Offshore investing has been portrayed in the media recently in a negative way, portraying criminals stashing away cash in some illegal company on a remote island in the Caribbean somewhere. This is unfair as the vast majority of offshore banking is perfectly legal and, depending on your particular situation, can be very advantageous.
What Is Offshore Investing?
Offshore investing refers to various investment strategies that take advantage of facilities available outside an investor’s home country. Below are some very basic advantages and disadvantages of offshore investing but anybody considering this should take professional advice on what can be a complex subject.
There are many options such as money-market, bond and equity assets available to offshore investors, offered by offshore companies that are fiscally sound, trustworthy, established and, most importantly, legal.
There are many different reasons for investing offshore:
Tax Reduction – It is not unusual for countries (known as tax havens) to offer tax incentives to foreign investors. The main reason for an offshore country to offer tax incentives is to promote a healthy investment environment and to attract foreign investment. For some countries, who for example may have limited resources, a small population and little production, try to attract investors to supplement their economic activity. To put it simply, offshore investment occurs when offshore investors establish a corporation in a foreign country. The corporation acts as a shell for the investors’ accounts, protecting them from the higher tax burden that would be incurred in their home country.
As the corporation does not engage in local operations, little or no tax is imposed on it. Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets, which mean that investments through foreign corporations can hold a distinct advantage over making investments as an individual.
However, in recent years, many governments have become increasingly aware of the tax revenue lost to offshore investing. Many have tried to create more restrictive laws that close the tax loopholes currently exploited by offshore investment experts. Investment revenue earned through offshore investment is now being looked at carefully by both regulators and the tax man.
Diversification of Investment – In some countries, international investment opportunities of citizens are restricted by regulations. This can be unhelpful in the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible and give investors unlimited access to international markets and to all major stock exchanges.
Tax Laws are tightening – Many governments have tightened up their policies on what they see as tax avoidance.
Cost – Offshore Accounts can be quite expensive to set up and can include legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company.
Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.
Conclusion of offshore investing
Offshore investing should be treated with caution but it can still pay to shift some investment assets from one jurisdiction to another. As with every investment, do research before investing and only use money you are prepared to lose.