How did you come to be a tax advisor?
I was an International Tax Partner of Arthur Andersen and left before it collapsed. I then became the co-chair for International Tax of the Greenberg Traurig Law Firm. After two years there, I decided that as both an attorney and a CPA, the best way for me to work with entrepreneurs and startups was to go out on my own, which is exactly what I did in 2003.
You work with Internet companies. Have you worked with internet dating sites yet?
I began with one dating site in 2002 that had owners from four different countries. A more recent dating client has four owners: 2 US and 2 Canadian. So there are tax issues on both sides of the border as well as in other countries.
Are there any special challenges for internet dating sites in that situation?
There are quite a few if you’re going to approach the US marketplace. Most entrepreneurs are so focused on running the business that they don’t consider the tax implications. If they structure it properly, they could address the US marketplace, have US customers, and not pay any US tax on operating income in many cases..
Obviously there are some differences between US citizens and entrepreneurs from other countries. Nevertheless, an offshore operating entity that does things properly can have zero US tax on operating income. That means offshore entrepreneurs can gain access to the US marketplace without necessarily paying US tax. and US individual entrepreneurs can have a business that approaches the US marketplace and not pay U.S. tax until they put the cash in their own hands.
As a result, both types of entrepreneurs can grow the business with pre-tax dollars rather than after tax dollars, which leads to a geometric expansion of the business and its value for purposes of selling it.
When you say offshore…what does that mean? What sort of jurisdictions do you advocate?
If you’re going to pay no tax you need to be tax free jurisdiction. There are a number of those around the world, many of which I already work with and I find new ones every day. Nevertheless, it is not just a question of where is the operating company incorporated, for U.S. entrepreneurs, it’s where the parent is incorporated.
For all entrepreneurs, it’s also where are the services performed. For example, if a company is incorporated in any tax free jurisdiction but it operates its software on servers located inside the United States, the company will not only pay 35% US corporate tax but also an additional 19.5% tax because of the US Branch Profits Tax rules.
So what general strategy would you recommend for dating sites that do business in the USA?
For those doing business in the USA there are 2 or 3 things to focus on. First is making sure that you have a proper corporate structure so that you’re not subject to immediate tax in the country in where you’re incorporated. Now depending upon where the ultimate parent company is located, you want a jurisdiction that is amiable to either zero or low tax on dividends received. There are a number of those countries.
The next thing is the location of the servers. For example, if the offshore company owns servers in the US or it has its software hosted on a 3rd party server in the US it is still subject to US tax. Alternatively, if the offshore company had its servers located somewhere else outside the US it wouldn’t be subject to US tax. The question is would the income be subject to tax where the servers are located? In some jurisdictions the answer to that question is whether or not the company owns the servers or is simply having its software hosted on servers in that country. So it is something that you have to be very, very careful about and make sure that you’re doing things the right way.
The third thing you have to be careful about is what I call the substance issue. Most dating sites require a significant amount of data generation, massaging, reviewing, support services, etc. Where do you locate the support services and what is the relationship between the operating entity and the support services? Are they all part of the same company or are they part of a different company? And what are the tax consequences of that? If it is organized properly it can be a very profitable venture.
How does it work for a company that is already operating in the USA?
There are 2 different scenarios. Let’s focus first on the startup entrepreneur. The startup entrepreneur is in the best possible position because they are not moving anything outside of the United States. They are simply going to incorporate an entity or entities outside of the US to be the operating company. The offshore company may need a sister U.S. company to provide some support services in the US performed under support contracts. The offshore company could then take advantage of the onshore company’s resources.
Somebody who is already operating in the United States is not in a hopeless position. I’ve taken many internet companies offshore. It is simply a question of the fundamental nature of the business model, and how many entrepreneurs are involved in the ownership of the entity. There are many US tax rules involved in moving certain things offshore as well as operating offshore that will come into play, and we have to be careful about each and every one of them.
How can the companies contact you?
Via email at firstname.lastname@example.org or simply call my cell at 917-328-3137.
How do you typically structure a consulting engagement?
I can structure almost any kind of fee arrangement agreeable both parties, but I have no hourly billing rates. I can work on a fixed fee with one payment or over a period of time. I can also participate in profits under certain circumstances. It is all a question of what is appropriate for the entrepreneur.