I love to write articles based on the phone calls and emails that come in. One of the most difficult consult questions is, “what’s the best structure if I plan to raise capital in an offshore company?”
This question often gets rephrased as, “what structure will an investor feel comfortable with? or If we raise money in the US or Asia, what are investors looking for if we’re a foreign business?”
If money’s no object, the answer is simple enough: Investors are used to Hong Kong, Cayman Islands, and the United Kingdom. The problems are the high costs of incorporating and annual compliance. For example, Hong Kong requires annual audited financials and tax filings. Both Hong Kong and the UK are getting aggressive with tax audits. All three make it nearly impossible to open a bank account.
Even our Chinese clients find doing business in Hong Kong a challenge. How do you think the rest of us will fare? Seriously, every client we have from China and HK contacted us because of the high costs and headaches of doing business in Hong Kong.
Likewise, if you don’t care about your tax rate, you can incorporate in Delaware. It’s fast and cheap, but comes with a 35% corporate tax rate and major compliance costs. Also, in most cases, you’ll need a US person to open the bank account for you.
If you’re on a budget, and don’t want to deal with compliance, I have two options. The first is for true startups operating on a shoestring and the second is for established businesses with at least 5 employees.
Startups Raising Capital in an Offshore Company (Angel Round)
When you’re on a tight budget, look for a zero tax low cost country you can sell to investors. Find one that you can build a story around.
For example, I had a client from New Zealand with a tech business. We went with the Cook Islands, which is a protectorate of New Zealand. We got a zero tax and zero reporting country and a story we could sell.
It make sense that this business is incorporated in Cook Islands. Also, because legal disputes involving CI companies are heard by NZ courts, it gives investors an added level of comfort.
Another popular jurisdiction is Panama. We can build a story around the low cost of labor, solid banking services, top notch technology, quality low cost labor, and tax free zones like Panama Pacifico. These benefits, along with the fact that Panama does not tax foreign source income, allows us to build a solid explanation for investors.
If you’re going to raise capital in an offshore company, make sure you keep proper books and records. Hire an in-house accountant from day 1 and run the business as if you were in the United States.
That is to say, keep track of all income and expense. Hold on to receipts and prepare monthly cash flow statements. Operate the business as if you are going to be audited by the taxman every year to be prepared for investor due diligence down the road.
Assuming you’ve been keeping track of income and expenses, I also suggest you have an accounting firm prepare a financial statement before you attempt to raise money. Professional financials, especially audited financials, will help to balance out the risk or negative connotations of operating through an offshore structure.
Before moving on the established business, a quick comment on the Cayman Islands:
It’s near impossible to operate a business through a Cayman shell company. However, if you’re planning to move to the islands, and your business qualifies for their tax and visa waiver program, Cayman can be a good option.
Yes, living in Cayman is expensive, but it’s a solid business environment with many major investment funds, companies planning for an IPO, etc.
In 2015, Cayman passed a couple laws that opened up the visa, work permit and tax laws for internet startups. If you want to start a business in Cayman and live on the Islands, see: Move Your Internet Business to Cayman Islands Tax Free
Established Business Raising Capital in an Offshore Company (Venture Round)
If you’re a business that can support at least 5 employees, then I have a unique option for you. Setup your business in the US territory of Puerto Rico. This gets you a great tax deal not available offshore and is very easy to sell to US and Chinese investors.
If you have an internet business, or one that provides a service from Puerto Rico to persons or companies outside of Puerto Rico, you can set up on the island. For more, see Why Puerto Rico is the Top Offshore Jurisdiction for American Businesses.
This gets you a 4% corporate tax rate, a tax holiday guaranteed for 20 years, and an average cost of labor lower than any US state.
Often the most important benefit of incorporating in Puerto Rico when raising capital for an offshore company is the ability to bank and transact in the United States. Your Puerto Rican corporation can open a bank account at just about any bank in the US.
For example, we have clients with accounts at Chase, Wells Fargo and Bank of America. These are held at branches throughout the US, typically where the client lives.
It’s impossible for an offshore company to get a US bank account. A Puerto Rico company allows you to bank wherever you like (or wherever your investor demands).
To compare the tax benefits of Puerto Rico with those available offshore, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion
I hope you’ve found this article on raising capital in an offshore company to be helpful. For more on structuring an offshore company or Puerto Rico business, please contact us at email@example.com or call us at (619) 550-2743. All consultations are free and confidential.