Registering A DAO in An Offshore Country | Disadvantages

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

DAO registration on the island?

Marshall Islands, British Virgin Islands, Cayman Islands, Wyoming, Utah & Co: In search of a "legal wrapper"

Many DAOs, which have been founded without first seriously dealing with legal issues, start looking for a suitable legal form in the course of their usually young lives, i.e. for a legal "protective cloak" that surrounds them, in Denglish: for a so-called legal wrapper.

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

DAO legal form enables business with third parties

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.

Offshore registration not useful for many reasons

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.

This is why offshore foundations have been effectively dead for years

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.

Apparent advantages of the offshore DAO are no

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:

Liability protection through special laws for DAOs with holes

Almost all countries have legal forms that limit liability. Limited liability companies have existed in Great Britain since the mid-19th century. Germany also introduced them at the end of the 19th century. After that, the legal form spread all over the world.

The fact that now, 100 years later, a hype has suddenly erupted around the "new" legal form of the DAO LLC is therefore due more to the offshore jurisdictions' good marketing than to the fact that they have introduced a particularly convincing innovation.

Non-member LLCs, such as those recently made possible in the Marshall Islands, are also old hat in developed jurisdictions. The concept describes nothing other than the legal foundation, which has been known in Germany, for example, since the beginning of the 19th century.

In short, LLCs have been existing for a long time and also foundation law is very well developed. The laws are clear, and the case law on foundation issues is firm. A foundation in Germany knows what to expect and operates in a legally secure, reliable environment. Therefore, no DAO needs to embark on the adventure of having to rely on the new law of an island state that has not yet proven itself in practice, on which there is no case law, and with which local advisors have not yet been able to gain any experience.

DAOs that choose a legal form that has been established and recognized on the respective island for decades and also provides liability protection for the members, but is not (or no longer) recognized abroad, can fare even worse. This currently applies, for example, to the legal form of the Limited in the British Virgin Islands, which since Brexit is no longer recognized as a liability-shielding corporation in Germany, for example, but is only treated as a partnership or sole proprietorship: Each partner (token holder) is therefore liable with his private assets. For a BVI-DAO, therefore, the following applies: Nothing but expenses.

Tax benefits for DAOs are only available locally

Not having to pay taxes in a tax haven sounds tempting. The problem is that zero taxation on the island says nothing about the other countries in which the DAO, with its usually numerous activities, has to pay taxes.

In other words, even a DAO based in Austria does not have to pay taxes in the Marshall Islands if it does not operate there. The fact that it does not have to do so even if it has its registered office in the Marshall Islands is therefore not an advantage for the DAO, but a matter of course.

Offshore formations do not exempt from regulatory obligations

Just because the country of incorporation waives any regulation of the DAO, e.g. does not expect any banking regulatory compliance, does not protect the DAO from unpleasant surprises when it goes global. Like any other company that operates internationally, an offshore DAO must adhere to the regulatory framework that applies in the various countries in which the DAO is active.

The fact that regulators are not squeamish in this respect has been experienced by the crypto and Web3 community on a monthly basis for quite some time. No matter whether it is the SEC (USA), FINMA (Switzerland) or BaFin (Germany): Anyone who does not behave in a legally compliant manner is suddenly under pressure. In this case, it is of little help that the home island state waives prosecution.

Clear disadvantages of offshore DAOs

In addition to the only seemingly beneficial promises, offshore DAO startups also come with tangible disadvantages that the community should be aware of in order to decide whether an offshore startup is really the best bet for promising DAO economic development.

The disadvantages include, first and foremost:

Tax haven defense laws

Many countries around the world no longer accept aggressive tax planning by tax havens and have enacted strict laws that explicitly target these tax havens. One example of such laws is the regulations in place in Europe, which currently (as of April 2023) target the following countries that are on an EU-wide blacklist:

  • American Virgin Islands
  • American Samoa
  • Anguilla
  • Bahamas
  • British Virgin Islands
  • Costa Rica
  • Fiji
  • Guam
  • Marshall Islands
  • Palau
  • Panama
  • Russian Federation
  • Samoa
  • Trinidad and Tobago
  • Turks and Caicos Islands
  • Vanuatu

The legal regulations make it considerably more difficult for companies from the above-mentioned countries to enter into and maintain business relationships with contractual partners in European countries. For example, payments to a DAO in one of the countries mentioned are generally not deductible as business expenses for a German contractual partner, and more stringent Controlled Foreign Corporation regulations also apply.

Domestic contractual partners must also fulfill increased cooperation obligations vis-à-vis their tax office if they wish to maintain a contractual relationship with a company domiciled in a country on the blacklist. Companies with functioning tax compliance will therefore refrain from entering into business relationships with the DAO, which is based in an offshore jurisdiction.

