The term haven is defined as a safe place that offers favorable conditions or opportunities. Corporate haven laws are essentially laws that are designed to attract and benefit corporations through various tax and filing incentives. In the past, corporate havens were often located offshore, and not on the continental United States.
However, more recently states have begun to enact and maintain corporate haven laws in order to attract corporations and keep the funding onshore, rather than offshore. In fact, there have been estimates that note states could collect more than $20 billion more each year in corporate income taxes, if they provided competitive corporate haven laws.
States that provide and maintain corporate haven laws are known as corporate havens or corporate haven states. The most notable corporate haven states that maintain corporate haven laws are Delaware, Alaska, Montana, Nevada, and Wyoming. Once again, businesses may choose to incorporate or conduct their business in one state over another, based on corporate haven laws.
How Did Corporate Haven Laws Develop in the United States?
Once again, corporate haven laws arose as an attempt to prevent corporate income taxes from going offshore. The laws also arose to attract corporations to do business within the state that offers the havens. In the United States, Montana was the first state to implement changes to tax laws to attract corporations. Since the passage of the corporate haven laws in Montana, tax collections in the state have increased around 7%, which equates to millions in addition revenue collected from corporate income taxes.
Soon after Montana, numerous other states followed suit with similar corporate tax haven structures. For instance, Oregon passed corporate haven laws in 2013 and Maine lawmakers passed laws in 2014 in an effort to collect additional tax revenue from corporations.
The most famous corporate haven state is the state of Delaware. In short, Delaware allows companies to shift certain revenues and corporate funds into holding companies in the state, and those revenues and funds are then not taxes. In fact, as of 2018 over 1.3 million businesses have incorporated in Delaware, which is actually higher than the entire population of the state. By utilizing the tax havens in Delaware, there have been over $10 billion dollars in taxes that have been saved by corporations that those corporations would have been required to pay in other states.
Advantages of filing for incorporation in the state of Delaware include, but are not limited to:
- Lower franchise taxes and incorporation fees than other states;
- Corporate offices are able to be held by a single individual;
- There is no requirement to provide addresses of initial board of directors;
- Delaware has a separate “Court of Chancery” specifically for businesses. In fact, Delaware’s
- Court of Chancery is recognized as the preeminent forum for internal affairs and disputes between Delaware corporations and other business entities; and
- Incorporation in Delaware is often faster and easier than in other states.
Also, businesses that don’t conduct business in Delaware are not required to pay Delaware’s state income tax. Likewise, non-Delaware residents that have stock in Delaware corporations don’t need to pay the state’s personal income tax.
Similar to Delaware, Nevada also offers havens to corporations, including:
- All offices for the corporation can be held by a single individual;
- There is no state annual franchise tax, no state personal income tax, and no corporate tax for the state on profits made by the corporation;
- Shareholders for Nevada companies aren’t required to disclose their identities in public corporation records; and
- Directors, officers, and shareholders, are allowed to be non-residents of the state.
What Are Some Features of Corporate Haven Laws?
Depending on the state a corporation chooses to incorporate, the corporate haven laws will differ. Oftentimes corporate haven laws will offer different benefits and advantages for different types of businesses. For instance, as mentioned above, corporate haven laws in the state of Delaware will be more favorable for larger and more complex corporations. On the other hand, Nevada, Alaska, and Wyoming will offer greater protections for smaller corporations and closed corporations.
In general, corporate haven laws offer the following benefits to corporations:
- Various different legal liability protections for shareholders and board of directors, such as those noted above for Delaware corporations;
- Legal liability protections for management personnel, such as the protections offered by Wyoming, Nevada and Alaska;
- Various tax shelter laws and protections for both in-state residents and out-of-state businesses that choose to incorporate in the area;
- A more streamlined filing and incorporation process;
- Minimal need, or in some cases no need, for actual physical presence in the state in which they incorporate; and
- Choice of law forum. In other words, businesses are usually subject to the corporate haven laws where they have incorporated, rather than where they conduct their daily business operations.
As can be seen, the choice of where to incorporate is an important decision for corporations, since it will not only affect the company’s rights and operations as a corporation, but it may also allow them certain tax havens resulting in significantly less taxes being paid.
What Are Some Legal Issues to Watch Out for With Corporate Haven Laws?
One of the most common legal issues associated with corporate haven laws is the issue of double taxation. Double taxation occurs when a company is taxed twice for the same income. The second most common legal issue associated with corporate havens, which goes hand in hand with the first issue, is the operation of multinational corporations (“MNCs”).
A Multinational corporation is a business that operates and is incorporated in one country, but also maintains business operations in other countries. When it comes to taxation of the corporation, the home country may tax the total worldwide income of the corporation. In these cases, the home country and state often offer a credit or deduction for foreign taxes that were paid on foreign income. This is an attempt to avoid the double taxation of corporate profits and income. Thus, corporations may need to file specifically for certain tax credits and deductions in order to avoid the issue of double taxation.
It is important to understand all of the tax credits and deductions in the state of incorporation, if you are intending to operate a business internationally. It is also important to understand if the home country of operations is going to tax the corporation based on United States based income, or worldwide income.
If a corporation is being taxed by their home state of incorporation only for their income generated in the United States, then it is important that the business understands how their worldwide income will be taxed, if at all.
Do I Need a Lawyer for Assistance With Corporate Haven Laws?
As can be seen, corporate haven laws are very important and can often affect the success of a corporation. Further, corporate haven laws require a thorough understanding of not only state tax code, but international taxes. Thus, if you are needing assistance in choosing a state of incorporation or filing for incorporation, you should consult with an experienced and local business attorney.
A corporate attorney can help you determine how best to incorporate according to the various corporate haven laws available. Additionally, an experienced attorney will also provide you with valuable legal advice regarding where and how to incorporate, and how the laws of that jurisdiction will affect your business moving forward. Finally, an attorney will also be able to represent you in court, as needed, should any legal issues arise with corporate haven laws.