Why you might not want to incorporate in the USA
USA used to be the “Land of Opportunities” for us Europeans. For decades, we looked in awe at the big country to the west, and millions emigrated in search of happiness. Today, Razuna has grown dramatically – especially in the USA – and this is the story of why, we will take money away from the Americans. Not because we want to, but because the Americans don’t seem to want it.
Razuna is headquartered in Denmark, which is a very small country. We speak Danish, a language spoken only by us 6 million people, so for obvious reasons, most of us are fluent in several languages. Otherwise we would find it difficult to conduct business or travel. Two things, of which we are generally very fond.
Denmark is one of the oldest and most stable democracies in the world. And despite having limited natural resources, very few inhabitants, a weird language and ridiculously high taxes, we are one of the richest countries in the world.
And why is that?
Because we love doing business. Ever since the boat was invented, we have travelled the world, buying and selling stuff. I admit we probably did a bit of looting too in the old days, but for the past few hundred years, commerce has been the order of the day. So now, we are one of the top exporting countries in the world, measured on a per capita basis.
In the late 1800s, a lot of Danes – like the other Europeans – emigrated to USA, “The Land of Opportunity”. My own great-great grandfather and his entire family emigrated too leaving only his oldest son, my great-grand father Jens, behind in Denmark, building a small printing business on the Danish west coast. Today it’s still thriving under my younger brother’s ownership.
Razuna’s founder, Nitai is originally from Italy, then Switzerland – not forgetting the years he lived in the USA and India. When we first met to work on commercializing Razuna back in 2011, Nitai moved from Switzerland to Denmark to work for half a year. In order for him to do that as an EU citizen, he bought a plane ticket, rented an apartment and he was good to go.
Today, Razuna is an international company. We have 70% of our customers in the USA and the rest are equally dispersed throughout South America, Asia and Europe. So – on a daily basis, we send out invoices from Denmark to our customers – mostly in the USA, which they happily pay, and we then put the money into our Danish bank account.
With the majority of our customers in USA, we decided to scale up there. So – we went out and hired developers, rented office space, incorporated in Texas and started preparations to move support, billing and operations for certain customers to the USA.
Welcome to the stone-age…
This is where I got my first shock. The USA is completely systematic, infected with stone-age processes and in all honesty – stupid.
First – let me explain the basics. Every year, Americans gladly send millions of dollars to our Danish company. We do provide a very good service, and we’re thankful that our customers love us. But – in the end, the money flows out of the USA – and into Denmark. The Danish tax authorities take their (very high) share. But the USA gets nothing.
So – by incorporating in the USA, we would start billing from this entity, thereby creating a domestic USA-to-USA cash flow. On top of this, we would start paying sales tax. We don’t mind. There’s some logic in billing locally and paying sales tax, and although we find it rather odd that there are different rates for different states, we are, however, used to this kind of confusion from the EU, where the taxes vary between member states.
And we will do more good. As we hire Americans, they will start paying American taxes – as opposed to what the Danes, Swiss, Germans and whoever else we would hire in Europe would pay.
In short, we would form a company in the USA, hire local people, pay local taxes, pay local sales tax and even keep most of the money we make in an American bank account. If anyone would come to Denmark to do the same, we would meet them and wave welcoming flags at the airport. We like business, as I mentioned.
How one incorporation can turn into many…
But in the USA, we are met – not with flags – but with what can best be described as a brick wall of complicated laws and obstacles. I thought that the EU was getting bureaucratic. I couldn’t be more wrong.
For instance: We hired engineers in states other than Texas, where we are incorporated. Being a cloud based company, doing world class media asset management software, we don’t mind where our team lives. We want our staff in the US, for obvious reasons, but if it’s in Alaska, New York or Texas – we couldn’t care less.
The US legislation doesn’t agree. All of a sudden, we were forced to figure out, how much we actually sold in each of those states, where we hired people. And if it was more than a certain percentage or figure, we then needed to incorporate in those states too! So – instead of having one US company, we were looking at having to incorporate in a multitude of states.
How stupid is that USA? When I can invoice you from Denmark and not worry about, which state I’m getting the money from?
I have made a small diagram below to illustrate:
Can you spot the difference?
Endless amounts of paperwork…
In Denmark, all reporting to the authorities is done via web – or in most cases even, automatically.
In the US, however, it’s like being in the 70’s in Denmark. In a country, where the NSA supposedly reads all my email, knows how much money I make, what I ate for breakfast and what color underwear I prefer, I cannot report electronically to the authorities!
