Incorporation for location-independents: what's the best setup?

Analysis of what the best tax setup looks like for digital nomads and where to incorporate.

Incorporation for location-independents: what's the best setup?
Photo by İrfan Simsar / Unsplash

As you may know, if you read our article on the different kinds of location-independents, by deciding to incorporate a business as a location-independent you're officially entering the digital nomad category, which grants you even more freedom and possibilities from a financial perspective.

However, the choice of the correct setup is always a tricky one. Should I incorporate my business in the home country I am very familiar with? Or should I go for the Cayman Islands option to avoid heavy taxation?

In this article, we'll break down 6 essential considerations to be taken into account when it comes to where to incorporate your business:

1/ Remote-friendly company management

2/ Client's location

3/ Investor's location (if any)

4/ Taxation

5/ Multi-country exchange of information

6/ Country political stability


1/ Remote friendly company management

As location-independent, the very first criteria to be taken into account, and that is surprisingly overlooked, is the easiness of managing your company remotely. By definition, you'll be away from your company's location most of the time, as a digital nomad.

Therefore, if the country you're thinking about for incorporating your business (including your home country) is a big fan of paper-based communications, we highly recommend that you stay away. We don't like to give up names, but you probably already heard about the bureaucracy in Germany, Switzerland, India ...

Besides the remote-unfriendly paper communication, in some cases, you'll even need to accomplish some administrative processes in person. Some countries will also require you to be physically present on their land for a certain time per year (this is the case in Dubaï, for example).

One last note, in terms of remote-friendly management: this may also be useful to have a look at the ecosystem of services in the country you plan on incorporating your business in (banking options, accounting, legal representation ...).

However, in some circumstances, it can still make sense to incorporate in a country that is not fully remote-friendly. For instance, from a commercial perspective (you have key customers located there) or based on particular tax advantages that counterbalance the inconvenience of traveling back to the target country, on a regular basis.

We'll come to those points below.

Some remote-friendly countries for incorporation that we can mention are, for example, Estonia with their E-residency program, the United States of America when targeting incorporation in Delaware specifically, or South Africa with their E-residency program.

2/ Your client's location.

Depending on your line of business, your country of incorporation may matter for your clients. Not all digital nomads are software engineers, pro-bloggers, or infopreneurs.

This may be important in terms of trust but also in terms of companies your customers want to work with. Again, it depends on your line of business.

Your client's location may also have an influence from a sales tax perspective. Incorporating a business in the USA while having most of your clients in Europe makes probably little sense from a VAT perspective.

Make sure that you weighed this correctly, before jumping on an incorporation decision.

3/ Your investor's location (if any)

If you work with investors or intend to, it is necessary to know whom you're dealing with.

Some investors may be location-agnostic and follow you no matter where your business is based. On the contrary, some other investors work only in a given country or geographical area.

The language barrier and/or heavy administrative processes and paperwork may also suppress the appetite of an investor for having a deal with you and your company.

Those considerations also apply to any particular financial support that you may be targeting or that you may be eligible for (regional or country-specific stipends, some public funds supporting entrepreneurs, etc ...).

4/ Taxation

⚠️ Before starting on this section please note that even if we are tax experts we are not YOUR tax experts (yet), and we recommend that you don't implement the information below by yourself. You can start using our technology solution here, for a personalized global tax setup.

When it comes to the taxation aspect, the question is a little bit more complicated than simply picking THE country that is considered tax-friendly. In fact, some business owners can still benefit from a winning tax setup while being incorporated in a "tax hell" (in general the western world, with some exceptions). Even, some countries may be Hell for some profiles, while being tax-friendly for others (what we call "tax heaven").

How is that? It all depends on one's particular situation.

When considering her global taxation level, a location-independent should consider both her location and the location of her company.

Basically, if you are personally based in a tax "heaven" (but not necessarily a "tax haven"), you can still benefit from very advantageous taxation while your company is located in a "tax hell". This is also the case if you work this the other way around and are considered tax resident in a "tax hell" with a company based in a tax heaven.

