Which is to say, if the only thing going out to (or coming in from) the foreign holding company is the revenue—and you still do incorporate locally, but without any expectation of profits to pay taxes on—then it's still complex (even moreso), but less risky.
In the end, it’s all about ‘corporate substance’, google it.
I can set up a BVI company tomorrow, capitalise it with $5M, and use that to buy a boat - no one will care (in most cases).
You can’t just have a ‘shell’ create operating income out of thin air (in most cases). Who is operating the business then? IP holdings, internal corporate banks, etc, all that stuff is much easier to do without significant substance. But running a SaaS company, completely out of Canada, without paying some tax in Canada, will be hard to do I think. You could have a US company own all the IP rights, customers, and everything related to the business, and then appoint an ‘agent’ in Canada to operate the SaaS business, and pay them a fee for it, for example. It's better for the agent to at least pay some tax as well. But you still need proper US substance to that.
But you can bet, if you’re booking millions through a Delaware company that you’re just running from Canada, with no proper board etc, there is a real chance this gets challenged. That is, if they find out about it. Delaware might not be the best example, but if you replace it by a low tax jurisdiction (i.e. Cayman Islands, Jersey, Cyprus, etc), that gives you a better idea.
Because, face it, why wouldn't we all have a Cayman company then? :)
Also, different countries have different anti avoidance measures in place to combat this.
The Delaware company may indeed need local agents, but those can be the same agents (i.e. lawyers) that run twelve other Delaware shells in a particular VC's portfolio. Effectively, the investors make up the Delaware company's board, while the founders of the venture (and the Delaware company itself) make up the Canadian company's board. You could think of it as the investors founding the company and simply outsourcing development to another country—which is, I'm sure, the argument that would be used to defend the practice in a suit.
The important bit is that income flows into the Delaware company, not from nowhere, but from what are in all practicality customers of the Delaware company. The founders—although undertaking 99% of the company's day-to-day operations—are nowhere to be seen from a customer perspective.
Well, in this specific case, you can probably argue that business (and not tax) reasons are at the heart of the decision. After all, the US corporate tax rate is higher than the Canadian one.
But, the OECD is trying to combat some of these practices. Tax authorities in certain jurisdictions are now also disregarding directors who are sitting on 10-20-50 boards for substance purposes. Some countries also want them to have relevant skill sets, for example: can an ex real estate developer really be much added value for a pharmaceutical subsidiary company doing Ebola research? He might be, but many western countries are running an extreme deficit, so they are looking for all sorts of ways to increase revenue collection
No problem if you’re holding shares through a foreign holding company, or you’re routing around millions in dividends to avoid withholding tax. They don't require much 'action' or operating. But, if you make a mistake (and face it, you probably will, especially if you don’t have good counsel), depending on the country you’re resident in, the fines are mind blowing.
This all is even worse for Americans, with extensive CFC rules barring you from doing certain things.
If this guy is on a student visa, he probably won’t have the resources to do this, and as such, it’s a bad idea to do this. As they say, setting it up is easy, getting away with it much harder.
Again, this is not legal advice