A tax haven hidden in Delaware

Digging into money maneuvers that feel sus.

Would you be able to spot a tax haven if you saw one? 👀 With all the tax-avoidance trash talk directed at the Cayman Islands, you may expect a tax haven to look like a beachy dream. To be fair, a five-floor building in the Cayman Islands—the Ugland House—is registered to more than 18,000 business entities and does look like a spring break destination.

On the campaign trail in 2008, then-Senator Obama said about the Ugland House: “That’s either the biggest building or the biggest tax scam on record.” So it’s not technically a scam, since it was and still is perfectly legal to register in a light- to no-tax area. But Obama did miss a much “bigger” building.

And that’s 1209 North Orange Street in Wilmington, Delaware, a humble two-story structure. It would blend right into your hometown suburban business park, where your friends’ parents set up their T-shirt screen printing shop. Yet 1209 North Orange Street, aka the Corporate Trust Center, is registered to at least 285,000 different firms.

Magically whisked away to Delaware

To understand what makes Delaware so appealing for businesses, it helps to know what makes a “tax haven.” Since 1998, the Organisation for Economic Cooperation and Development, or the OECD, says a tax haven has these four features:

  1. No or minimal taxes on certain forms of income.
  2. Laws that shield taxpayers from tax and law enforcement agencies in secrecy.
  3. Generally opaque legal, legislative, or administrative practices.
  4. No requirements for business entities to conduct “substantial” activities where they are registered.

According to Delaware: An Onshore Tax Haven, a report by the Institute on Taxation and Policy, one of the most attractive things Delaware’s tax law offers is the colloquially referred to as the  “Delaware loophole” or the “passive investment company loophole.” Because while Delaware isn’t a zero corporate tax state, it allows companies to earn income related to investments, interest, and intellectual property (IP).

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In practice, companies will often create shell companies incorporated in Delaware that “own” the entire company’s IP. The company then pays the shell to use that IP. So while the shell doesn’t owe taxes on income related to the IP, the company as a whole can write off the payments to the shell as an expense, saving millions of dollars in tax liability.

Nightmare on Orange Street

It isn’t just sophisticated financial firms looking to save on taxes, either. 1209 North Orange is the registered home to Coca-Cola, Embassy Suites, Dell, Walmart, even Wingstop (guess that’s the price we taxpayers bear for $0.70 boneless wings).

On the Financial Secrecy Index (FSI), which ranks global tax jurisdictions by size and how complicit they are in shielding individuals from tax bills, the US ranked No. 1 in 2022. The Tax Justice Network, which created the FSI, lists both federal and state law, like that of Delaware, as part of the secret-keeping tax structure. On Tax Justice Network’s corporate index, the US ranked 25 in 2021, just three spots above Panama—which, y’know, is the origin of all those leaked scandalous papers.

Delaware is home to a little more than 1 million people, per the latest US Census data. Meanwhile, a total of 1.8 million legal entities are incorporated in the state, as of 2021. Two-thirds of Fortune 500 companies are incorporated in Delaware.

It’s other states, too

Delaware may be the corporate darling for now, but it hasn’t always been (New Jersey used to be more favorable), and other states are vying for the top tax haven title. South Dakota, Nevada, and Wyoming all have no income, capital gains, estate, or corporate taxes. And many states made permanent tax cuts in 2022, which correlated with budget surpluses from federally funded pandemic relief.  Once there’s a new hot corporate address, we’ll be sure to let you know.

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