What? Was it a slow news week last week?
Nothing else newsworthy to write about? [jk] That can be the only
explanation for this piece that appeared in this weekend's NYTimes, "How Delaware Thrives as a Tax Haven". There are
two issues pushed in the article: first, the "tax haven" thing. Firms
use Delaware corporations to avoid state, not Federal, tax liabilities on
trademarks, patents, and investments. Here's the strategy as they described in
a 2009 NY Times piece ("Critics
Call Delaware a Tax Haven"):
Corporations are allowed to establish these shell
companies in Delaware, as well as in Nevada and Wyoming.
Typically, they then transfer to these subsidiaries
ownership of things like trademarks, patents and investments. Delaware does not
tax holding companies set up to own and collect income from such lucrative
The parent companies of these shells usually pay
royalties to the Delaware subsidiaries to lease back those assets. By doing so,
they can claim income tax deductions in states where they actually do business.
The shells also funnel profit, tax free, back to their parents, in the form of
dividends and loans.
OK. So I guess one can get some tax savings at the state
level by structuring this way. But, is
that news? My guess is no. How can it be? The Times published a 2009
piece on the exact same subject.
In any event, the tax thing is just a set up for the
second issue raised in the article, which is the more nefarious one...Delaware
corporations are secretive, more secretive than Cayman corporations!
Big corporations, small-time businesses, rogues,
scoundrels and worse - all have turned up at Delaware addresses in hopes of
minimizing taxes, skirting regulations, plying friendly courts or, when needed,
covering their tracks. Federal authorities worry that, in addition to the
legitimate businesses flocking here, drug traffickers, embezzlers and money
launderers are increasingly heading to Delaware, too. It's easy to set up shell
companies here, no questions asked. ...
What does it take to incorporate a company in Delaware?
Not a lot, tax experts say. Shell companies - those with no employees, no
assets and, in fact, no real business to speak of - are remarkably easy to
establish here, and it doesn't always matter who you are or what business you
are in. Viktor Bout, the Russian arms dealer known as "the
merchant of death," used two Delaware addresses. In April he was sentenced to
25 years in prison on terrorism charges resulting from an American sting
Did you know that if someone incorporates a business in
Delaware, that no one, not even the state of Delaware knows who the beneficial
owners are! And that's the reason why Delaware is such a popular location
for incorporations. Wait ... what?
Now, if Delaware were the only state in the U.S. to
shield the identities of beneficial owners, I might be interested in the rest
of what this article has to say. But, let me just state as a matter of fact,
most - if not all - states in the U.S. have the same basic rule with respect to
beneficial ownership. And that is, the identities of beneficial owners of
corporations incorporated in the US states are not known to the state
government by default. Can you imagine what the paperwork burden would be on
the state and start-ups if everytime an employee at a start-up was issued an
immediately exercisable stock option the corporation had to make a report to
the State? Uh ... hellooo!
It's really a non-starter of an idea and the resistance
to the idea won't come primarily from Delaware, it'll come from California,
home of most of America's start-ups. Anyway, if you want to go after anyone for
excessive privacy with respect to corporations, why not go after someone who
really deserves it, like Nevada. That was their schtick for a long time. Not
only do you not have to report the identities of your beneficial holders, you
can report "nominee" directors and officers on your annual reports. That's
even more secret than Delaware!
Michal Barzuza has a very good recent paper on Nevada
as a "liability-free zone" for incorporations. The Times should
have started there rather recyle an old story in a "slow news week".
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