Tax liability at the place of management

In our practice, we have not yet advised any DAO whose officers wished to relocate their residence to an island atoll. The Marshall Islands are certainly an idyllic place. But to live there permanently?

But without local management, there is a risk that the DAO could become subject to unlimited tax liability in other countries. Many countries treat companies as unlimited taxpayers in Germany (with their worldwide income) if the management (in the case of a DAO, the "core team") is based in the country (e.g. in Germany). If this is the case, the foundation in a tax haven has not brought anything, but is a waste of time from a tax point of view.

Local consultants, of course, do not emphasize this point. They prefer to praise the local tax exemption. However, anyone who trusts in this and overlooks the tax regulations in other countries is doing the math without the host. Incidentally, things get even more complicated when the "core team" is scattered around the world. Lengthy disputes with the tax authorities worldwide about the respective tax obligations are then inevitable.

Tax liability at the place of business establishments

And even if the DAO is not treated as a fully taxable entity in any other country (which we have not yet encountered in practice), it will, in case of doubt, at least establish so-called tax permanent establishments in the various countries in which it operates. As a result, it will also be subject to taxation in these countries. The domicile in the offshore jurisdiction is therefore of little help in this case.

Controlled Foreign Corporation rules

At least "whales" who own DAO tokens on a large scale can also run into problems with the so-called Controlled Foreign Corporation rules if they live in a country that has such regulations. Most developed countries (USA, Europe, etc.) use such regulations.

They attribute income of the DAO, in which the token holder has a certain interest or over which he can exercise influence with his voting rights, directly to him as if the income had accrued to him personally - even if this is not actually the case. The "whale" thus pays taxes without having realized an inflow of funds.

Open a bank account? No thanks!

Offshore companies have very limited access to banking services. Banks are per se reluctant to open bank accounts for crypto and web3 companies. This is even more true if the DAO's registered office is located in a known tax haven. The search for a bank account in a recognized and reputable financial center thus becomes a less than pleasant and protracted experience.

Double legal fees

A DAO that has its registered office on an island needs local legal advice. However, this alone will not get the DAO far, because the country of domicile is not the market in which the DAO wants to operate. The establishment in an offshore country therefore always leads to the result that the law at the location of the registered office must also be observed unnecessarily - in addition to the legal requirements in all the other countries in which the DAO actually becomes active or to which it addresses itself online with its measures and offers.

Poor protection of members

A DAO that deliberately decides to set up in a little-regulated offshore market is thus ultimately also deciding against protecting its members. Regulation is not just about defending the "old world" against "the new"; it is primarily intended to protect market participants, e.g. by setting minimum standards for corporate governance.

Of course, there are also numerous examples of companies that have financially harmed their customers despite supervision by one or more regulatory authorities. However, compared to unregulated markets, where scams, hacks, insider trading, conflicts of interest and other market manipulations are commonplace, the number of black sheep in the regulated environment is small.

Reputational risks

Offshore countries have gained a reputation in recent decades for supporting tax evasion and other illegal activities. A DAO based in such a country will struggle to gain the trust of reputable business partners and investors. In order to conclude contracts with partners in developed countries, it will then be necessary one way or another to establish a reputable (subsidiary) company in the respective country of the contractual partner.

Serious alternatives to offshore foundation

The aforementioned points do not make it seem particularly attractive to rashly follow the lure to the island or the Midwest of the USA. As always with start-up projects, the advantages and disadvantages of an offshore foundation should be carefully weighed against each other, especially because there are very good alternatives:

Attractive legal forms in countries with developed legal frameworks

While in Anglo-American law the legal foundation is unknown and therefore memberless limited liability companies have to be "invented" to create a legal form similar to a foundation, foundations have long been known and proven in civil law in continental Europe. They are suitable for managing DAO assets and using them for the purposes of the DAO. The foundation does not have any shareholders. The members of the community are also not exposed to any liability risks, but can of course still be involved in the way that is typical for a DAO.

DAO in Germany | Legal Advice

DAOs recognized as charities: tax exemption and receiving donations

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.

Non-charitable foundation in Germany

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.

Permission from the regulatory authorities as a seal of quality

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.

Germany as a viable alternative to an offshore state

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.

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Do you have questions regarding the registration of a DAO? Do you need professional expertise regarding legal or tax issues in connection with your planned DAO project? Do not hesitate and contact us. Our experienced attorneys and tax advisors will work with you to develop the optimal strategy. The easiest way to contact them is by e-mail ( or by phone (+49 69 76 75 77 85 34).

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