As you may already be aware, setting up a holding company in Delaware , usually a C-Corp (Delaware HoldCo) may expose shareholders and your Delaware HoldCo to some level of tax liability. Here are just some key compliance points to note in relation to your Delaware HoldCo.
- Franchise Tax & Annual Report
Your Delaware HoldCo is typically required to file an Annual Report and pay Franchise Taxes by March 1st of Every Year. The official notification for these filings are usually sent to your Registered Agent in Delaware, typically in December or January. Other things being equal, your Registered Agent (Registered Agent) should have received these official notifications by now. If you do not have this notification yet, please reach out to your Registered Agent.
Filing an Annual Report and paying Franchise Tax is typically not a clumsy process because (a) Its really a matter for your compliance team (b) the filings can be done by your Registered Agent electronically (c) the filings can also be done electronically by you without reference to a lawyer or Registered Agent. Generally, the filing of Annual Reports and paying Franchise Tax should not attract any additional legal fees.
To be sure, an Annual Report is simply a document that contains business information and is usually submitted at the time of payment of the Delaware Franchise Tax. The Annual Report will typically contain information which includes the address of the corporation’s physical location, the name and address of all the directors (and 1 officer) of the Delaware HoldCo. The details of the Annual Report are not shared publicly as there is no requirement to publish the name of the shareholders of a company as the case is in Nigeria. It is useful to note that these filings are done in arrears. Accordingly, what would be due by March 1, 2020 will be Franchise Tax payments and Annual Report filings for 2019.
- There’s Evidence of Scammer Activity in Delaware and we think Offshore Companies May Be More Susceptible
Your Delaware HoldCo may receive a scam email asking you to file information and send some money by a certain date in order to complete a corporate action on behalf of your Delaware HoldCo.
Here’s some of the information published by the Delaware Division of Corporation on this issue:
- “October 23, 2015: A business called Register Delaware recently mailed a deceptive solicitation to numerous Delaware legal entities. These solicitations include a form titled “Annual Invoice for Statutory Representation – PAST DUE NOTICE” and urged companies to pay a $175.00 for “Delaware – Domestic Representation” for the period of 2015 – 2016. The address of Register Delaware on the solicitation is 1120 L Street, NW, Washington, DC 20005 which is the address of a UPS Store in Washington, DC. The form includes the illegal and unauthorized use of the Great Seal of Delaware to give the form the look of official correspondence from the State. The form requests the company to provide contact information and recommends that company pay for expedited service ranging from $100 to $500.
- “August 5, 2013: A company called Corporate Records Service mailed a deceptive solicitation to numerous Delaware legal entities. These solicitations included a form titled “2013 – Annual Corporate Records Form – Shareholders, Directors and Officers,” and urged corporations to file information naming shareholders, corporate directors, and corporate officers and send payment in the amount of $125.00 by a certain date in order to satisfy the annual records requirement for a corporation”
If you are not sure of the authenticity of an email relating to your Delaware HoldCo, it would be useful to seek legal advice. It may also useful to double check and assure that your Registered Agent is officially registered to carry out corporate agency services in Delaware. Here is a link to the official Delaware list of Registered Agents https://corp.delaware.gov/agents/.
- How Much Would You Pay as Franchise Tax?
This can vary and you would have to calculate the amount that is due and payable by your Delaware HoldCo using either the “Assumed Par Value Capital Method” or the “Authorised Shares Method”. The default method used by the Delaware State is the Authorised Shares Method. Generally, the minimum tax is $175.00, for corporations using the Authorized Shares method and a minimum tax of $400.00 for corporations using the Assumed Par Value Capital Method. You may check this link to better understand how to calculate or arrive at the amount payable Franchise Tax by your Delaware HoldCo.
- How About Annual Report Fees?
This is typically a flat fee. The filing fee for filing an Annual Report or Amended Annual Report for exempt domestic corporations is $25. For an Annual Report or Amended Annual Report for non-exempt domestic corporations the filing fee is $50. A good reminder is that failure to file as and when due may attract fines and affect the good standing status of your Delaware HoldCo
- Federal Income Tax Returns
This is a key area of compliance because defaulters can easily be fined up to USD30,000 dollars (or more) in penalties. Filing federal income tax returns is a separate compliance obligation altogether from Franchise Taxes and Annual Reports, which are filed with the state of Delaware. The requirement here, generally, is for all C-Corporations to file and, where applicable pay income tax returns by the end of the 15th day of the 4th month, typically April 15th, if the financial year end is December 31st. To be sure, every U.S. corporation must file an annual federal income tax return, even if the corporation has no profits, sales, or other business activities.
Things can also get tricky as your Delaware HoldCo may need to file other disclosures, as a result of its ownership interests in a Nigerian entity or as a result of some financial interest in a foreign bank account.
Here are some general points to note on this point:
- US entities or individuals which own 50% or greater interest in a foreign corporation are required to file form 5471
- Foreign individuals who own more than 25% of US Corporations are required to file form 5472
- US entities (or individuals) with signature authority or a financial interest in foreign assets or bank accounts must file a Foreign Bank Account Disclosure. The financial interest may be direct or “indirect”.
- There are other disclosures required related to foreign trusts or foreign pass through entities.
- Your Delaware HoldCo would most likely require the services/assistance of a Certified Public Accountant (CPA) for this purpose.
The disclosures have a very firm due date and failure to file penalties are significant. Failure to maintain the proper records, failure to file the correct Form 5472, or failure to file a required Form 5472 may result in a $10,000 penalty for each failure per tax year.
Important Notice
Information from our network of Registered Agents and Certified Public Accountants form the basis of this update. The amounts payable as tax or levy are subject to change and as such, all statements of fact in this update should be confirmed. You should definitely secure legal and tax advice that is specific to your situation.
Kindly reach out to your Balogun Harold contact or via support@balogunharold.com. .
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