CHICAGO Fighting the cliché of the dot-com start-up that runs out of a basement, David Ward is living the dream. The 32-year-old web designer moved his one-man operation from Albany, New York, to the Cayman Islands last year.
"My wife hates the winter. She wanted to be near a beach" said Ward, owner of Meticulosity, a support company for online retailers.
He is not alone. American small business owners of all stripes - some relocating existing ventures and others starting new ones - are considering tax-friendly locales ranging from Bermuda to Belize. Relocation experts say the so-called "fiscal cliff" that threatens to end the Bush-era federal tax cuts at year-end may be fuelling renewed interest.
An estimated $11.5 trillion of funds is held offshore by individuals in tax-friendly jurisdictions, roughly five times the amount estimated by the World Bank in 2002, according to the Tax Justice Network, a coalition of researchers and activists that promotes tax transparency.
"These tax havens begin to look fantastically attractive," said Bruce Hoch, managing director of DCG Corplan Consulting, a West Orange, New Jersey-based firm that assists private companies with relocation strategies and helps communities attract new business.
DO YOUR HOMEWORK
To figure out if moving overseas will help their businesses, owners must first consult with their tax advisers. They could decide to remain headquartered in the United States, incorporate in the foreign domicile or set up a holding company to repatriate earnings to the United States. Some even relinquish U.S. citizenship. Much depends on the industry, number of employees, whether cash is needed for growth in the foreign country and the lifestyle choices of management.
Ward's business, for instance, remains incorporated in New York State as a limited liability corporation and he has kept his U.S. citizenship. His earnings and his wife's salary from teaching, which total about $150,000 a year, are reported as personal income on their federal and state tax returns. The bulk of the savings comes from the couple's qualifying for a foreign earned income tax exclusion, which lowers their tax burden by roughly 40 percent. Stateside, Ward says, he paid 50 cents on every dollar his business made.
But there are also some negative off-sets. Because the Wards had a relatively low cost of living in New York, they are actually paying more for food, housing and other essentials in their island hideaway. Ward also has some travel expenses when he needs to return to New York for meetings.
"I'm not rolling in money," he said. But, "instead of living in the freezing cold, now I'm living in paradise."
There are also set-up costs and the potential need for periodic statutory audits, depending on the requirements of the location, said Jim Alabegu, a CPA and New York-based partner with Eisner Amper. Some business owners might be subject to an exit tax prior to their departure from the United States if they give up their citizenship.
BEWARE OF DELAYS
Business interruption can also have a significant impact on the bottom line, said Hoch, adding that most small businesses should plan on being inoperable for several months.
Business development groups and local government can assist with information about available real estate, business-licensing procedures, lending requirements and personal considerations such as the quality of schools.
"It's very disruptive to a small company," said Hoch. "Smaller companies really have to close down and relocate everything. The nice thing is, if it's well thought out, the savings are almost immediate."
Delays are what beset John Berglund, an attorney and former Minnesota-based lobbyist, when he and his wife decided to start a boutique perfume business on the French side of St. Martin - their favourite vacation destination - in 2007.
"We faced a few obstacles," said Berglund, who incorporated Tijon locally and claimed French residency, but did not relinquish U.S. citizenship. The couple pays business and income taxes to the French government at the relatively low island rate, and in return gets access to the French healthcare and pension systems. As U.S. citizens, they pay U.S. taxes only on their investments and earned income in excess of $75,000 per person.
Berglund said he struggled to get a basic grasp of French. On top of that, it took four months to open a bank account due to documentation requirements. Applying for residency presented other problems - appointments could not be made in advance and the Berglunds found themselves fighting large crowds.
PLAN FOR CONTINGENCIES
Among the most challenging issues to small business operators overseas are infrastructure problems, said Perry Sheraw, a former journalist who moved to St. Croix from Cincinnati in 2000. She worked as a diving instructor, boat captain and communications executive before co-founding a marketing communications firm, Sugarmill Media, in May.
"Your power can go out at any time," said Sheraw, whose clients include local jewellery stores, a charter yacht company and a financial services firm. "You have to have redundancies for your redundancies. Everything is just harder to do here - you have to be creative."
Even so, those inconveniences, as well as separation from relatives, are no match for the laidback lifestyle, she said.
"You're never cold and your kids can play outside all year long," Sheraw said. "It's a really diverse and interesting culture. Everyone in my circle is here because they love it." (Reporting by Deborah L. Cohen; Editing by Dan Grebler)