A merchant account allows a business to accept payments by debit card, credit card or charge card, such as Visa, MasterCard, American Express, etc.
Even though it is possible for an individual to obtain a merchant account in the case where he is running a business in his own name, this would not be a recommended setup for any serious business. The main drawback of operating a business in a personal capacity is the fact that the individual is personally liable for all the risks of the business. So, if a customer suffers a loss caused by the business and takes legal action against the business, the business owner will be personally liable to pay all damages. What happens if the damages amount to millions of dollars?
On the other hand, if the business is carried out through a company, then all business risks move from the individual to the company. The only obligation of the individual, who will now be the company’s shareholder, is to pay in full for the shares he owns in the company. He may only own 100 shares of $1 each, in which case he will need to pay $100 to the company. Once this is paid, even if the company finds itself in a position of having to pay damages of $1,000,000, the shareholder will not need to pay a single cent. This is the greatest advantage of operating a business through a company.
The first step in obtaining a merchant account is therefore to register a company. It is important at this point to make the correct decision as to where to register the company. If the business will be entirely local, selling to customers within the same country as where its physical operation is based, then it makes sense for the company also to be registered in that country. Examples of such localised operations would include a distributor of daily newspapers within Spain or a company manufacturing and selling furniture within Thailand.
If, on the other hand, the company will be operating on an international scale and particularly over the internet, then it may be possible or even advisable to register the company offshore. The choice of jurisdiction in this case will mainly depend on two factors, ie the possibility of obtaining a merchant account in the chosen jurisdiction and the associated tax implications.
In general, it is not possible to obtain a merchant account for a company incorporated in any of the typical tax-free jurisdictions. Payment processors are usually licensed to operate within specific geographical boundaries, eg Europe, Asia, North America, etc. A payment processor in Europe, for example, will only be able to provide a merchant account to a company registered in Europe. Registering the company in an Asian jurisdiction will similarly limit the choice of where the company may obtain a merchant account to the payment processors operating in Asia.
The jurisdictions in which companies are commonly incorporated in Europe for the primary purpose of obtaining a merchant account are Cyprus and the UK. In Asia, the preferred jurisdictions are Singapore and Hong Kong.
It is worth noting that as a general observation, the payment processing terms applicable to a merchant account from a European payment processor are more attractive in comparison to the terms imposed by Asian processors. This is based on a comparison of the initial cost of applying for the merchant account and the ongoing fixed and variable fees charged for processing transactions.
The choice of jurisdiction will determine the level of tax which will apply to the company’s business profits. Details of each jurisdiction’s tax rates can be found on our website, on the respective page for each type of company. In cases where the level of anticipated profits is substantial, it is possible to achieve a reduction in the effective tax rate by combining the European or Asian company with a non-taxable company. In this structure, the business will be owned by the non-taxable company, which will enter into an agreement with the European or Asian company to handle the processing of its transactions. Please feel free to contact us for further information on this arrangement.
In practice, the most popular structure for obtaining a merchant account has proven to be a Cyprus company, possibly combined with a Belize company.
If you would like to proceed with the registration of a company and apply for a merchant account, all you need to do is click on the Incorporate Now button below. Offshore Company Solutions can assist with both. Shelf companies are available if the company’s registration is urgent.