The Best Country to Incorporate an Online Business

Some time ago I wrote about the concept of flag theory and how different elements of your life don’t need to happen in the country where you were raised, or live.

This couldn’t be more true for an entrepreneur running an online business.

Running an online business gives you the freedom to incorporate in a country that best suits your business needs, or in the case of a lifestyle business, your personal goals as well.

By looking abroad at the many different entity types in many different countries, not only can you optimise for time, sanity and your customer experience, you can likely save on payment processing rates, bank fees, legal and accounting expenses, and tax as well.

This article isn’t about paying 0% tax. It’s about setting your online business up for success.

Can you reduce the tax you pay in the process? Sure. It’s easy to make blanket statements about which country is best to incorporate in. But tax is too specific to the individual for those statements to be correct.

So, for the purpose of this post I’m only going to discuss entities in countries that:

• have a sub-20% tax rate
• have no tax at all
• are a pass-through entity, meaning there is no tax at the company level; instead the shareholders are liable for their percentage of profit.

These entities that are flexible enough for people living in both high tax countries along with tax havens, and everywhere in between. They’re common among real estate investors, digital nomads, software companies and more.

But First, a Warning

Unless you are legitimately setting up an office and establishing residence of your company in the country you are incorporating, it’s very likely that your country of personal residence will have a claim on your company earnings.

In a lot of countries, if you own 100% of a company that operates in a low or no tax country, but the management of that company happens in your office at home, your home country can come knocking for their tax dollars claiming that you own a Controlled Foreign Corporation.

Don’t put your head in the sand!

Key Things You Need to Run an Online Business

A successful business does not need a 0% tax rate. But it does need customers, banking, payment processing and so on.

$1,000 in revenue, even with a 0% tax rate means you only take home $1,000. If your local environment enables that same business to flourish and bring $1,000,000 in revenue at a 40% tax rate, you’re still ahead by $599,000.

I’ve run companies in countries that seemed like a great idea from the outset, but with the benefit of hindsight wasted literal weeks, if not months of my life. I thrive on the learning, but this wasted time was probably the root cause of business failure.

Every business has unique requirements. My Andorran company is difficult for online business, but would be a necessity for investing in local real estate with local partners.

It’s not as simple as looking at individual countries. This section needs to be reviewed on an entity-by-entity basis;

• A UK Limited Liability Partnership works differently to a UK Limited Company.
• In the same way, a Singapore Pte. Ltd. is different to an Australian Pty. Ltd.

A lot of people quickly gloss over countries like Canada and say “the tax rate is too high”, but as you’ll see below, it doesn’t need to be. In doing so, they may have excluded an option that is otherwise perfect for their needs.

So let’s review the core elements that you want to be available for your new company before you cross anywhere off the list.

Banking

If you’re from a country where banking is easy, this may not make sense to you yet. Do business in a few countries around the world though, and you’ll begin to realise there’s a huge variance in the ease, cost and safety of banking.

One might think that it’s just the “offshore” jurisdictions that have bad banking, but it’s not as simple as that.

As an Aussie it amazes me that USA is still obsessed with cheques. A bank account at most Canadian banks is borderline useless if you don’t plan on being located in Canada, thanks to their requirements to walk into a branch to make a wire transfer.

When it comes to banking, you’re probably going to want:

• internet banking that allows you to make local transfers of at least $10,000 (or similar in local currency)
• internet banking that allows you to make wire transfers of at least $10,000 (ideally much more than this)
• at least a debit card for company spending
• ideally easy import/export of records to a well known book keeping system

Something a lot of people don’t realise is, you don’t have to bank in the same country as your company. If for example, you form a Private Limited Company in Hong Kong, it’s entirely possible for you to get a bank account in Germany. You’ll just need to jump through more hoops and have some good reasoning as to why you need this set up.

Merchant Accounts & Payment Processing

Have you ever wanted to buy a product, but it’s all just been a bit too hard? Chances are when you start your online business, you’ll be very grateful for those first few customers.

What you’ll come to learn over time is, paying for a product or services already brings friction, so you want to make it as easy as possible for each person.

If a client or customer in Canada has to send you a wire transfer that costs them an extra $35 and an hour of their time (as it involves a visit to their bank), you’ll be under scrutiny every time they’re standing in line at the bank.

