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I'm an international tax lawyer and I sense a normal foreign investor trying to do normal tax planning. One quick example: your foreign investor buys shares i

I'm an international tax lawyer and I sense a normal foreign investor trying to do normal tax planning. One quick example: your foreign investor buys shares in your Delaware corporation and hits the big time. The foreign investor dies before selling out. Shazam. 40% estate tax. In contrast, your foreign investor owns shares of a Cayman corporation that owns that Delaware corporation. Same big time. Same death. No estate tax. Second normal tax planning move. Go ask Mr Google about corporate inversions. Go on. I'll wait. Ok. You're back. Guess what? Your company started life as a foreign company and will never need to go through an inversion -- because it is already a foreign corporation. Bullet dodged. I could go on, but I'm going to go get some frozen yogurt. Happy weekend to you.

rahimnathwani 10y ago
I'm not saying there aren't other advantages for OP's company, but the example you gave (avoiding estate tax) can be achieved by the investor without the OP changing the corporate structure. The investor could just have their own Cayman company, and have that company invest in OP's Delaware corp.
- philiphodgen 10y ago
  I think that is exactly what the OP was suggesting. Cayman holding company with US operating subsidiary.
  - MichaelBurge 10y ago
    I think the confusion here is whether the existing US shareholders would own shares in the Cayman company or the US company. Some are talking about the former, and some are talking about the latter. Why would the existing shareholders want to move their shares to the Cayman company?
    - philiphodgen 10y ago
      The existing shareholders would like to own Cayman shares because of future corporate inversions. There may also be questions of "which entity should own the IP?" If the shareholders own holding company stock they are assured of ownership of IP even if the IP is parked in a separate corporation. Then you look at the exit. If this company is ever sold, what exactly will be sold? If you are a shareholder you do not want to be left behind with an orphaned element of the business. Owning stock at the top tier helps avoid this. OTOH if this is a "keep it forever and milk the cash flow" business, you have to think through the tax outcomes there too. U.S. shareholders in foreign corporations are punished by the IRS TaxBot for their impudence. The paperwork and accounting cost overhead are daunting. That is a significant reason to avoid a structure such as this. It ain't easy. Startups don't usually have the cash to get the thinking done correctly at the front end. So later on they are boxed in -- change may trigger massive tax costs that are unacceptable. IP ownership and exploitation is a major offender here.
    - rahimnathwani 10y ago
      Correct. The foreign investor could own 100% of the shares in a Cayman company, which owns x% of the shares in the Delaware company. Existing shareholders continue to hold shares in the Delaware company. This has the same effect on the new investor's estate tax as changing the corporate structure. So it's not worth if that's the only reason.
SmellTheGlove 10y ago
I responded to someone else a little bit speculatively. Let me ask, since it's really not my area, how much risk would you place on the forum for potential litigation being the Caymans vs the Delaware Court of Chancery?

rahimnathwani 10y ago

I'm not saying there aren't other advantages for OP's company, but the example you gave (avoiding estate tax) can be achieved by the investor without the OP changing the corporate structure. The investor could just have their own Cayman company, and have that company invest in OP's Delaware corp.

philiphodgen 10y ago
I think that is exactly what the OP was suggesting. Cayman holding company with US operating subsidiary.
- MichaelBurge 10y ago
  I think the confusion here is whether the existing US shareholders would own shares in the Cayman company or the US company. Some are talking about the former, and some are talking about the latter. Why would the existing shareholders want to move their shares to the Cayman company?
  - philiphodgen 10y ago
    The existing shareholders would like to own Cayman shares because of future corporate inversions. There may also be questions of "which entity should own the IP?" If the shareholders own holding company stock they are assured of ownership of IP even if the IP is parked in a separate corporation. Then you look at the exit. If this company is ever sold, what exactly will be sold? If you are a shareholder you do not want to be left behind with an orphaned element of the business. Owning stock at the top tier helps avoid this. OTOH if this is a "keep it forever and milk the cash flow" business, you have to think through the tax outcomes there too. U.S. shareholders in foreign corporations are punished by the IRS TaxBot for their impudence. The paperwork and accounting cost overhead are daunting. That is a significant reason to avoid a structure such as this. It ain't easy. Startups don't usually have the cash to get the thinking done correctly at the front end. So later on they are boxed in -- change may trigger massive tax costs that are unacceptable. IP ownership and exploitation is a major offender here.
  - rahimnathwani 10y ago
    Correct. The foreign investor could own 100% of the shares in a Cayman company, which owns x% of the shares in the Delaware company. Existing shareholders continue to hold shares in the Delaware company. This has the same effect on the new investor's estate tax as changing the corporate structure. So it's not worth if that's the only reason.

SmellTheGlove 10y ago

I responded to someone else a little bit speculatively. Let me ask, since it's really not my area, how much risk would you place on the forum for potential litigation being the Caymans vs the Delaware Court of Chancery?