There are many myths around offshore investing. Somehow when you put the word 'offshore' in front of any word people generally become either confused or suspicious. Anything that exists outside the proximity of our environment, we fear. Or at least we hold in suspicion.
That's why an unsurprising 1.22% of people use offshore banks, meaning 98.8% of the world's population decide to leave their investments inside their country of residence. Most people's sense of security extends only so far. For some reason, the idea of putting assets in a foreign country sounds alarming.
In fact, nothing could be further from the truth, as often foreign banking systems have more security, offer higher returns and provide a better alternative for financial diversification. This article will try and dispel some of the illusions around offshore investing and why investing in a country other than where you reside, might be a whole lot safer than you think.
Table of Contents:
The simplest definition of offshore investing is simply investing in a foreign country. The primary goal of investing offshore is to diversify your portfolio so that you are not exposed unnecessarily to any single factor.
Whether that's undue political or economic risk, risk in currency fluctuation or banking system. Keeping all of your investments in a single country is akin to keeping all of your eggs in a single basket.
Offshore investing allows you to diversify, not only in different assets but in different locations. Offshore investments also provide more choices and because they exist in foreign jurisdictions they have less regulation and can be traded without excessive regulations
A significant portion of the world's funds actually exists outside of the United States. The Cayman Islands, for instance, is home to over 30% of the world's mutual funds. Americans, are restricted from many overseas investment funds, and so using an offshore LLC with an offshore trust is often used as a means around the regulations. Fund managers would then only be in a relationship with assets in the Trust or LLC rather than with any US clients directly.
In many instances using an offshore LLC is the best structure to use as an investment vehicle as it provides a layer of security and privacy in financial transactions which can help reduce the prospect of frivolous litigations.
Offshore investing is not about getting rapid short-term gain but is just a part of a broader strategy to diversify and reduce risk associated with your assets. When assets are spread across many classes, sectors, currencies and countries it effectively reduced the chance of being overly exposed to any single fluctuation.
The whole idea of expanding your financial freedom, and going offshore in the first place, is to reduce the risk of any single factor. Such that the failure of any single class, economy, currency, government would not severely affect your financial continuity.
If you already live overseas, then you are well-positioned to make an offshore investing strategy apart of your portfolio. Generally, ex-pats and global citizens tend to see the benefits and have firsthand exposure to different environments and opportunities which make investing in foreign markets more tenable.
Diversifying your portfolio is essential for any secure investment plan. There are a number of advantages that come when choosing a foreign jurisdiction. Some of the most important include:
Like with any investment, there are some risks involved, however, these risks are comparable when balancing out the risks involved when investing all within a single jurisdiction. Any true financial diversification needs to find the right balance that spreads your risk and maximizes your advantages.
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There are numerous forms of investments that can be made. Some of the most popular, and the few that we generally recommend and have had a lot of success in the past in dealing with are related to:
This is not a comprehensive list by any means, as there are literally endless forms of offshore investing.
An offshore investment account usually refers to a foreign or international investment or brokerage account. An offshore account can be used as an investment holding account or trading account. Such accounts are used as a personal private offshore account that primarily holds assets or trading account that can trade and exchanges asset classes in either low or high-volume amounts.
An offshore investment account allows an individual to invest, hold and trade stocks, bonds, futures, FX, securities or options as well as engage in a variety of transactions to-and-from different accounts allowing a high volume of deposits and withdrawals per day.
A financial entity, offshore company or limited partnership is the preferable means of using the account so as to remain separate from the individual person. The revenue earned from an offshore investment, as well as all transactions and gains, are held under the offshore entity rather than an individual, giving more layers of protection and security.
An offshore brokerage account is in simple terms an offshore structure used as an investment account to hold and trade financial instruments. What is unique of an offshore brokerage account, is that because it is located “offshore” it benefits from all the opportunities provided by being in a tax neutral destination where capital gains can be reinvested tax-free.
An offshore brokerage account used in conjunction with an offshore company formation or LLC makes it so that the offshore accounts are owned by the company rather than the individual. No intermediaries, private bankers or brokers are required. Though often a professional trader acts upon the clients' behalf. An offshore brokerage allows you to trade in international markets using a tax-neutral offshore entity.
There are a number of offshore brokerage accounts, the most popular being in the Cayman Islands, BVI or Belize. An offshore brokerage account acts as a trading account designed as a high-volume account, where the capital is transferred regularly as opposed to an investment fund where the capital might be held for months and years.
There are three main types of brokerage accounts.
Online brokerages are for those who would like to manage it themselves, usually done entirely remotely through an online platform. This allows for the individual to act as a broker and manage their own trades and accounts.
A second alternative is to hire a firm or broker to assist in trades for you. There are many different types of firms and brokers who can make investment choices as per your instructions.
A retirement account is a long-term investment such as a Roth or IRA which falls under different tax obligations in comparison to standard investment accounts, where assets are usually required to be held for a minimum of 5 -10 years depending upon the account, asset and jurisdiction.
