Why Registering A DAO in An Offshore Country Is Not A Good Idea

The idea is right and good. A DAO is not an entity floating in a legal vacuum; rather, it fits into international law. And it should be clearly identifiable and, above all, know how it is set up in terms of corporate law, tax law and liability law.

It therefore makes sense to give it a legal form that enables it to enter into business relationships and contracts with third parties, while at the same time limiting its liability. If a DAO does not take care of this, it exposes itself and its members to enormous liability risks. In case of doubt, it will be regarded as a partnership - with the consequence of unlimited liability of each individual partner/token holder.

It makes little sense, however, to follow the lure of offshore jurisdictions and their advisors head over heels and relocate the DAO's registered office to some atoll in the Caribbean just because the local legislature has enacted a new "DAO-LLC Law" with seemingly irresistibly good framework conditions for DAOs.

As a rule, these legislative actions are more appearance than reality and offshore incorporation does not make sense for many reasons. Experienced advisors with knowledge of corporate law, liability law and tax law can quickly recognize this and seriously evaluate the meaningfulness of an offshore foundation.

Ever since the OECD launched initiatives to combat harmful tax practices a few years ago, the classic business model of offshore jurisdictions has been dead. Nowadays, no one believes that they can effectively evade taxes by setting up in a zero-tax foreign country.

But that was precisely the business model of tax havens for many decades. Tax evasion has always been illegal. The difference between now and the past is that today it usually takes only a few years for a tax evader to be discovered, whereas in the past, protected by the secrecy of the offshore countries, they could operate undetected for decades or even forever. Problems often only arose when the illegally accumulated assets had to be reintroduced into the ordinary economic cycle.

In short, offshore setups for the purpose of tax evasion finally no longer work. So offshore jurisdictions need to reinvent themselves. And one of these questionable new inventions are legislative initiatives that promise DAOs the moon with regulatory freedom, zero taxation, and intense liability protection.

Answering the lure may make sense in exceptional cases. Most of the time, however, it does not. Because the apparent advantages of an offshore foundation are none at all on closer inspection:

Developed jurisdictions have equally developed nonprofit laws that exempt companies that promote specific public welfare purposes from taxation. For example, most countries, including Germany, fund companies that support research and education. A DAO in the form of a foundation dedicated to the purpose of further developing the respective protocol and token ecosystem and informing the general public about it could therefore be recognized as a charitable and thus a tax-privileged nonprofit organization. In this case, it would not have to pay taxes on its cryptotrading income, for example.

Of course, this does not prevent the DAO from also engaging in classic commercial activities - usually via domestic or foreign subsidiary corporations.

Such a constellation gives the DAO a high reputation with cooperation partners from the corporate world, but also with public research institutes and public funders. Even donations - in fiat, crypto or other tangible assets - could be received by the DAO, which is recognized as a nonprofit organization, and tax-deductible donation receipts could be issued to its donors in return.

Even a non-charitable foundation would be tax privileged, at least in Germany, to the extent that its asset management is only subject to corporate taxation of 15 percent. And DAOs that manage their assets by way of "hodl" can sell their coins tax-free after one year, just like private investors. Dividends and exit proceeds from investment companies are also subject to taxation of only about 0.7 percent.

Done correctly, a DAO in the form of a German foundation - whether nonprofit or for-profit - is therefore more than competitive in an international tax comparison.

A DAO that wants to be reputable and legally compliant cannot avoid having its activities checked for compliance with the regulatory requirements in the relevant countries. It is therefore well advised to look into the regulations in the markets in which it is active and, if necessary, to obtain the relevant permits or to have it confirmed that a permit is not required.

By the way, the positive effect of a granted permission should not be underestimated: It is also a sign of seriousness. A permit from the German BaFin can also be the starting point for a business activity that is permitted throughout Europe.

The registration of a DAO in an offshore state can make sense in individual cases if it is implemented consistently. This includes, among other things, gathering the management of the DAO in the country of incorporation. This is more likely to succeed in the UAE (e.g. Dubai) or Cyprus than on an island in the Caribbean.

In most cases, however, it makes much more sense to establish a DAO in a country that offers clear and transparent liability and tax frameworks and a robust regulatory environment. European countries come into question for this, especially Germany. Choosing a domicile in Germany strengthens confidence in the DAO and helps it establish itself as a serious and reputable player in the long term. Tax and other design measures are then of course also possible in the course of the further development of the DAO.

Would you like advice on registering a DAO? Feel free to contact us at any time!