While offshore investing has a shady image in the minds of many, it can be a legitimate way to invest. It has its own special benefits as well as considerations to take into account.
Governments want the money to stay where it can be more easily watched and taxed, and US Federal law prohibits offshore banks from advertising these services in magazines and newspapers in the US. In addition, domestic banks do not want the extra competition and like to keep the image of offshore investing as shady as possible.
Reasons for investing offshore
- Tax purposes: Popular offshore banking and investing locations usually will not tax the deposits of non residents. However, there are reporting requirements that can have serious consequences if ignored. Depending on the type of investment, there still can be tax advantages. If nothing else, it can sometimes be a way to delay taxes.
- Asset protection: Overseas investments can be a way to protect assets from frivolous lawsuits and other problems. Keep in mind that assets need to be transferred before any problems start to gain from this.
- Confidentiality: There is no telling when confidentiality about assets will be needed. Offshore investment countries often have very strong confidentiality laws.
- Diversity: Just as it is a good idea to diversify the types of investments made, it can help to diversify where they are made. It is not wise have everything in one country and currency.
- Better returns: Overseas investments are often in areas that have less regulation, a more favorable investment climate and thus can offer better returns.
- Different investment products: Sometimes, varied investment products and services not found in one’s country are available.
- Convenience: Those living, traveling or doing a lot of business overseas often have foreign bank accounts out of necessity and invest through them.
- Political problems: For people in some places, it is a good idea to move their money to avoid political problems.
- Estate planning: Some find overseas tax havens the best way to pass on assets.
Drawbacks of offshore investing
- Depending on the type of account and locality, setting up an offshore account can require a degree of paperwork or a visit to where the account will be opened. Particularly with the know-your-client regulations passed after 9/11, it is likely that at the very least notarized copies of a passport, and a utility bill will be required for identity verification.
- For many investors, the extra time and expense of setting up and maintaining an offshore account may be more than it is worth. Furthermore, the distance from the assets is sometimes a problem.
- While they are not as large as many people might think, offshore accounts will require larger balances than those back home.
- There may not be any tax advantages. Penalties for not reporting taxable income are steep (US law requires that American report worldwide income). With increasing cross-board information sharing and other ways of tracking money becoming more pervasive, those who do not report income might be setting themselves up for a lot of trouble.
- While investing through legitimate institutions is relatively safe, it will not offer the kind of regulation (which sometimes protects depositors) and Federal insurance that is availabe back home.
- There is the expense and unwanted attention that comes with sending assets overseas. US law requires that banks report transfers of $3000 or more.
- Laws may change and what was once a good place to invest may start sharing information with other governments in some cases (as has happened in Switzerland).
Types of offshore investing
- Banking: Various types of accounts, credit cards and services are available, but rules for opening an account vary greatly with the country and are getting stricter. These accounts can be useful for those who travel and do business overseas a lot as well as a springboard for investing.
- Stocks and ETFs (what is an ETF): These are the simplest investments to get into for those who have some kind of brokerage account overseas. A wide variety of stocks can be purchased. For a good mix of investments, ETFs can be bought and sold like stocks and can be a way to get diversity without mutual funds (see ETFs vs. mutual funds).
- Mutual funds (see mutual fund basics): Every type of mutual fund is available for those investing offshore. Often, top mutual funds will domicile offshore to avoid taxes and regulation. Therefore, many funds available overseas are virtually identical to those in the US. Overseas funds generally have lower expenses, and returns can be invested tax exempt directly back into the fund (if the fund owner is not a resident). However, due to reporting and other pressure put on these funds by the US government, many of them will not take American investors overseas.
- Offshore companies: Offshore LLCs and other types companies can offer significant legal tax advantages and are an increasingly popular tax strategy. Unfortunately, the financial and accounting costs of setting up and maintaining one may not justify the advantages they offer for the average investor.
- Offshore trusts. These are the strongest way to protect assets overseas but are only practical for wealthier investors.
To really do offshore investing properly, it is highly advisable to sit down and do some reading on the topic.
Once one is ready to go, investing offshore often starts with simply making a request to the institution one would like to invest in for the requirements and paperwork. Requirements will vary greatly with the location. Some of the top offshore investing havens include the following:
The Isle Of Man