‘Offshore investing’ is one of those terms that tends to set off immediate red flags whenever you hear it.
This practice has been continually demonised by western media sources, to the extent that we now automatically associate it with greedy investors rubbing their hands with glee as they stash ill-gotten gains in illegal companies, a fan whirring away above to protect them from the worst of the tropical heat.
In reality, this image is largely erroneous. Although it’s true that criminal enterprises have used offshore deals to their advantage, the majority of offshore investing is entirely legal, and indeed can have many benefits for those who indulge in it.
Put simply, offshore investing means nothing more complex than this: capitalising on investment strategies that put you at an advantage, but are only offered outside of your home country.
So, what are the pros and cons of offshore investing? We’ll start with the former…
One of the most common reasons for investors to place their money overseas is because of tax incentives offered by foreign governments. Favourable tax rates will often be set with the specific intention of attracting outside wealth. This is done to stimulate the economies of ‘tax havens’, which are often smaller nations, and benefits both the country as a whole and the individuals who invest there.
Usually, it is done by forming a corporation, which acts as a shell for accounts, and shields investors from the higher tax burdens they face at home. Because little to no business is actually done in these countries, little to no tax is imposed on the corporations. Although such practices may be morally questionable, they can be perfectly legal, and are utilised by many.
An added advantage is that many of these foreign companies then enjoy tax-exempt status when they in turn invest in western markets.
To combat this, however, many governments have refined their laws in recent years in an attempt to limit or close such loopholes. Indeed, a number have even begun to tax investors based on their worldwide income, which means that they have to be very careful that their activities do not fall into the category of tax evasion. The best way to do this is by consulting with a good lawyer at every step.
Another reason that many turn to offshore investing is because it can be utilised as a form of asset protection. For those with a good deal of wealth, it can be prudent to transfer funds, through trusts, foundations, or corporations, from the individual to other legal entities. In doing so, it is possible to protect oneself from seizure or other domestic troubles in a way that is entirely above board.
An additional boon is that offshore jurisdictions will often have secrecy legislation. This can provide an individual with strict corporate and banking confidentiality, which in the case of those accumulating shares in a public company, for example, can have significant financial and legal advantages.
On a simpler level, offshore investing also has diversification benefits. These need little explanation, for where risks are lessened, profits are preserved, and the advantages of such are obvious.
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Of course, it is not all plain sailing, and as appealing as offshore investing can be, it’s important to understand its limitations.
Tightening Tax Laws
As we mentioned above, one of the key advantages of offshore investing is the tax benefits that often accompany it, yet these are not as attractive as they once were. Tax laws are being tightened all around the world, and major tax agencies are not ignorant of offshore strategies – or how to thwart them. Many have gone to pains to eradicate traditional means of tax avoidance, and as a result you have to be very careful about how you invest.
Thus, abiding by the legalities is essential. Although loopholes do exist, the legislation controlling them is ever evolving, and in order to avoid ending up on the wrong side of the law, legal advice is essential. Choose a good lawyer, talk through your plans with them step by step, and have them ensure that everything is fully above board before you find yourself involved in illegal activities.
Another point to be made is that offshore investing is not an economical option. Small time investors will find that it’s far beyond their means, and that offshore accounts are very expensive to set up. When these costs are coupled with the necessary legal fees, plus corporate and account registration charges, the overall total can grow alarmingly. In addition, some jurisdictions will require you to own a property in their dominion before they can allow you to have an account at all.
Accounts set up in the names of children or spouses can be beneficial for tax purposes, but they can also be devastating in the event of a breakup of the family unit. Investors are at risk of losing much, if not all, of their offshore investment in the settlement.
Properly utilised, offshore investing can have many advantages, yet it is not a simple solution to reducing your taxes. The legislation surrounding it is complex, and it’s essential that those who wish to become involved in it stay on the right side of the law at all times. If you have the means and the nous to give it a go, it’s worth looking into, but be aware that you’ll need to play by the rulebook from start to finish.