What is an “exempt corporation”? And does it affect me?  Like many here, you are probably clueless when you hear the phrase “exempt corporation” and you are not alone.  You are part of a majority of citizens and residents alike that do not have a clue what this means, or understand the bill seeking to create “exempt corporations.” And yes, the bill if it becomes a law can affect you.

An exempt corporation or exempt company is “a company that does not have to pay tax or act according to the usual regulations of the country in which it is established”, in other words, does not have to follow general laws of a country they are in.  There are different variations of definition but it generally means that the “exempt” business does not have to follow the general rules that apply to most businesses in a specific country.

Senate bill 11-43, SD1, to be called a “Palau Exempted Corporation Act” provides a different set of rules for companies that only want to be registered in Palau in the name only as a business but do not do business in Palau.

The bill seeks to create another set of rules for these corporations that meet the criteria for “exempt” corporations, including not having to pay taxes. Corporate Registration law that was passed a couple of months ago covers all corporations that register in Palau, but the proposed exempted corporations are exceptions to that.

The bill incorporates certain sections of Delaware General Corporation Law including applying precedent cases in Delaware if there is a dispute.  Disputes will be resolved through arbitration and Palau Judiciary will not have jurisdiction over them except for cases where there may be a Palauan shareholder of the corporation with the dispute.

Delaware State of the United States has an “exempt corporation” law that allows corporations to register as exempted corporations if they meet specific qualifications under the law.

The bill seeks to attract international businesses to register in Palau as Palau corporations for a fee without having to be present in Palau and pay taxes or comply with most local laws.

Olbiil Era Kelulau says in its findings that the bill is to “diversify” Palau’s economy by taking advantage of Palau’s high-speed internet connectivity to the rest of the world, to “compete with other jurisdictions to attract internationally known corporations and businesses.”

This bill is similar to the “Digital Residency” bill that President Whipps supported.  Digital Residency gives an individual a legal electronic residency status without actual physical residence in Palau. This enables the individuals to conduct business elsewhere as a legal entity without revealing themselves. An Exempt Corporation gives a corporation a legal status without it being here or doing business in Palau.  This also allows the Exempt Corporation to act, conduct business more freely without restrictions.

The proposed bill creates a position title of Exempted Registrar which is the Minister of Finance or his designee who will contract with a “Private Partner” to manage operation and market the Exempted Corporate Registry. Revenue will be split between the Republic of Palau and the “Private Partner” based on a contract to be decided between the Exempt Registrar and the Private Partner.

The proposed bill gives Exempt Registrar and Private Partner a lot of power, power to set regulations without going through the APA process, set fees, and set their criteria for selection of Private Partner with very little oversight by the congress.

Issues were raised about the potential impact the bill will have on Palau’s reputation.  It could provide an additional source of revenue to Palau but it can also negatively impact the financial sector and could get Palau blacklisted again by international financial regulators.  

(Second part of this article will cover the impacts, negatives, and positives of having an “exempt corporations” law.”

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