There are a number of reasons why people choose to establish an offshore brokerage account, whether that be for confidentiality, security, future planning, or wealth protection.
Offshore investing or an offshore investment account is just like a domestic account with numerous added benefits such as:
What usually prevents people from choosing to invest in an offshore jurisdiction is the lack of information. Many people generally avoid offshore investing and setting up international funds largely due to difficultly and risk. Though there can be more risk and involved and there can be greater difficulty in opening an account, however, this is not always the case. If you have the proper documents and information at hand it can be accomplished in the same amount of time as a domestic account.
Initially, there are some hurdles to jump through, after getting an account established a broker can be assigned to your account, making it just like a regular domestic investment registration. The primary difference between offshore investment accounts and domestic are higher minimum thresholds which usually range from USD 50,000-100,000 while others are upwards of USD 1 million. Offshore accounts generally have higher fees though this is offset by the higher interest rates and returns.
If you are looking for an international investment strategy then the advantages of higher returns and interest rates are well worth paying the extra associated fees. Many investment accounts are closed to American citizens, as many companies choose not to go through registering with the SEC and all the regulatory hassle that comes with it.
However, a corporation or foundation-owned brokerage account in a jurisdiction like Panama would give you access to many investments that would otherwise be off-limits. Many of the highest performing mutual funds, also known as unit trusts, are not available to U.S. investors; however, when you invest through an offshore brokerage account owned by an offshore corporation or trust - then everything changes.
While some offshore banks offer their own in-house brokerage accounts; except for a few notable exceptions, in certain private management institutions for high net-worth clients, these in house options are inferior in service. It is advised you stick to a dedicated brokerage investment firm.
The brokerage firms with whom we assist clients in opening up accounts have all the latest online trading platforms available, that can be accessed 24/7, have a history of safe investing and diligently conduct the KYC and due diligence processes to ensure assets that come to the firm are not stemming from illicit sources.
It is often assumed an offshore investment account opened under the person's name will be protected by the offshore jurisdictions' privacy laws and confidential banking policies. However, the problem is that every time you decide to make a transaction, your name will be tied to the account. To ensure your personal details remain private, a limited company, partnership or trust can be used to open up an offshore investment account.
The beneficial owner has complete ownership signatory powers can be transferred to dedicated in house lawyers who act as both as a legal representative and signatory on all account-related documents. The account can remain confidential through our third-party signatory services where your account will be anonymous to the world (however, not all citizens will qualify for these types of services due to FATCA and CRS laws). Please enquire within to see if you are eligible.
Gone are the days of anonymous numbered accounts. Any incoming or outgoing payment from the account will have a name associated with it on the bank-to-bank routing instructions. An investment account can remain totally private or may remain partially private, depending upon your residence and the reporting requirements that you are bound too (unless you renounce your citizenship and move to a tax residency.)
Depending upon where you live and the tax laws in your country will determine how public or private your account details will be. Offshore jurisdictions have extremely private confidentiality laws. The problem however, is due to the country where you reside, which will have requirements that may or may not force you to report all your offshore accounts.
There numerous tax sharing agreements that have seriously eroded privacy, however, that does not mean privacy does not exist, it just means that it is not as private as it once was. Privacy can still be maintained, there will just be several hurdles and conditions that will have to be addressed before an account can be secured. You must declare your account if the laws in your country of residence require it.
Offshore jurisdictions keep your details private, but due to Controlled Foreign Corporation (CFC) laws, Tax Information Exchange Agreements (TIEAs), and the Common Reporting Standard (CRS) scheme, if your country of residence is a signatory on any of the above laws then your details will be shared with tax officials and banking regulators, but will otherwise remain private to everyone the public and everyone else.
By using an offshore company, foundation or trust, your personal name will remain off of any payment transfers and will be limited to appearing only on the inter-bank payment instructions. This level of confidentiality will likely be suitable for most clients. For complete anonymity will be completely dependent upon where you live.
Nominee and signatory services can serve as an instrument to preserve account confidentiality as legal director powers are transferred to nominee individuals. Again some conditions apply as to the effectiveness of this type of arrangement.
Using a 'corporate shield' has many advantages that protect and keep one's personal assets secure, even if you only plan on using it for banking and investment purposes.
The company or trust that holds the investment account becomes a separate legal entity with its own life and rights under law giving the foreign-based company strong asset protection features. Companies formed in jurisdictions, such as Panama, have corporate laws that ensure and protect the assets and names of non-residents who holding foreign accounts.
See our offshore banking guide for more specific information on opening bank accounts, including different types of individual accounts and the best jurisdictions to open an offshore account.
Opening an investment account in an offshore as opposed to 'onshore' jurisdiction gives you many advantages. It allows you too:
Diversifying your account portfolio across a range of countries and accounts is an important step in any wealth management strategy. Not only does it mitigate risk, but also allows access to developing regional markets and gives you a form of asset protection that comes only with having a foreign brokerage account.
