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By: Richard F. Klumpp, CPA, JD, President and CEO, WT SP Services
European companies wishing to do business in the vast U.S. market will find Delaware an ideal jurisdiction for basing operations. Similarly, Delaware can be a welcome home for executives of such companies who want to hold personal assets in the U.S.
Delaware's business-friendly environment and favorable tax structure are attracting well-known companies. For European CEOs who would like to relocate their corporation's headquarters, or who simply wish to have operations in the U.S., Delaware can offer a hospitable business climate and access to financial partners that are familiar with fulfilling the needs of international clients.
Accessing the U.S. Capital Markets
Working with an entity based in Delaware is a particularly attractive way for European companies to access the U.S. capital market, which has become a primary purpose for doing business in the U.S. The U.S. capital market is large, liquid and flexible. Many American investors are eager to diversify their portfolios by holding European securities and this demand can provide European companies with funds at a reasonable cost. In addition, raising capital in the U.S. offers European companies a way to diversify currency risk by issuing dollar-denominated securities.
European companies often turn to the U.S. capital markets in order to raise funds for their American operations. In recent years, issuance of commercial paper has been increasing as European companies discover the appeal of unsecured, short-term debt for financing accounts receivable and inventories. Commercial paper is especially attractive now, given the lower short-term interest rates prevailing in the U.S.
When European companies come to the U.S. for business opportunities and access to capital, tax considerations may dictate the choice of jurisdiction. Delaware offers tax benefits to companies wishing to license intellectual property, finance inter-company activities, hold investments, or factor receivables. In all of these situations, state income taxes and capital gains taxes can be minimized by setting up business in Delaware. Moreover, European taxes may be reduced on the eventual disposal of U.S. assets.
It is true that a few other U.S. states have favorable tax laws. However, European companies that use Delaware as a base of operations will find that this state provides other unique benefits to corporations. Well-established Delaware law, for example, includes Section 1902(b)(8) of Delaware's corporation tax code, which provides that a Delaware corporation that limits its activities to the maintenance and management of intangible assets is exempt from Delaware state income tax. This exemption covers dividend income, interest on notes receivable, capital gains, trademark payments, rents, and royalties. Moreover, Delaware permits a corporation to establish a wholly owned Delaware subsidiary to own and manage the parent company's intangible assets.
European companies considering operating in the U.S. must be sure to choose the most appropriate corporate structure for their needs. While many use the basic "C" corporation structure - the standard corporate form in the U.S. - this structure will not be right for every U.S. activity of a European company. Special purpose entities such as "S" corporations, limited partnerships, limited liability companies, trusts, or general partnerships may be more appropriate.
European companies should pick a service provider with expertise in establishing and overseeing all types of special-purposes entities to be sure that they are establishing the one that will best meet their needs. Ideally, this provider should also be able to offer accounting and regulatory filing support, recommend local legal counsel specialized to their needs, provide local independent officers and directors, and serve in various banking and related fiduciary roles, including escrow agent, trustee, and custodian.
When choosing a service provider in the U.S., European corporations should also demand a provider with a stellar track record and a reputation for integrity. This is particularly true when considering the implications of the USA Patriot Act and the Sarbanes-Oxley Act, both of which impose government mandates on how American companies track and disclose financial information. European executives should be leery of any U.S. provider that does not demand full compliance.
Managing Wealth in the U.S.
While their companies are discovering the advantages of doing business in Delaware, European CEOs who wish to hold personal assets in the U.S. are discovering that Delaware is an ideal jurisdiction for this as well.
Among the European CEOs who wish to hold assets in the U.S. are those married to U.S. citizens and those with children or grandchildren living in the U.S. For these or other reasons, European executives may plan to eventually move to the U.S. and therefore, might wish to migrate personal assets as a form of "pre-immigration planning." Of course, a European executive might have other grounds for wishing to hold some assets in the U.S. In tumultuous times, it may be desirable to hold assets in multiple jurisdictions, including the U.S.
When transferring assets to the U.S., European executives might choose to have those assets held in trust. In many cases, such transfers will not trigger any U.S. gift tax consequences. Once assets are in a properly drafted U.S. trust, they may avoid U.S. estate tax at the grantor's death. Despite laws easing the impact of estate taxes in the U.S., they remain a prime concern for wealthy individuals. Effective planning can reduce a family's tax liability.
Generally, U.S. trust laws provide more flexibility than those trust laws in Europe. A Delaware trust can often last longer than trusts established in many European countries. Not only can transfer taxes be minimized, holding assets in trust can be an effective means of shielding those assets from future creditors' claims. A well-planned Delaware trust can provide access to trust assets for present and future generations.
Some of the entities that may interest European executives are:
Dynasty Trusts. As the name suggests, such trusts are meant to serve the grantor's descendants, far into the future. A reliable trustee can make trust assets available to its beneficiaries for vital purposes, such as funding higher education or starting a business. Because the trust beneficiaries do not own these assets, however, the assets are not usually reachable by the beneficiaries' creditors, divorce settlements, and other claims.
Asset Protection Trusts. These trusts can place assets beyond the reach of the grantor's future creditors. Under Delaware's landmark asset protection trust law, the grantor may have access to trust assets if the need arises.
Total Return Trusts. Many trusts create a conflict between current income and future beneficiaries. The solution may be found in trusts that instruct the trustee to invest for total return, long term, while periodically "peeling off" a percentage of assets for the income beneficiaries.
Blind Trusts. The trustee is given the authority to trade trust assets without the grantor's approval or prior knowledge. This approach may be ideal for European executives who would be considered insiders of U.S. companies - their holdings could be sold without running afoul of securities regulations.
Limited Partnerships and Limited Liability Companies. These entities permit individuals to hold assets, especially investment property, without exposing other personal assets to creditors of the entity. They are generally taxed as partnerships in the U.S., which can lead to benefits such as the ability to deduct accounting losses and the avoidance of corporate income tax.
High-net-worth individuals can find the vehicles that will best suit their purposes and use them to help accomplish their goals. What's more, they can proceed with reasonable confidence that their efforts won't be overturned in the future: Delaware has a long history of respecting property rights, so European executives are justified in believing that the rules won't be changed retroactively.
Whether European executives are coming to America for business or for personal financial reasons, teaming up with a Delaware expert can enable them to take advantage of Delaware's unique opportunities.
Updated: January 1, 2013
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
© 2013 Wilmington Trust Corporation.