The more you can remove this friction, the better. Credit card processing is probably one of the easiest ways to take payments.

There are a lot of payment processors around, and the one that works best will depend on your industry. Most online business owners will find themselves working with one or more of these companies:

• 2Checkout
• Braintree
• PayPal
• Stripe

Of course, each country has a different list of merchant account providers. And when you begin to process larger amounts it can be worth investigating better options as even 0.5% can make a big difference at the end of the year.

Limited Administrative Overheads

If you’re much smarter than me (highly likely) you can probably set up a business that doesn’t require much of your time.

But, if you’re like myself and need to commit a lot of time to launching and growing your business, the last thing you want to be doing is committing a ton of that time to a government’s bureaucratic systems.

I’ll give some of the most common examples below, but there are plenty more around.

Tax Reporting

In many countries you’ll need to lodge company and sales tax information on a quarterly basis. If we compare that to a country that requires it once per year well, it’s 25% of the work.

Compare that again to a country that doesn’t want you to lodge this information ever and it could be a game changer for your business. That free time can go into making sales or growing your team instead.

Business Licenses

In many countries, depending on the industry you are in, after registering your company you’ll also need a business license on top of that.

Similarly, this is more money and time that could go into the growth of your business.

Operating Agreements & Share Certificates

When you form a company, you need a document or documents that state who owns which percentage of the company, what the terms are for operating that company and so on. Different countries and entity types have different names for documents.

If we take a US LLC for example, you can update an operating agreement with the signature of other shareholders. That is, if you and I own 50% of a company together, and I want to sell my 50% to you, we can:

1. update our agreement showing this change, and
2. sign it digitally.

That’s it! You’ll need to notify your bank and payment processors after the fact.

To do the same with a “Societat Limitada” in Andorra, we need to:

1. advise a notary of the necessary changes to this document (which you won’t be able to read unless you learn the local language; Catalan),
2. physically visit that notary (in Andorra, which can sometimes take weeks to book a time with and is impossible over Christmas or summer holidays),
3. review that document with the notary,
4. sign that document in their presence and
5. pay a good deal of money for that experience.

Now that the company has changed from 2 shareholders to one, it becomes a “Societat Limitada Unipersonal”, meaning your company name has now changed from an SL to an SLU. So in addition you need to:

1. updated records with multiple government offices, each with their own lines, wait times and fees.
2. notify your bank and payment processors need to be notified, and
3. any references to your company name need to be updated.

The Andorran company just sapped a ton of time and money from your business, whereas changes to the US LLC might have cost you 30 minutes.

Resident Directors or Local Office Requirements

Some countries require at least one local resident director. What this means is, someone who is a resident (lives or has strong ties there) of that country needs to be a legal representative of your business.

If you have a business partner who lives or is a citizen in this country it could make good sense for you, but in many cases it’s just another cash and hassle grab, as you need to pay a “nominee resident director”.

In Singapore, you might pay $1500 or more per year for a nominee resident director of a Pte. Ltd.

Similarly, some countries have local office requirements, and they’ll actually send someone around to check once a year to make sure you’re meeting their demands.

If you’re operating through a UAE RAK as a foreigner you’ll likely have it set up in a free trade zone. Depending on which “free zone” or FTZ your RAK is registered in, you will probably have a requirement for a “physically functional” office space that is much larger than your online business needs.

These things might make sense when you’re seeing millions in profit each year, but if you’re pursuing a “4 Hour Work Week” online business model that helps you to earn a modest living while travelling the world, it’s probably best to avoid these types of hassles and expenses.

Perception & Reputation

Outside of the other points mentioned here, the core issue with forming a company “offshore” is that it’s a massive red X next to your business’ name for many people and entities.

It’s not that you are necessarily doing something illegal by operating your business an offshore jurisdiction, but the fact that others have in the past can make others skeptical.

• Banks will need to see more information.
• Payment processors will be more wary of your business.
• Credit card companies may block your customers’ payments pointing to “suspicious activity”.
• Your local tax department may decide to audit your affairs.

All of this is fine if you’re doing everything legitimately/legally; you can work through it.