Your tax liability regarding the revenues generated by your business activity in the chosen global setup will be one of the trigger points that will determine whether your setup is good or bad, from a tax perspective:

  • With a limited liability company (also called opaque), your revenues will be taxed in your company's country of incorporation.
  • With an unlimited liability company (also called transparent or passing-through), the revenues coming from your professional activity will be taxed in your country of tax residency, at a personal level.

You certainly start to see what a bad setup may look like, only from a tax perspective:

  1. Example 1: you are based in a tax hell, your company is in a tax heaven but transparent. You'll be heavily taxed.
  2. Example 2: you are based in a tax heaven, your company is in a tax hell and opaque. Your revenues will also be heavily taxed.

This offers a host of opportunities for winning setups, but also risks in case of bad setups, as you can imagine. Especially regarding some corporate legal status in given countries that ally both transparent and opaque characteristics.

The main question will afterward be: what is a tax hell and what is a tax heaven?

And the answer is... it depends. Based on your particular situation the main aspects to be taken into account are the following:

  • The direct taxation of your business revenues: is the corporate tax high in the destination that I am considering? Are there no specific tax breaks applicable in my specific situation that can reduce or eliminate the taxation on my business revenues?

  • The taxation of distributions: will I be heavily taxed in case of distributions, for example dividends? Again, are there no specific tax rules applicable in my situation that can reduce or eliminate this taxation?

  • The taxation of capital gains: are capital gains taxed in the targeted country? Can I benefit from particular tax breaks in this particular country?

  • The same goes with your personal taxation: is the general level of taxation high in the targeted country? Are there specific tax breaks I can benefit from in my particular situation and in the given country?

If your answer is "Yes the taxation is high, without tax breaks" to most of those questions, for a specific destination, we are probably talking about a tax hell. Otherwise... you know.

Having this in mind, some optimization schemes can be very surprising. For example, a crypto trader can find her tax heaven in Germany and reach 0% taxation on large revenues (if the setup is right), while another profile with a similar level of revenues will be taxed over 45%.

This is all about implementing the right global tax setup, that works for you in your specific situation.

5/ The multi-country automatic exchange of information

There are various international agreements and treaties between countries related to the exchange of information. This exchange of information can be activated on request by another country or can be automatic, depending on the agreement.

Regarding your choice of incorporation, the main exchange of information agreements that you need to consider are the CFC rules (Controlled foreign corporation).

The country that takes part in such an agreement will communicate your financial information to the other countries you're involved with (foreign corporations and the related earned income, taxes paid, etc ...).

⚠️ Let's be clear: you want to avoid this. For three reasons:

  1. As a digital nomad, this may trigger an undesirable effect on your tax residency and put you in a double taxation situation that you'll need to solve after you already paid the tax money, so that you can get a refund (if you can).
  2. At a corporate level, this can also trigger a permanent establishment. Basically, one country will consider, based on the information that they collected on you, that you are actually running part of your business on their territory and will consider an "undeclared company". This can result in additional business taxation in this specific country, that you will also need to challenge (if you can).
  3. This may finally trigger additional paperwork, depending on the concerned country.

The CFC rules are a criterion to be verified before deciding on your country of incorporation.

6/ The country's political stability

Finally, you want to preferably incorporate your business in a politically stable country.

This, for the trust of your clients/partners and, more importantly, to avoid changes in legislation that may threaten your business.

While recommending specific global setups to our clients, this is also a criterion that we take into account to determine an incorporation index.

***

The main idea behind those essential considerations is the following: the only perfect setup is the one that works for YOU with your specificity. You may find Heaven in a setup that will be Hell for another profile.

Based on your travel plans and your aspirations, you may give less importance to the tax aspect (while still having it under control) and go with an optimum remote-friendly setup. Another profile may be focused on financial independence and target exclusively the tax and information exchange aspect, while some others will be mainly focused on their clients.

A good tax setup requires having all those criterias in mind. The perfect tax setup requires finding the adequate dosage adapted to your situation.