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I'm about to launch a product and need to register a company (in order to handle payments for my product, and get a merchant account). I'll give specific information on my own situation below, but my specific question is, if I incorporate offshore while still remaining a resident of my home country, will I really save on taxes? Or will I simply have to pay my taxes at home?

I'm a Canadian that travels full-time; although I am not physically in Canada, for tax purposes, I believe I am still considered a resident of Canada and will have my personal income taxed in Canada. I am currently considering incorporating in Singapore, though I have no plans of becoming a resident of Singapore. My alternative is to set up a corporation (or more likely just a sole proprietorship) back in Canada. What might be the best option from a tax perspective? I really don't have a good understanding of how I will be taxed. I have had some people say that I will be taxed according to Canada's corporate tax rates because I (the majority shareholder) am a resident of Canada, and I have had others tell me that I'll be taxed under Singapore's tax scheme.

Thank you for any help!

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2 Answers

up vote 2 down vote accepted

http://www.cra-arc.gc.ca/tx/nnrsdnts/bsnss/bs-rs-eng.html

Typically a company is a Canadian Corporation for tax purposes if:

  1. It's owned enriely by Canadians

  2. It's operated entirely by Canadians

  3. It's been incorporated in Canada

So you will be caught by the first 2 points regardless.

But don't despair! There are loopholes like transfer pricing that you can use later regardless of where you have been incorporated. Here is a Forbes article on the matter. The idea is that once you have your company up and running profitabely, you incorporate offshore another company and sell it some intellectual property. Then you lease back the IP at higher rates thereby transfering profit to a more tax-friendly state. Big multinationals frequently use differnet permutation of this scheme.

And finally, if you are starting a company, the first thing you should be worried about is getting it profitable. Minimizing taxes is something that you pay good lawyers/accountants for doing once you are successful, not before.

Good luck.

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up vote 5 down vote

For the moment, let's put aside the issue of saving taxes. Incorporating in a tax friendly country sounds great on paper, but IMHO it normally doesn't make sense for a startup.

First, if you are just starting out, odds are your business won't be generating a ton of income, so any money that you might save by incorporating off-shore will likely be very small. Second, the amount of paperwork you'll need to handle to ensure that you are legal will consume a lot of your time. Plus your lawyer and accountant fees are going to increase substantially, which will eat into the small amount of money you might save. Lastly, depending on the circumstances you may end up having to pay taxes in Canada anyways. IMHO, your time is better spent on other things, like looking to increase profit, increase your customer base, etc.

Now to your question about how you will be taxed.

Some countries have established tax treaties with other countries to reduce the tax burden of double taxation on people. You'll have to find out if Canada and Singapore have a tax treaty, and if so, how it works.

I would guess that since you are a Canadian citizen, you will have to pay Canadian taxes on your income even if you establish your company outside of Canada. And if you establish your business in Singapore, you may also have to pay taxes in that country as well. The tax treaty between the two countries (if there is one) should clarify this. If there isn't a tax treaty between the two countries, you'll likely be stuck paying taxes in both countries along with filing all the necessary paperwork in both countries.

This is a complex tax issue that will require the services of a specialized accountant. If you want to pursue this, you will need to hire an accountant to advise you, setup and maintain all of this. Honestly, I don't think it's worth your time at the moment. If it were me, I would setup my company in Canada, and be done with it. Once you're successful you can start investigating ways to reduce your tax burden. Focus on building an awesome product first.

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100% agreement with this. You're worried about the wrong thing at the moment. Once you have revenue, hire an accountant and/or attorney to figure it out. – CaseySoftware Jan 5 at 19:51

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