Software as a Service (SaaS) businesses tend to be uniquely portable compared to traditional businesses, even within tech. There are a couple reasons for this.
First, they lend themselves to international customer bases, unlike more regionalized tech businesses which may require a market-by-market growth strategy.
Second, they are often run by solo founders or small teams, allowing for a high level of flexibility when it comes to personal and tax residency.
Given this flexibility, and with few or no employees to keep happy, SaaS founders commonly choose to incorporate in more tax-advantaged regions, rather than simply opting for the brick-and-mortar default in their country.
The most popular locations for SaaS businesses to incorporate are:
- United States (Delaware): favored for investor access
- Singapore: favored for low corporate tax (local director requirement)
- Hong Kong: favored for low corporate tax and no local director requirement
- Ireland: favored for R&D tax advantages
- Estonia: favored for ease of doing business remotely
|Corporate tax rate
|Personal income tax rate
This article is not legal or financial advice. NanoGlobals content is intended for general information purposes only. NanoGlobals may be compensated when featuring partner brands.
United States (Delaware)
The primary benefit of Delaware is that it is a low-tax state with a high level of recognition as an incorporation center in the US.
If you're chasing US customers in multiple states with some international customers as well, and you intend to court investors, Delaware is an extremely popular option. So popular, in fact, that a number of startups and corporations offer Delaware formation and compliance as a service. (We recommend ZenBusiness for setting up US companies; the bigger brands like Stripe Atlas offer less ongoing support).
The primary benefit of Singapore is that it's well-regarded internationally, very stable, and has a low tax rate. It's also a very international city with lots to offer and low "culture shock" for westerners compared to most places in Asia.
Singapore does require a local director for the business, however, so it's not like Hong Kong or Estonia where you can simply register and manage the company/banking remotely.
Hong Kong is popular as a convenient location for the Chinese market, as well as for its low overall tax rate and convenient, stable banking system.
The main issue with Hong Kong at this time is that ongoing conflict with China and street-level protests have brought the perception of the location down somewhat when it comes to stability.
Ireland is worth including here as it's famously a shell location for companies like Apple to manage and route their international profits, resulting in an extremely low effective tax rate relative to the EU norms.
However, Ireland is not ideal for most mid-size companies, even when relocating, due to high personal tax rates and increased scrutiny on the region thanks to the ongoing legal battle between the EU and Apple.
Like the US, Estonia's biggest benefit is perhaps the branding. The country has successfully gone from "obscure post-soviet country" to "EU tech center" in just a few years. They've also launched some very innovative digital government services, including the world's first Digital Nomad visa.
The main benefit of Estonia is for residents of countries like Germany with extremely high tax rates and high costs for incorporation, but more flexible rules on foreign-earned income.
Corporate Tax Rate vs Personal Tax Rate vs Holistic Tax Rate
As discussed in this article, there are a variety of options for SaaS company incorporation. Depending on your revenue, growth rate, customer base, personal residency, and etc… you can potentially save millions annually by selecting the proper structure.
However, at the end of the day, the best place for most individuals to register their SaaS business is in their country of residence. This is especially true for SaaS companies making less than $2–3M/year in revenue.
The importance of incorporation aligned with your personal tax residence is highly relevant to US residents, even expats and digital nomads. (The US is one of the only countries that taxes residents when they live abroad.)
Achieving a low holistic tax rate as a SaaS founder
Ultimately, the problem with advising on “the best place to incorporate” is that a region with tax advantages at the corporate level may ultimately be more expensive, once you factor in your personal income taxes and laws around your residency.
For example, let’s say you’re a US citizen founder with a company registered in Estonia. You travel as a digital nomad and have not set foot in the US for several years. However, you remain and citizen and expect to return one day.
So long as a majority of your customers are in the US, you’re looking at double taxation — as the US tax authorities will consider you to be a US company and an US resident. This is the same for most EU countries.
If this weren’t the case, every online contractor with a freelance writing business would be registering their companies and personal residence in “pay to play” zero-tax jurisdictions. Obviously, this is untenable for governments.
Relocating to reduce holistic tax rate for SaaS founders
There are loopholes if you are willing to become a permanent resident in a more low-tax location, however — provided you are willing to cut all personal and fiscal ties with your home country.
For example, it is not unheard of for EU citizens to relocate to Singapore to operate a company targeting asian markets.
One prominent example of this strategy is Pieter Levels of NomadList, a popular open startup in the Digital Nomad community. While originally incorporated in his home country of the Netherlands, after 5+ years in business and reaching $80,000+ MRR, he chose to relocate personally to Singapore. This makes sense for his company, because by the nature of the business he spends most of his time in Asia, and it’s likely a tiny minority of his customers that are in the Netherlands.
I'm a Singapore company, and soon personal resident!— (@levelsio) May 30, 2019
In more extreme cases, SaaS founders can also set up a Hong Kong company (meaning there is no local director requirement, as with Singapore) and relocate to a low-cost region, or bounce around as a digital nomad perpetually to avoid triggering residency periods.
For most people, this simply isn’t practical, and you will have more money at the end of the day by simply registering your company in your country of residence and concentrating on your product and investment cycle.
One final caveat worth mentioning for US citizens — if you’re a sole proprietor and pull less than $100,000 USD/year, you can take advantage of the foreign-earned income exclusion to avoid paying tax on that.