The legal part of this is trivial. Form a corporation somewhere. Delaware. Meh. (It is actually slightly more complex than that, but not MUCH more complex).
The tax side of this is nontrivial.
You sound like you are doing this because you have problems extracting money from your customers. In other words, you have a business process problem. If at all possible I would suggest finding a business process solution to your business process problem.
Here's why. You are solving a business process problem with a legal solution. You are pounding nails with a screwdriver. It is going to create a tax problem for you.
A U.S. corporation (formed in Delaware or anywhere else) is a taxpayer. The Federal government will be looking for a tax return from this corporation. (Form 1120, if you want to look at it). Your money collected from your customers will be flowing into that corporation. That looks like taxable income to the U.S. government.
Now you have replaced your business process problem with a U.S. government tax problem. That's an order of magnitude worse. You can solve tax problems, but it takes time and money to do so. That means lawyers and accountants and paperwork.
So now you have replaced your business process problem with a tax problem, and you have solved your tax problem with an "accountants and lawyers and paperwork and overhead and brain damage" solution.
Is it cost-effective? Maybe.
Then the next thing to consider is State income tax. The U.S. has a peculiar set-up for income tax. The Federal government imposes an income tax. Most of the States impose an income tax. Some cities also impose an income tax (stay the F away from Philadelphia and New York, for instance).
Your Delaware corporation must be doing business SOMEWHERE. "Must be somewhere, can't be nowhere." So you need a physical presence somewhere for your corporation, even if it is only a glorified Post Office Box. You put that in a tax-free location. More money.
In summary: sub-optimal.
OK. If you absolutely have to solve a business process problem with a legal solution, look at this as a possible solution:
1. Check with your tax advisor in Portugal. What type of entity is your company? You want it to be taxed as a corporation as defined in U.S. law. THIS IS ABSOLUTELY ESSENTIAL. (It doesn't matter how your company is taxed in Portugal. We're doing U.S. tax engineering here).
2. Form a Delaware limited liability company. If necessary, file Form 8832 to have the LLC treated as a disregarded entity.
3. Get your authorize.net or whatever account in the name of the Delaware LLC.
4. <the moment of magic> I don't know if this will work or not but if it does, then you win. You want the Delaware LLC to NOT be a "permanent establishment" of your Portuguese corporation as that phrase is defined in the income tax treaty between Portugal and the United States. See Article 5 of the Treaty if you want to be confused. :-)
5. The impact of NOT having a permanent establishment in the USA? Only Portugal can tax your profits. The USA cannot tax your profits even though they are earned in the USA.
6. The objective you are aiming for is this:
- you have a Portuguese corporation deriving profit from U.S. sources.
- The money pipelines through a Delaware LLC which is disregarded for tax purposes, so it is as if the Portuguese corporation is doing business directly in the USA for tax purposes.
7. You file Form 1120-F for the Portuguese corporation, and attach Form 8833 claiming the benefits of the treaty.
- By doing this you are saying to the U.S. tax authorities: "Yes, I have U.S.-source profits but the U.S. can only tax those profits if they are derived from a permanent establishment in the USA and my Portuguese corporation does not have a permanent establishment in the USA. So go bite tires."
That's what I would do.
(I do this in real life but I am not your lawyer, this is not legal advice, you'd be a damn fool to rely on random postings on a website to make critical financial and business decisions, etc. etc.)
Thanks a lot, Phil. That's a good piece of advice.
The Authorize.net was just an example where we felt like we couldn't relate to everyone else in the industry when searching for a solution for that problem. Now, we've solved that and "replaced" Authorize.net for one of the european companies that do pretty much the same.
So, my post wasn't focused on that specific problem, but on incorporating in the US, mostly because that's where our clients are and if doing it on Delaware would allow us to save a lot on taxes: great ;)
So, the company we have in Portugal could even not relate to the one we would create in the US, by now it is just the common umbrella under which we're been doing business (both client work and that specific product I've mentioned).
So I don't really know how this would work, but isn't this whole approach predicated on the idea that US corporate tax rates are higher than Portugal corporate tax rates (which on the face of it seems unlikely)? If the opposite is the case, and it's advantageous to the business to build up a US presence, wouldn't it be better to have as much income as possible taxed as US corporate income, and repatriate as little as possible to Portugal?