Potentially worst of all though; clients may pull out of deals when they learn that you’re operating out of a “shady” country.

Sales and growing a business is hard enough, don’t make it more difficult for yourself.

Bonus: Reward Credit Cards

It shouldn’t be the highest on your list of priorities, but something to consider is whether or not reward credit cards are available to your new company.

Depending on what your online business does, there’s a chance that you do a lot of spending. Consider if you’re reliant on Facebook ads, or you’re buying products to be drop-shipped to your customer. Even paying contractors can be done by credit card.

It doesn’t matter if it’s to fund business class flights for your next holiday or to get 2% cashback on all of your business spending. If your card is hitting 5 digits or more each month, reward cards are worth investigating.

Friends of mine have moved their entire online business to Hong Kong and USA purely just to rack up air miles.

The Best Countries to Start a Business

You’re here to learn which countries are best so let’s get stuck into it.

Criteria for each country are both objective and subjective. You must do further research if one country appears to be suitable for your business.

British Virgin Islands Business Company

Known for: Asset Protection, Aviation, Consulting, Investment Funds, International Trading
Reputation: Negative
Bank Account Opening: Difficult

The BVI Business Company (BC) is well known as an asset protection vehicle due to their high level of confidentiality, flexibility and freedom of operation.

This tax neutral entity is not allowed to do business within the British Virgin Islands. As a result the entity is considered non-resident for tax purposes, in most cases making it exempt from local taxation.

BVI companies are increasingly difficult to open bank accounts. Where many business owners used to find it simple enough to open accounts for their BVI business company in Hong Kong or Singapore, many of those bankers are no longer interested in this new business.

Referrals will go a long way if you do not have any existing connections. Most bankers will want to see a business plan and letter of recommendation from your current banker or someone with a strong reputation such as a lawyer or notary.

Canadian Limited Liability Partnerships

Known for: Consulting, Payment Processing, Marketing Agency, Sales Agents
Reputation: Excellent
Bank Account Opening: Easy
Cost to Start: €357 / US$389 (Using code “jase” at checkout)

OECD nations are quick to denounce the little countries that offer tax efficient structures in order to generate revenue, so it may come as a surprise to see Canada on this list. Canada offers both Limited Partnerships and Limited Liability Partnerships.

These partnerships can be used as a “disregarded” or “pass-through” entity, meaning profits are not taxed at the business level unless sales are made within Canada. They are instead paid by the partners themselves.

Most Canadian provinces offer an LP structure which requires a general and a limited partner (though the same individual or entity can be both). The general partner has 100% liability, while the limited partner (theoretically a “silent investor”) does not.

British Columbia however, offers a full Limited Liability Partnership which helps to protect both partners and is very similar to the UK LLP and multi-member US LLC.

Estonian OÜ

Known for: Ecommerce (European Market), Information Businesses, Tech Companies
Reputation: Average
Bank Account Opening: Average

Well known for their e-Residency program, Estonia has become one of the best European countries to start a business for location independent entrepreneurs. Their marketing around e-Residency has been excellent, albeit misleading many digital nomads into thinking that it means they have tax residence in the country.

The osaühing, or OÜ for short is a private limited company that works very well for online business owners who have optimized their personal tax residency situation.

Estonian OÜ’s do not pay tax on realized profits. Instead, there is a 20% tax on distributions. When an OÜ is resident in Estonia, salaries paid out to non-resident directors are tax exempt. Do note however, that if your online business is effectively a one-man team, it’s likely your company will not be tax resident in Estonia.

Especially popular with tech startups, you’d think that Stripe would offer access to all Estonian companies. Unfortunately, Stripe is only available when at least one director is resident of a supported country.

Hong Kong Private Limited Company

Known for: Ecommerce, Investment Funds, Holdings
Reputation: Average
Bank Account Opening: Average

A former “offshore” favorite among online business owners, forming a company in Hong Kong is much less appealing today than it was in years past.

While the banking system is excellent, opening an account at many Hong Kong banks has become difficult for smaller online business owners. This is especially true for those who do not have a personal residence visa for Hong Kong.

In addition, China’s strong-arm tactics in Hong Kong proves that this jurisdiction may not have the same stability that it did a decade ago.

