Quite often when people hear the words "tax haven" (not to be confused with tax shelter), they immediately think of the notorious Panama Papers, which leaked information on more than 214,000 offshore entities and their abusive use of tax havens. While the scandalous documents shed light on the abusive use of tax havens, making use of a tax haven is not inherently illegal as long as it is used for the proper purpose. Use of a tax haven can be part of an effective tax plan.
In fact, to some, the U.S. is considered a tax haven. While not quite the Cayman Islands or the British Virgin Islands, the U.S. has its own tax haven. Known for being more than just the Diamond State, Delaware is known all across the globe as a U.S. tax haven. Many businesses have reaped the benefits of establishing a business in the Diamond State.
If you're surprised to learn that the United States has its own tax haven, read on to find out more about why the state of Delaware in particular has been given this title.
What is a tax haven?
In general, when a country or other specific location offers favorable tax treatment to foreign investors, it is considered a tax haven. The state of Delaware falls into this category; it offers favorable tax treatment to certain categories of business, and it does not require companies to identify their beneficial owners when formed. For this reason, Delaware has become the mecca for many companies and corporations.
Delaware as a domestic tax haven
Note: This is not an exhaustive list of Delaware tax law
At present, the state of Delaware is home to approximately 1,000,000 businesses and more than 67.8 % of Fortune 500 companies. Additionally, in 2019, 89.9% of U.S.-based businesses with initial public offerings chose Delaware to be their corporate home. Sounds like a lot of business deals are taking place in the Diamond State.
Not only are there many business deals taking place in the state, but many of these deals occur under the same roof. That’s right: Approximately 300,000 of these businesses are located in a one-story building located at 1209 N. Orange St, Wilmington, DE 19801.
As you can see, for a state with a population of only 973,764, there are a lot of business transactions going on. But what brings companies like Apple, American Airlines, Berkshire-Hatheway, and Coca-Cola together under a single roof? Let's learn more about Delaware’s business and corporate allure.
Corporate income tax exemption
In general, the corporate income tax in Delaware is 8.7%. However, the Delaware code states that "corporations whose activities within the state are confined to the maintenance and management of their intangible investment, as well as the collection and the distribution of the income from such investments" are exempt from corporate income tax.
Note: Intangible investments include easements, water rights, timber rights, patents, trademarks, and computer software.
Additionally, Delaware's code does not impose a tax on a "statutory corporate office (registered office) in the State but not doing business within the state." Now we know why so many companies have a subsidiary office in Delaware.
Note: The statutory corporate office (registered office) is the physical office where the corporation receives service of legal documents.
State and local sales tax
In addition to exemption from corporate income tax for certain businesses, Delaware does not impose state or local sales tax on the sale of goods. At the same time, the state does have an annual business license requirement, as well as a gross receipts tax imposed on the seller of goods or service provider.
Flat rate for annual tax
Another perk of doing businesses in Delaware is that LLCs and partnerships are charged a flat annual tax. Delaware imposes a flat rate of $300 and does not require entities to complete an annual filing.
In addition to annual flat tax paid by LLCs and partnerships, Delaware has a flat tax for corporate franchises. For Delaware franchises, the minimum tax is $175 for those using the Authorized Shares Method; for those using the Assumed Par Value Capital Method, the minimum tax is $400. While the minimum tax for both entities is rather reasonable, the tax can be as much as $200,000, or if the entity is identified as a Large Corporate Filer, the tax can be $250,000.
The Court of Chancery
In addition to favorable tax treatment, Delaware is also known for its favorable business laws. Cases and controversies involving businesses and/ or corporations are overheard in Delaware’s Court of Chancery. The Court of Chancery was established in 1792 and is a court of equity. This means the court hears cases that offer remedies other than monetary damages, such as an injunction.
While litigants cannot receive a jury trial in the Court of Chancery, they can receive a decision from an expert impartial decision-maker who is well versed in the areas of corporate, business and commercial law. This makes the Court of Chancery an excellent forum for litigation if you're a business owner or corporate shareholder.
Millionacres bottom line
As previously mentioned, tax havens are not inherently illegal; they're simply locations that offer businesses and corporations favorable tax treatment -- like the Diamond State of Delaware.
If using a tax haven seems like a great tax plan for you, be sure to consult with a competent advisor. This is an important step to avoid being potentially involved in an abusive transaction or tax avoidance scheme.
If you have done your due diligence and have sought a competent advisor, then Delaware may be the haven for you. I’ve heard 1209 N Orange St. is a pretty popular place!