Offshore investing is often demonized in the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing. While it’s true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore investing may offer you many advantages.
What Is Offshore Investing?
Offshore investing refers to
a wide range of investment strategies that capitalize on advantages
offered outside of an investor’s home country. We will briefly touch on
the advantages and disadvantages of offshore investing. The particulars
are far beyond the scope of this introductory article.
Exerpt from about.com . . . . and investopedia.com
There is no shortage of money-market,
bond and equity assets offered by reputable offshore companies that are
fiscally sound, time-tested and, most importantly, legal.
Advantages
There are several reasons why people invest offshore:
Tax Reduction - Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country
with very few resources and a small population, attracting investors
can dramatically increase economic activity. Simply put, offshore
investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the
investors' accounts, shielding them from the higher tax burden that
would be incurred in their home country. Because the corporation does
not engage in local operations, little or no tax is imposed on the
offshore corporation. Many foreign companies also enjoy tax-exempt
status when they invest in U.S. markets. As such, making investments through foreign corporations can
hold a distinct advantage over making investments as an individual.
In
recent years, however, the U.S. government has become increasingly
aware of the tax revenue lost to offshore investing, and has created
more defined and restrictive laws that close tax loopholes. Investment
revenue earned through offshore investment is now a focus of regulators
and the tax man alike. According to the U.S. Internal Revenue Service
(IRS), U.S citizens and residents are now taxed on their worldwide income. As a result, investors who use offshore entities to evade U.S.federal income tax on capital gains can be prosecuted for tax evasion.
Therefore, although the lower corporate expenses of offshore companies
can translate into better gains for investors, the IRS maintains that
U.S.taxpayers are not to be allowed to evade taxes by shifting their individual tax liability to some foreign entity. (To learn more, see How International Tax Rates Impact Your Investments.)
Asset Protection
- Offshore centers are popular locations for restructuring ownership of
assets. Through trusts, foundations or through an existing corporation
individual wealth ownership can be transferred from people to other
legal entities. Many individuals who are concerned about lawsuits, or
lenders foreclosing on outstanding debts elect to transfer a portion of
their assets from their personal estates to an entity that holds it
outside of their home country. By making these on-paper ownership
transfers, individuals are no longer susceptible to seizure or other
domestic troubles. If the trustor is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free of income tax.
However, the trustor of an offshore asset-protection fund will still be
taxed on the trust’s income (the revenue made from investments under
the trust entity), even if that income has not been distributed.
Confidentiality
- Many offshore jurisdictions offer the complimentary benefit of
secrecy legislation. These countries have enacted laws establishing
strict corporate and banking confidentiality. If this confidentiality
is breached, there are serious consequences for the offending party. An
example of a breach of banking confidentiality is divulging customer
identities; disclosing shareholders
is a breach of corporate confidentiality in some jurisdictions.
However, this secrecy doesn't mean that offshore investors are
criminals with something to hide. It’s also important to note that
offshore laws will allow identity disclosure in clear instances of drug
trafficking, money laundering or other illegal activities. From the
point of view of a high-profile investor, however, keeping information,
such as the investor’s identity, secret while accumulating shares of a
public company can offer that investor a significant financial (and
legal) advantage. High-profile investors don’t like the public at large
knowing what stocks they’re investing in. Multi-millionaire investors
don’t want a bunch of little fish buying the same stocks that they have
targeted for large volume share purchases - the little guys run up the
prices.
Because nations are not required to accept
the laws of a foreign government, offshore jurisdictions are, in most
cases, immune to the laws that may apply where the investor resides. U.S. courts can assert jurisdiction over any assets that are located within U.S. borders. Therefore, it is prudent to be sure that the assets an investor is attempting to protect not be held physically in the United States.
Diversification of Investment
- In some countries, regulations restrict the international investment
opportunities of citizens. Many investors feel that such restriction
hinders the establishment of a truly diversified investment portfolio.
Offshore accounts are much more flexible, giving investors unlimited
access to international markets and to all major exchanges. On top of
that, there are many opportunities in developing nations, especially in
those that are beginning to privatize sectors that were formerly under government control. China’s willingness to privatize some industries has investors drooling over the world’s largest consumer market. (To read more, see Investing Beyond Your Borders.)
Disadvantages
Tax Laws are Tightening - Tax agencies like the IRS aren't ignorant of offshore strategies. They've clamped down on some traditional ways of tax avoidance. There are still loopholes,
but most are shrinking more and more every year. In 2004, the IRS
amended the Internal Revenue Code (IRC) and began to collect taxes from
both American corporations that operate out of another country and
American citizens and residents who earn money through offshore
investments. (For more information on tax laws that affect offshore
investors, see the IRS' "International Taxpayer - Expatriation Tax".)
Cost
- Offshore Accounts are not cheap to set up. Depending on
the individual's investment goals and the jurisdiction he or she
chooses, an offshore corporation may need to be started. Setting up an
offshore corporation may mean steep 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 (not Roatan). Businesses
that make money facilitating offshore investment know that their
offerings are in high demand by the very wealthy and they charge
accordingly.
How Safe Is Offshore Investing?
Popular offshore countries such as the Bahamas, Cayman Islands, and Isle of Man
are known to offer fairly secure investment opportunities (and especially Roatan, Honduras with its MLS and Realtor Associations).
More than
half of the world's assets and investments are held in offshore
jurisdictions and many well-recognized companies have investment
opportunities in offshore locales. Still, like every investment you
make, use common sense and choose a reputable investment firm. It is
also a good idea to consult with an experienced and reputable (team such as the Lynch Team), investment advisor,
accountant, and lawyer who specializes in international investment. If
you are looking to protect your assets, or are concerned with estate planning
or business succession, it would be prudent to find an attorney (or a
team of attorneys) specializing in asset protection, wills or business
succession. Of course, these professionals come at a cost. In most
cases the benefits of offshore investing are outweighed by the
tremendous costs of professional fees, commissions, travel expenses and
downside risk.