Having access to global securities anywhere in the world gives you access to markets that are growing at a much faster rate than the US or UK for example. Many developing or emerging markets are not uncommon to find yields at 12-13% without having to take on unnecessary levels of risk.
Having multiple accounts in several jurisdictions helps to account for currency fluctuations, gives you access to greater liquidity, and ensures that you remain profitable despite changes in the currency or economy of any one country.
Having an international brokerage or investment account protects you from unwarranted litigation, lawsuits and fraudulent claims trying to steal your wealth.
Accounts established in a foreign jurisdiction gives a second layer of secure banking laws and practices for your accounts. International banking laws protect those assets that otherwise would be vulnerable if they were held in the same country where you reside.
Structures that are incorporated in foreign jurisdictions are also used in the avoidance of forced heirship, as family estates are much better protected in laws outside the country of primary residence and can generally avoid heavy taxes that come when inheritance is passed down.
Offshore brokerage accounts, because they are located in low-tax jurisdictions, assets are able to be re-invested where dividends, capital gains, and income received from the investment can be held without having to pay taxes locally.
A brokerage account can act as a very powerful asset protection mechanism and an efficient tax structure as it is located in a tax neutral environment and is considered a non-resident entity.
An offshore brokerage account allows you to invest in international markets remotely, using online services and can be established in many places around the world for investing in offshore stocks in developing markets, or in buying government bonds, dealing with invest, hold and trade stocks, bonds, futures, FX, securities, futures, options, CFDs etc...
Investment funds that are held in offshore countries have lower levels of regulations and offer a broader range of investment opportunities and financial services that are not as heavily regulated. Offshore Mutual and Hedge Funds in the Cayman Islands, and Belize, for instance, have attracted wealth from across the globe because of its financial environment attracting over 40% of all worldwide funds.
Go here: for more on the benefits of offshore investing.
There are any number of ways to structure an offshore fund. It all depends on:
(1) the location of the investment fund
(2) the number or type of investors, and
(3) the nature of the investments the fund will be involved in.
Depending on what those three answers are, will determine the nature of the fund, whether it is an open or closed investment and which type of structure will be used.
Hedge funds are set up as offshore or onshore funds depending if the offshore structure is located outside the country of residence. Investors chose offshore financial structures because they offer (1) tax benefits (2) asset protection (3) privacy (4) wealth diversification.
Hedge funds are similar to mutual funds though they are usually close-ended. They are only used for specific private individuals and companies and are generally not just open to anyone from the public. There are usually different regulations governing each type of fund depending upon the jurisdiction where the fund is established in.
A BVI Hedge Fund main advantages:
Mutual funds provide investors with a wide range of choices in both passive and active managed investments. Mutual funds are regulated investment products that are open to any individual and usually are more liquid.
The offshore fund may be formed as an offshore company, partnership, or trust.
Offshore Funds are used as a means to attract foreign capital into a country. Often smaller less developed countries offer offshore or international funds as a means of attracting capital by offering some benefits, usually in the form of tax incentives.
Offshore funds are usually held outside the US and are invested in by non-US persons or entities in tax-exempt countries by nature of their offshore structuring.
A St. Lucia Mutual Fund main advantages:
Professional Signatory Account Management is an option for those that do not want to be a signatory on a corporate, foundation or trust account and prefer to use a professional, such as a lawyer or accountant, to act in a fiduciary capacity as some countries require extensive reporting of any accounts with which one has signatory control over; the penalties for non-reporting are high and are being enforced more aggressively in the wake of the UBS case.
For many clients, the reporting of such accounts defeats the very purpose of having the offshore accounts in the first place. Those individuals who do not want to take the risk of non-compliance (again we recommend not take such risks) can use Professional Signatory Account Management Services, which provides some distance from the assets while still giving you the ability to make decisions on their deployment.
If you are truly seeking freedom from all taxation, the best solution is not only to move your assets, but move your residency. Even with the most sophisticated offshore structure, over many jurisdictions, accounts, nominee directors and trusts, you will still be inevitably tied to the high-tax country where you live and the laws that are dictated to you.
Perhaps a decade ago it was possible to effectively cancel your tax burden; however, tax authorities, and information-sharing agreements are making it increasingly difficult to do so. Though if you live in the right destination, there are more possibilities to properly structure your financials. Moving your primary residence (living less than 180 days a year) frees you from local income taxation. And because taxation does not follow you, and ends where the border of the country ends, you are tax-free.
Depending on where you live, if you live in a territorial-based tax system (which is the majority of the world, besides the US and Eritrea), then you are only taxed on income made within the territory that you reside in- rather than on worldwide income. Therefore all profits accrued from an offshore investment are free from taxation in your country of residence.
However, each country has its own unique tax structure and foreign-income reporting requirements. It is important to find out what those requirements are for you, before you get started.
If you are interested in opening an offshore brokerage account, there are a few things that will be required. Generally, you will need to provide:
*if required proof of funds (which includes a receipt or documentation where the funds originated from
Other requirements might include a professional reference letter or CV.
Let us know if we can help you creating your next offshore investment.
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