This building (1209 North Orange Street) and several others in Delaware is how more than half of America’s publicly-listed companies, and two-thirds of Fortune 500 businesses, legally minimise their tax bill.
You’d be forgiven if you can’t place Delaware on a map. It’s a tiny east coast state whose less than a million denizens account for only 0.29 per cent of the total US population.
Its main city, Wilmington, is approximately halfway between New York City and Washington DC, and it’s America’s second smallest state by land mass. In the US presidential elections, Delaware gets only three electoral votes, compared to the country’s biggest state, California, which gets 55.
But a perusal of America’s biggest and most well-known corporations and you’ll find they are incorporated in Delaware, far from their actual headquarters in California, Georgia, Nebraska, Michigan, Illinois or New York. Think Walmart, General Motors, Berkshire Hathaway, Disney, Facebook, Amazon, JP Morgan, Kraft, Netflix, McDonald’s and American Airlines.
There are a couple of factors at work, one of which is tax benefits. Surprise.
According to the New York Times , Delaware allows companies which are incorporated (the process of separating a company from an individual ie. Facebook and Mark Zuckerberg are separate entities under business law) there to reduce their tax obligations by shifting certain revenues to holding companies in Delaware.
Specifically, Delaware doesn’t apply tax on what’s termed ‘intangible assets’ such as trademarks, royalties, leases and copyrights. For example, if company X held the copyright to song Y, every time song Y is licenced for use, company X collects royalty fees. Those fees are liable for tax collection in the state company X actually operates in. But if company X shifts that revenue to Delaware, then that cash stream isn’t taxed, saving it tons of money every year.
But it’s not the only reason Delaware is such an attractive proposition to its more than a million companies — there are more companies incorporated in Delaware than there are people. Because Delaware generates a quarter of its state budget from fees and taxes from these companies, it’s in the state’s best interest to keep them happy. Very happy.
And one of the ways it does that is with business-friendly laws and regulations free of red tape. Delaware is one of the easiest places in the world to set up a business with its Department of State office open until 10:30pm on Mondays to Thursdays and midnight on Fridays. It can take less than an hour to incorporate a company.
However, the other reason why businesses are so enamoured with Delaware is because of its court system. The state set up the respected Court of Chancery in 1792, which only hears business disputes. The court is timely and presided over by judges incredibly well-versed in the state’s business laws. There is also more than 200 years of case law and precedent which means there are very few surprises in the verdicts.
Plus, it’s self-perpetuating. The next generation of US companies are also incorporating their businesses in Delaware with start-ups following the example of their bigger siblings if they want to attract investors.
The founder of a Virginia-based technology start-up, who declined to be named, told news.com.au: “Delaware has the most straightforward rules for corporations and companies and venture capitalists prefer to go with what they know.
“They know exactly what to expect in Delaware rules, rather than having to know the rules of 50 different states. Over time, Delaware has just become the go-to and easy place, and you’re expected to incorporate there if you’re serious about growth.”
news.com.au 8 Apr 2014