Are you aware of the corporate tax incentives in the State of Delaware? Do you want to minimize corporate income taxes, improve profits, and consequently increase cash flow? Learn how to shift taxable income from one state to tax exempt income in Delaware.
The State of Delaware is the home of many successful companies due to its business friendly infrastructure including its business climate, court structure, and corporate tax exemptions. As states today are increasing the tax burden on corporations, you can take advantage of an attractive opportunity in the State of Delaware – the Delaware Holding Company.
There are more than 7,000 such companies registered in Delaware. This large number demonstrates the recognition and widespread acceptance that this savings opportunity has achieved since the holding company law was first enacted in 1958. The following information introduces you to the concept of the Delaware holding company so that you can start an informed discussion with your financial, tax, and legal advisors on this unique tax advantage.
Section 1902(b)(8) of the Delaware code provides exemption from Delaware corporate income tax for corporations whose activities within the State of Delaware are confined to the maintenance and management of their intangible investments and the collection and distribution of the income from such investments or from tangible property physically located outside this state.
Under the law, "intangible investments" include, without limitation, investments in stocks, bonds, notes, and other debt obligations (including debt obligations of affiliated corporations), patents, patent applications, trademarks, trade names, and similar types of intangible assets.
A "corporation" can also refer to a limited liability company (LLC) or a business trust if the entity is taxable as a corporation for federal income tax purposes. "Intangible investments" can also refer to service marks, copyrights, franchises, technical know-how, inventions, unique computer software or manufacturing processes, and secret formulas. This list is not necessarily all-inclusive.
The following examples represent some of the more common uses of Delaware holding companies. These examples by no means constitute an exhaustive list of all possible uses as new and innovative applications of Delaware holding companies are increasing.
Holding an Investment Portfolio
If a corporation pays state income tax on investment income, the income-producing assets can be contributed to a Delaware holding company. The investment income would then be exempt from Delaware corporate income tax. The parent’s cash requirements can be met through a dividend, if the parent’s home state allows a dividend received deduction in computing state taxable income, or a loan from the Delaware holding company to the parent at prevailing market rates. Debt obligations of affiliates are permissible investments for a Delaware holding company. Interest received by a Delaware holding company on a loan to an affiliate will not be subject to Delaware tax and may generate an interest deduction to the affiliate in its domicile jurisdiction.
Intellectual Property Activities
When a company holds the rights to patents, trademarks, or other similar intellectual property, state tax savings can be realized by transferring the assets to a Delaware holding company and collecting the royalties or license fees, whether from affiliates or unrelated third parties, in the Delaware holding company. The company holding and licensing such intellectual property can perform the necessary policing activities to maintain proper registration. Moreover, this may provide a deductible expense for the licensee. Properly structured intellectual property licensing arrangements can produce substantial state tax savings to an affiliated group of corporations.
Sales Vehicle
When substantial investment assets or subsidiaries are to be sold at a gain, state taxes may be saved by transferring the assets or subsidiaries to a Delaware holding company in a reasonable time prior to the sale. Under appropriate circumstances, the gain is not subject to Delaware tax and it may also escape the tax that would have been payable to the parent’s state of domicile if the parent had sold the assets itself.
Minority Stock Interest
Several states in their income tax statutes provide an exclusion for dividends received from wholly owned domestic subsidiaries, but not from foreign subsidiaries or from subsidiaries less than a certain percentage of whose stock is owned. If the stock in such a subsidiary were to be transferred to a Delaware holding company, the dividends paid by the subsidiary could escape Delaware tax.
The Delaware holding company’s payment to its parent in the form of a dividend may qualify for exclusion from the parent’s state tax base. For those states that follow the federal deduction, 100% of the dividends received from a Delaware holding company of which the parent owns at least 80% would not be subject to taxation.
Role of McBride Shopa & Company, P.A.
- Act as the registered agent for the Delaware holding company.
- Provide address and office space, with proper filing and storage capacity.
- Provide telephone number and listing, answering service, and fax services.
- Provide meeting facilities and conference rooms.
- Provide mail services.
- Provide stationery and business cards.
- Provide clerical assistance and administrative services.
- Perform bookkeeping and accounting services, including:
- Have on-line access to account information with Delaware bank.
- Maintain corporate checking account.
- Make bank deposits and request bank transfers.
- Pay bills.
- Prepare financial statements.
- File required tax returns including quarterly payroll tax returns, annual information return, and annual franchise tax report.
- Provide introductions to Delaware financial institutions for physical custody of assets.
- Document investment decisions originated in Delaware.
- Maintain corporate minute book and stock register.
- Furnish a part-time employee.
- Provide independent officers and/or directors.
- Attend director and shareholder meetings.
- Work with auditors and legal counsel.
