Escuela del Sur #5 “Latin Founders: Brush Your Teeth, Wash Your Hair  & Don’t Overthink Where to Form Your HoldCo”

LatAm List – A significant factor of success is choosing how to focus your time.  So I often tell founders from Latin America don’t misuse your most precious resource brushing your teeth or washing your hair (just kidding: unless you are a coder.) Smile.  

Entrepreneurs from Latin America consistently waste lots of time, money, and bandwidth trying to answer what should be a very straight-forward question: “Where should I set up my holding company?”

This question is actually quite complicated, but the answer is relatively simple. Much to the chagrin of many lawyers and advisors who would like to overcharge startups for the answer, your friends at LatAm List will answer this question for free.

There are only two credible jurisdictions where a Latin American tech-enabled company should put its holding company: Delaware or Cayman.   

You can confidently ignore all those misguided, clever ideas you may have heard about Malta, Cyprus or BVI companies.  You can also ignore the suggestions to explore a Spanish ETVE, a Chilean FIP, or a Panama Foundation. Time spent considering alternatives to Delaware or Cayman may be a fool’s errand.

Creating a Delaware Corporation as a Holding Company is the “right” alternative 99.9% of the time, if the founders are US persons, if the intellectual property was developed in the US, if the mind and management of the company is in the US and if the main target market for the company is the United States.  

That is a lot of ifs.  For many Latin American founders, none of these ifs will apply.  Latin American founders should be careful of leaping into a Delaware C-Corp structure based on the words of a Silicon Valley lawyer who cannot differentiate between Mexico and Argentina.  

A Delaware C-Corp is like the Hotel California, where you can check-in but you can never leave, as the song says.

Once you create a Delaware C-Corp and contribute the underlying operating subsidiaries to the new holding company, you will be locked into paying two levels of tax in the United States.  First, the Holding Company will pay corporate tax (around 21%) on its worldwide earnings – even if none of the company’s sales are in the US. If or when the Holding Company distributes dividends to its shareholders, those people (even those who have never been to the United States) will have to pay US income tax on those dividends or face a 30% withholding on any distributions outside of the US.  

The math can get complicated, but in simple terms the effective tax rate for a Delaware C-Corp structure can quickly approach 50% – even if the company has never made a sale in the US or if the founders don’t have US visa.  Once you implement that Delaware C-Corp structure, there is no easy way to avoid the reach of Uncle Sam and his taxation of worldwide income, other than selling or liquidating the Delaware company at fair market value and paying US tax on the gain.

Many Latin founders prefer to consider a more tax efficient alternative to Delaware companies that institutional venture capitalists will still accept for investment.  Five years ago, before we at PAG.law began to share the benefits of Cayman, there were no alternatives to a Delaware C-Corp that Silicon Valley investors would accept for Latin American-based businesses. Even today, there is only one alternative jurisdiction: Cayman.  

A significant percentage of large funds with over $250M in assets are either based in Cayman or have a feeder fund in Cayman to facilitate non-US investors supporting their fund.  It is therefore difficult for a VC fund to object to Cayman if the fund itself has operations in Cayman or may have operations there in the future.

The Cayman Islands are preferred because they do not charge corporate tax on income generated outside of Cayman. There is also no tax on distributions paid from a Cayman holding company to its owners.  However, each recipient of any distributions needs to see if he or she needs to pay taxes on that income in their home country.

Setting up a Cayman holding company structure generally takes an extra week or two and $3-5K more than setting up a Delaware holding company structure.  For many Latin American entrepreneurs, this difference is modest in comparison to the significant tax efficiency. We generally recommend to hang a Delaware limited liability company (LLC) under the Cayman company and have that Delaware LLC be the owner of the local operating subsidiaries in each Latin American country where you have operations.   

Cayman holding companies also allow flexibility to change the structure in the future.  If a Latin founder has a Cayman holding company and a blue-chip fund like Sequoia or Softbank says it would like to invest in the business but it doesn’t like the Cayman structure, no problem.  Generally the Cayman holding company can be redomiciled to Delaware in less than a week and for less than $5K without triggering any tax changes. A redomicile is much like moving a house from one jurisdiction to another. In conclusion, Cayman can offer many Latin founders a lot flexibility at a relatively low cost.

Finally, there is one more alternative that Latin founders can consider, which is starting off using a Delaware LLC as their holding company.  This alternative is a bit more tailor-made and beyond the scope of this article.


Recently, a successful entrepreneur from Mexico came to my office.  He was ready to expand his tech business throughout LatAm and raise money from investors in the Valley.  He proudly showed me a 100+ page report prepared by a leading accounting firm that analyzed 26 different jurisdictions where to set up his holding company.  This monster of a document concluded that a Dutch Commanditaire Vennootschap (CV) was the best option given the applicable tax treaties.  

I asked “Are you aware of any Dutch Commanditaire Vennootschap that has ever raised money from a credible venture capital investor?” Then we looked on Crunchbase and couldn’t find a Dutch CV involved in any VC deal.

I tossed the report in the garbage and said “Amigo Mio, let’s find you more time to brush your teeth and wash your hair because you aren’t using your time very efficiently.”

This article is not meant to provide legal or tax advice. It should be understood as a provocative, simplified overview to allow the reader to better consult its legal and tax advisors. Every founder, every company, every situation is different.  There is no “one size fits all” solution.

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