Video Briefing

Offshore Citizen: Setting Up in a Higher Tax Country to Save on Costs? (What to Consider Besides Taxes?)

Jul 28, 2021Video Briefing7:45Watch on YouTube

The choice of where to incorporate a business can have a far larger impact on cash flow than the headline corporate tax rate. A recent client case illustrates how payment‑processing fees, foreign‑exchange (FX) costs, and other operational expenses can outweigh a nominally “zero‑tax” jurisdiction.

Tax rates versus effective cost

Jurisdiction Corporate tax Dividend withholding Approx. effective tax*
United States (LLC) 0 % 0 %
Romania (SRL) 1 % of gross revenue 5 % on dividends ~7 % (1 % + 5 % ≈ 6 %‑7 %)

*Effective tax is calculated on revenue rather than profit, assuming a 55 % margin in the example.

Hidden costs that shift the balance

  1. Payment‑processing fees

    • US‑based processors: ~1.9 % of gross transaction value.
    • Romanian processors: ~2.9 % of gross transaction value.
      The 1 % difference is applied to revenue, not profit, so with a 55 % margin it translates to an additional ~2 % effective tax.
  2. Foreign‑transaction surcharge
    When the US LLC processes payments in euros, the processor adds a ~1 % foreign‑transaction fee. This again doubles on revenue, raising the effective cost by another ~2 %.

  3. Currency conversion (EUR → USD)
    Converting euros to US dollars typically costs 1 %‑2.5 % of the amount. Using a conservative 1 % estimate adds another ~2 % effective tax (percentage of revenue).

  4. Re‑conversion (USD → EUR) for expenses
    Spending the proceeds back in euros incurs a second conversion fee, again roughly 1 %, pushing the effective cost to about 8 % over the baseline.

Result: Although the US LLC has a zero corporate tax rate, the cumulative impact of processing, foreign‑transaction, and FX fees can raise the overall cost to ~8 % of revenue, surpassing the Romanian company’s ~7 % effective tax burden.

Other variables to weigh

  • Currency of invoicing and spending – Aligning the functional currency of the business with the jurisdiction’s native currency reduces conversion steps.
  • Staff and payroll expenses – Local labor costs, social‑security contributions, and benefits differ markedly between countries.
  • Office and overhead – Rental rates, utilities, and ancillary services can be substantially cheaper in some regions.
  • Banking and reputation – Access to reliable banking partners and the perceived credibility of the jurisdiction affect client trust and financing options.
  • Regulatory risk – Consider the likelihood of political or legal changes that could affect the ability to operate or repatriate profits.
  • Customer location – Proximity to the primary market can lower payment‑processing fees and reduce latency in settlements.

Practical decision framework

  1. Map revenue flow – Identify the currency in which you invoice clients and the currency needed for expenses.
  2. Calculate transaction costs – Sum processor fees, foreign‑transaction surcharges, and FX spreads for each jurisdiction.
  3. Add statutory taxes – Include corporate tax, dividend withholding, and any other mandatory levies.
  4. Factor operational overhead – Estimate staff, office, and compliance costs.
  5. Assess risk and reputation – Evaluate legal stability, banking access, and brand perception.
  6. Compare total effective cost – Express all items as a percentage of revenue to see the true cost of each structure.

Bottom line

When the bulk of a business’s income is earned in euros (or any non‑USD currency) and expenses are also in that currency, the transaction and FX fees associated with a US‑based entity can erode the tax advantage. In such scenarios, a jurisdiction like Romania, despite a modest corporate tax rate, may deliver a lower overall cost of doing business.

Choosing a jurisdiction should therefore prioritize total cash‑flow efficiency—including taxes, processing fees, currency conversion, and operational expenses—rather than focusing solely on headline tax rates.