Though the headline corporate tax rate for Hong Kong is 16.5%, there are many ways to lower this percentage. One of which is the offshore tax exemption which can bring tax paid down to 0%. Of course, applying for and maintaining this exemption is not free; some consider it a form of tax in itself.

Reputation seems to range wildly for Hong Kong. As an Australian with many friends from South East Asia, these companies are “normal” to me, and the country has a great reputation. In Europe however, Hong Kong seems to scream “illegitimate”. Take your clients, customers and culture into account.

Singapore Proprietary Limited Company

Known for: Financial Services, Investment Funds, Trading Companies, Tech Startups
Reputation: Excellent
Bank Account Opening: Easy

Singapore is rapidly becoming the financial center of South East Asia. On face value, Singapore’s high tax rate and requirement for a resident director can make this entity unappealing.

For the right online business however, it may be the perfect location. Singapore is flush with cash, and venture capital is looking for tech startups to invest in.

Similarly, financial services, investment, trading and related companies may find themselves with a captive local audience to help launch their business.

Depending on the size and revenue of your company, you may be eligible for exemptions that can bring the corporate tax rate down to 0%.

UK Limited Liability Partnership

Known for: Ecommerce, Payment Processing, Service Businesses
Reputation: Excellent
Bank Account Opening: Easy
Cost to Open: €267 / US$292 (Using code “jase” at checkout)

Very similar to the British Columbia LLP, the UK LLP is not seen as a separate entity and usually has no tax burden. This is known as a tax neutral, pass-through entity.

UK LLPs are popular among non-residents who do not trade in the UK, as it often results in 0% tax. That is, if you and your business partner own 50% of a UK LLP, and your business generated a $100k profit, each of you will declare $50k on your personal tax return.

Of course, as with all things international tax, it does come down to the situation of the individuals who run the business.

In general however, these are incredibly cheap and easy to set up and maintain, with lots of digital banking solutions available, and the brand name payment processors you’re probably on the look out for.

Many of my friends from Eastern Europe use a UK LLP to operate through as their customers find it more trustworthy than when they traded through a local company in Montenegro, Serbia, Ukraine and beyond.

USA Limited Liability Company

Known for: Ecommerce, Payment Processing, Service Businesses
Reputation: Excellent
Bank Account Opening: Easy
Cost to Open: €267 / US$292 (Using code “jase” at checkout)

Possibly the best and most common structure for internet business owners is the humble US LLC. Quick and cheap to set up, easy to maintain, with a great reputation and unlimited options for banking, payment processors and credit cards, there’s a lot to like here.

Despite outward appearances, many people consider the USA to be one of the best countries to start a business as a foreigner. There may be a few extra hoops to jump through but generally the country is accommodating.

Depending on the state, taxes and fees vary – sometimes wildly. Most common states are Delaware and Wyoming, however New Mexico seems to be increasingly popular.

Usually Delaware LLCs are favorite among larger companies or online businesses taking outside investment, due to the extensive corporate case law that the state has under it’s belt.

Wyoming LLCs are more affordable operate and can offer greater privacy, so these are more commonly used for small businesses.

When owned by non-residents these become tax-transparent pass-through entities, similar to the BC and UK LLPs. If not trading within USA, this can result in a 0% tax rate for owners.

For more information on this topic I recommend reading my guide on how to open a company in USA as a foreigner.

Details below refer to the Wyoming Limited Liability Company.

Not Sure Where to Start Your Online Business?

When I started out, the idea of paying thousands or more for professional advice was hard to accept. Between then and now, I’ve spent tens of thousands on advice, much of which was flat out wrong.

As an online business owner, the final responsibility ends with you. I don’t give unsolicited advice, but if I could tell my younger self what to do, it would go something like this:

• educate yourself as much as possible on tax and company law,
• learn from other entrepreneurs who have done this before but are less biased,
• seek professional advice,
• cross reference all of this information to find the common truths, and continue to do this until you understand what you’re getting yourself into.

The truth is, there’s no best country to incorporate an online business. There’s no one size fits all solution to company registration. It comes down to your personal residence, company residence and your customers.

I love learning about tax but will happily pay more of it to make growing and operating my business faster and easier!

Still a little lost? Sign up to this free course on low tax business so you can make a better informed decision.