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Delaware Serves as a Corporate Tax Haven

July 2, 2012

Big corporations, small-time businesses, rogues, scoundrels and worse have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. It’s easy to set up shell companies here and use the banking system, no questions asked.

Since 1792, the state established its Court of Chancery to handle business affairs. By the early 20th century, the state was writing friendly corporate and tax laws to lure companies from New York, New Jersey and elsewhere. Most of the businesses incorporated here are legitimate and many are using all legal means to reduce their tax bills.

Delaware is a great place to reduce a tax bill. Delaware today regularly tops lists of domestic and foreign tax havens because it allows companies to lower their taxes in another state — for instance, the state in which they actually do business or have their headquarters — by shifting royalties and similar revenues to holding companies in Delaware, where they are not taxed. In tax circles, the arrangement is known as “the Delaware loophole.”

It doesn’t take a lot to incorporate a company in Delaware, 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.

Delaware serves as a domestic tax haven, much like the Cayman Islands serves as an offshore foreign tax haven, and offers a similar level of tax avoidance. American corporations find the Caymans alluring for many reasons. There, they can operate in relative secrecy, attract more foreign customers, avoid regulation and enjoy a low tax rate. In one respect, however, Delaware is even better than the Caymans. At some point, American companies have to bring back their foreign profits from the Caymans and pay federal taxes.  But in Delaware, the state tax savings through the Delaware loophole are permanent.

Source: pettir.com – “Delaware Serves as a Corporate Tax Haven

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