Yes you want profits to be earned in the lower tax-rate jurisdiction. What you describe is the typical tax strategy: direct profit to the lower-rate country then leave it there.
The economic value is in deferral of tax. A dollar of tax paid next year has a lower present value than a dollar of tax paid today.
You need a lot of deferred tax to make this cost effective. If you are postponing the payment of $100,000 of tax that means you have $100,000 of extra cash in the bank that would have gone to the tax man. What can you do with it? Earn 1% in a bank? Whee! That won't pay for much of Phil's legal fees. :-)
It is a game for big companies.
For most companies, keep it simple is the strategy. Deferral won't generate a big enough economic benefit.
US LLCs are usually a pain in the ass for non US residents. At least, it is for Canadians and I was strongly adviced not to do that by my tax specialist. C Corp is the way to go for non residents afaik.
CRA says LLCs are taxed like corporations. The IRS says they are disregarded or taxed as partnerships (I.e., passthrough). This mismatch causes great pain. :-)
A lot of times this mismatch (an entity is treated as a corporation in one country and something else in another country) can be used for fun and profit. These are called "hybrid entities" and they bedevil the government.
The tax side of this is nontrivial.
You sound like you are doing this because you have problems extracting money from your customers. In other words, you have a business process problem. If at all possible I would suggest finding a business process solution to your business process problem.
Here's why. You are solving a business process problem with a legal solution. You are pounding nails with a screwdriver. It is going to create a tax problem for you.
A U.S. corporation (formed in Delaware or anywhere else) is a taxpayer. The Federal government will be looking for a tax return from this corporation. (Form 1120, if you want to look at it). Your money collected from your customers will be flowing into that corporation. That looks like taxable income to the U.S. government.
Now you have replaced your business process problem with a U.S. government tax problem. That's an order of magnitude worse. You can solve tax problems, but it takes time and money to do so. That means lawyers and accountants and paperwork.
So now you have replaced your business process problem with a tax problem, and you have solved your tax problem with an "accountants and lawyers and paperwork and overhead and brain damage" solution.
Is it cost-effective? Maybe.
Then the next thing to consider is State income tax. The U.S. has a peculiar set-up for income tax. The Federal government imposes an income tax. Most of the States impose an income tax. Some cities also impose an income tax (stay the F away from Philadelphia and New York, for instance).
Your Delaware corporation must be doing business SOMEWHERE. "Must be somewhere, can't be nowhere." So you need a physical presence somewhere for your corporation, even if it is only a glorified Post Office Box. You put that in a tax-free location. More money.
In summary: sub-optimal.
OK. If you absolutely have to solve a business process problem with a legal solution, look at this as a possible solution:
1. Check with your tax advisor in Portugal. What type of entity is your company? You want it to be taxed as a corporation as defined in U.S. law. THIS IS ABSOLUTELY ESSENTIAL. (It doesn't matter how your company is taxed in Portugal. We're doing U.S. tax engineering here).
2. Form a Delaware limited liability company. If necessary, file Form 8832 to have the LLC treated as a disregarded entity.
3. Get your authorize.net or whatever account in the name of the Delaware LLC.
4. <the moment of magic> I don't know if this will work or not but if it does, then you win. You want the Delaware LLC to NOT be a "permanent establishment" of your Portuguese corporation as that phrase is defined in the income tax treaty between Portugal and the United States. See Article 5 of the Treaty if you want to be confused. :-)
5. The impact of NOT having a permanent establishment in the USA? Only Portugal can tax your profits. The USA cannot tax your profits even though they are earned in the USA.
6. The objective you are aiming for is this:
- you have a Portuguese corporation deriving profit from U.S. sources.
- The money pipelines through a Delaware LLC which is disregarded for tax purposes, so it is as if the Portuguese corporation is doing business directly in the USA for tax purposes.
7. You file Form 1120-F for the Portuguese corporation, and attach Form 8833 claiming the benefits of the treaty.
- By doing this you are saying to the U.S. tax authorities: "Yes, I have U.S.-source profits but the U.S. can only tax those profits if they are derived from a permanent establishment in the USA and my Portuguese corporation does not have a permanent establishment in the USA. So go bite tires."
That's what I would do.
(I do this in real life but I am not your lawyer, this is not legal advice, you'd be a damn fool to rely on random postings on a website to make critical financial and business decisions, etc. etc.)
Phil.