I liken an American corporation to a steel cage. The assets are trapped in this cage by the tax law. This applies to an S-corporation, a C-corporation, a foreign corporation,
When a corporation transfer any type of property (tangible and intangible property, a taxable sale occurs. The exception is a domestic reorganization that is classified as tax free by the tax law.
A reorganization by an American corporation with a foreign corporation is not tax free.
Tom called the other day. His Nevada corporation has unique software to search big data. The data is hosted by an unrelated business outside of the United State. He is the only employee. The corporation pays Tom a salary and withholds the payroll taxes. Tom told me that the corporation has no assets. He just wants to start using a tax haven corporation.
Here is what’s going on. The corporation has goodwill and that is intangible property, Goodwill includes. among other items, a trade name, customers, knowhow, websites, unique software, and workforce in place. The corporation will owe taxes when the business transferred.
Tom believed that he owned the software and knowhow to search and manipulate big data. However, he worked for his corporation and result of his work is owned by his corporation.
What is the solution for others. In starting new business, which may move offshore, create a foreign corporation and not an American corporation if you can afford the expensive legal fees and annual CPA fees. Do not do this yourself without both an attorney and a CPA.