The necessity of getting advice

Despite all of the good intentions of international treaties and globalization advocates, the complications associated with transnational business can still be daunting.

Take a simple example: an American entrepreneur establishes a Dutch BV to create a software product in the Netherlands for sale to US customers.

Pretty straightforward, until you start to follow the money through the business.  I’m not an accountant, but here’s how the conversation went when I spoke with one:

The American ownership of a foreign entity must be reported to the US government.

The transfer of money in excess of $10,000 is a reportable flow out of the US under anti-terrorism and money laundering laws.

The creation of software in the Netherlands is a wholly Dutch corporate activity, with income after appropriate business deductions taxed at the 25% corporate tax rates.

The sale of software in the US is a foreign source income, subject to a foreign tax exclusion which varies from 0% to 100% depending on how the software is defined as a good (e.g.: service, product, license for use).

The Dutch corporation’s retained earnings are subject to a supplemental 15% US tax if they are ever transferred to the US when the owner moves home, raising the total tax hit to 40%, unless…

The full corporate income is reported to the US in parallel with the Dutch reporting, in which case it is taxed at roughly a 5% marginal rate (‘Pay me now or pay me later)

…or you could fight for a sub-part-S exclusion that forces you to distinguish personal service income from manufactured income, where “manufacturing” can mean different things in the US and Europe on almost a yearly basis….(whimper)

Yes, I’m glazing over too: a one-sentence business drags all of this behind it!  Worse, up-front choices make $10,000’s of dollars of difference in taxes. The method for reporting corporate income must be decided and registered in the US within 75 days of the establishment of the Dutch company. The service / product / license choice must be made when the client contract is signed.

So, the lesson is to secure excellent tax and legal consults in both the US and Europe.  They can get the best startup structure established, and create the yearly audited accounts and annual tax returns for the Netherlands and the US.

I’ve found that the services are offered as standard service packages whose costs don’t vary much from firm to firm.

Setup costs for establishing this one-line business are around $3500.

Total annual reporting and tax preparation costs are  around $5000 per year.