an Annual General Meeting, 18 months from the date of formation. The subsequent years, the AGM must be held every 15 months.
Time-frame – It usually takes between 5 to 7 days to incorporate in Hong Kong.
NB: Although there is no official requirement to be physically present in Hong Kong, you must be present in order to get a Business Bank Account. It’s difficult(if not impossible) to get a bank account remotely.
Documents Required
To set up a company in Hong Kong, the following documents are required:
Articles of Association of the company. A copy is normally provided by the firm assisting the incorporation process.
Incorporation Form that includes all of the following:
Company name
Registered address
Description of your business & sectors you will be operating in
Personal Details of shareholders, directors and company secretary
Member Liability
Share capital – Amount & No. of shares
If directors or shareholders are non-residents of Hong Kong, these additional documents are needed:
Copy of passport
Overseas proof of address
Bank Reference Letter
For resident shareholders and directors:
Copy of Hong Kong identity card
Proof of address
For corporate shareholders and directors who are registering a subsidiary in Hong Kong:
Copy of parent company registration documents such as Certificate of Incorporation and Articles of Association
NB: If your documents are not in the English language, they must be professionally translated.
Further Assistance
If you need further guidance on the best policies of registering a Hong Kong Company, Manuel & Michael Michelini from Global from Asia have just released a brilliant Udemy course. They explain all the steps in detail and Michael has extensive experience helping online sellers register companies in Hong Kong.
You can check out the course here:
https://www.udemy.com/how-to-start-your-international-business-via-hong-kong/
*Please note that the link is an affiliate link
Conclusion
I hope this very long blog post provides some clearance and options on incorporation. This can be a really confusing topic, especially when starting out. This is one area(the others being taxes, accounting & IP) where you should seek out professional advice due to the complicated nature & international laws.
However, the aim of this series is to guide you in the right direction and be protected from the legal aspect. The correct incorporation structure can have a lot of benefits for you and your business – whether it’s tax credits or legal protection of your personal assets. In the next blog post we will move over to business banking where we will explore some of the best accounts & practices to save you money.
I would love to hear your feedback on this series! Both myself & Manuel are trying our best to provide you the tools and information to expand your business, so any suggestions are welcome
All the best & happy selling,
Duncan