Delaware Gov. Tom Carper took another strong step this year toward maintaining the state's progressive banking tradition by signing a bill to let foreign banks establish Delaware as their "home state."

The Foreign Banking Amendments of 1999 permit foreign banks to put their U.S. headquarters in Delaware and to engage in general banking business, though federal requirements realistically will dictate that any deposit- taking would be of a wholesale, not retail, nature.

The law does not authorize de novo branching by a foreign bank into Delaware because domestic banks do not have that permission under the Delaware interstate banking and branching provisions.

In earlier years, Delaware had passed legislation to authorize foreign banks to establish agencies and representative offices. Delaware revised the original Foreign Banking Development Act to also permit the formation of foreign bank limited-purpose branches. These offices can do everything that a foreign bank agency can do, plus accept deposits as permitted under the Edge Act section of the Federal Reserve Act.

The latest legislation closes the circle by letting a foreign bank establish and maintain a branch in Delaware that can engage in general banking business if it has declared Delaware to be its home state under the International Banking Act of 1978.

Delaware provides a favorable tax environment. The bank franchise tax uses a regressive rate schedule, which has a scale beginning at 8.7% and drops to 6.7%, 4.7%, 2.7%, and finally 1.7%, depending on the amount of taxable income.

Under Delaware law, taxable income is arrived at, and the relevant tax rates applied, only after excluding 44% of the pertinent income of the Delaware banking organization.

Because federal law allows for the deduction of state taxes, the effective tax rate is less than the actual rate in the tax schedule, particularly for larger Delaware banking organizations.

Delaware also allows for a reduction in taxable income for net income derived from international banking transactions. For a foreign bank considering whether to elect Delaware as its home state, additional clarification might be necessary-perhaps through regulation-to determine whether the proposed activities of a foreign bank branch would qualify as international banking transactions under Delaware law.

Of course, all foreign banks have economic incentives for operations and transactions in offshore localities when states tax the banks' U.S. activities. Thus the boldest move by Delaware might be to levy no bank franchise tax whatsoever on a foreign bank wishing to declare Delaware as its home state.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.