After the first quarter with our shiny new US business, I suddenly received a pile of paperwork in the mail from our CPA. My first thought was to place it in the circular file [euphemism for trash can] – we’re not really used to so much paper in Denmark apart from toilet paper and Kleenex. But just to be on the safe side, I called our CPA, who told me, that I had to sign each document in hand and send one copy to each state, in which we had an employee – and another copy (of each document) to the IRS. I immediately sent an email, to nobody in particular, asking the NSA to get those tax figures themselves and pass them on to the IRS.
I couldn’t believe it. And as some kind of joke, the documents look identical, but are not. On the documents for individual states, the box, in which you write your title comes right after the date box. On the document for the IRS – the boxes have switched places. Or is it reversed? I forget. I took the liberty of scanning the two forms for your comparison below. Can you spot the difference?
I’m guessing one that employee at the IRS, or wherever, is responsible for Form 1. And someone else for Form 2. They’ve never met. They don’t talk. But they clearly don’t like each other.
Why do you want to come and pay tax in USA..?
Well, after a series of laborious, albeit value-destructing, maneuvers, we got going with our US company. Now with employees in different states and a very important part of our operation now moved to the USA, we decided that we needed someone to manage our US operations.
Since our first wave of people were engineers, we agreed to send our CTO and founder, Nitai. As Razuna is our baby, he was willing to sacrifice his life in Europe and move to the USA. Little did he know, that this would be when the real fun begins. As a European, you can’t just move to the USA and work. You need a visa, which is probably a good idea. But – obtaining one, is a complete and utter nightmare.
Again – simply put, we just need Nitai there to manage our US operations. We will pay his salary. He will pay taxes. He will spend money in the US. The company will grow. We will hire more people, who pay more taxes.
Sounds good? Again, in Denmark we would love it. I know we have built a reputation lately for being less than welcoming towards foreigners. But if some lunatic moves here and volunteers to pay our completely insane taxes and build a company, we welcome him. As mentioned, we will wave welcoming flags in the airport.
Now, in the USA, however, this does not seem to be the case. Because it quickly became apparent that our plans were not actually in sync with the real world. First, we got ourselves a lawyer, who could help out with the paperwork. And you will not believe what we were asked. I would argue that this process is a solid proof that the NSA knows absolutely nothing. I wouldn’t worry about them.
We sent endless amounts of documents, translated documents, notarized documents and copies of this and that. We had to send a detailed list of all transactions from our Danish bank accounts for the past 3 years. We had to send our lease agreement for the office. We had to take pictures of the office from the outside. Both in Denmark and the USA. Once that was sent, we also needed to take pictures of the inside – and we needed to make sure that the pictures had employees in them. We had to get the main lease agreement from our lessor to prove that they could actually sublease to us.
Below is just a snippet from the latest email about the premises. I will not bore you with snippets on financials, on Nitai, on formation etc. We needed to explain, why we needed the space. We needed to explain, why we didn’t need more. Then why we didn’t need less. Then we had to send copies of all Nitai’s diplomas. Then we had to explain, why nobody else could run the operation in the USA for us.
Why didn’t they just set up a meeting with us, so they could ask us? All we wanted was for Nitai to work in the US for our own company, because nobody else can do that in this phase. And the only result would be (I am now repeating myself, I believe):
- A larger portion of the money the company makes stays in USA
- Nitai would start paying taxes and spend money in USA
- Our company could grow quicker and hire more people in USA instead of Europe or Asia – and they would pay taxes in USA
We spent countless days writing documents, sending copies of the weirdest things and preparing even more documents before finally giving up.
The ephemeral of a state…
Nitai is now back in Europe. He will pay his taxes in Denmark, Germany, Switzerland or wherever he freely chooses to live. In Europe, you can live in whichever country you like. Most countries here seem happy to receive taxes.
We will continue to bill our many US customers from our Danish company, thus creating a Danish export – and a US import. Money flowing out of your country. The growth of Razuna in the rest of the world will not be via the USA but via the Danish company or somewhere else. Resulting in, loss of US export opportunities especially in Canada and South America – our most important growth market.
All we can say is: Wake up USA! How on Earth did a country, which we Europeans have always seen as “The Land of Opportunities”, become a replica of Rome in its last days. Completely systematic, bureaucratic and oblivious to opportunities.
We would really love to make money in the USA and keep it there. But it seems you guys will go to great lengths to force us to send it instead to Denmark.