Friday, August 03, 2007

Offshore Investment

Offshore investing is often portrayed in the media, as the practice of sending your hard earned money to some Caribbean Island in order to evade tax or to find a whole for your ill gotten gains. Of course there are some jurisdictions that may fit into this bracket and we know that there are those whose nefarious activities have to result in ill gotten gains, and these people have to bank too. However, offshore investing as a strategy for some investors has its place in any planned portfolio.

What Is Offshore Investing?

Offshore Investment is essentially the strategy of investing outside the investors home country for the purposes of tax planning, privacy or gaining higher returns from investment vehicles not available to the investor in his home country. 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.


There are several reasons why people invest offshore:

Tax Reduction -

When discussing investing offshore with your friends down the local watering hole this is the one area that comes up most frequently and, one would assume, would be the first reason that investors look offshore. Plenty of jurisdictions offer tax breaks of many kinds to encourage investments by foreigners. For small countries with little resources and not much tax income from its citizens there is an incentive to increase the countries economic activities by offering a safe, legal, tax efficient structure for companies to base themselves for investment purposes either as holdings companies or investment vehicles.

To put it in simple terms an individual or corporation can set up a company in an offshore jurisdiction where that corporation does not have any operational facilities or business (in fact most of these types of company are prohibited from operating in the host country) and as such it attracts little or no tax in that jurisdiction for investments made. This makes it very attractive as part of an investment strategy to route investments rather than doing this individually or corporately in the home state.

In recent years, however, the U.S. and UK governments 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. In the UK the European Savings Directive was intended to be an anonymous way of a European country paying withholding tax on interest on foreign held accounts directly to the home state of the account holder. Unfortunately this has recently been usurped by the UK government to gather information on offshore accounts. They then gave an amnesty called 'The Offshore Disclosure Facility' which gave UK taxpayers until the 22nd of June 2007 to tell the tax man about their accounts, pay taxes due and a 10% fine. 50,000 people did so.

However, as the taxman becomes more sophisticated at finding ways to reel in the offshore loopholes, the practitioners will find ever more complicated ways of helping clients plan for their taxes in an efficient manner and investing in the right offshore jurisdiction is still the place to do this.

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.

The use of bearer shares, for example is a classic strategy of exchanging ownership of companies without a paper trail of transfer, and therefore tax. What is a bearer share? If you are in the UK pull out a bank note and you will see "promise to pay the bearer..." The very notes in your pocket are bearer notes meaning that whoever has the ten pound note in their hand owns it and it can be exchanged for goods and services. It is the same with bearer shares. Lets say you own a company that you have built up to be worth ten million Euros and you want to sell it. If it is a UK company, there would be capital gains and stamp duty on the transfer, evidence by a trail of paperwork. If it is an offshore company held with bearer shares, you could simply give the shares to whomever you are selling the company to and there is no trail to follow.

Of course it is not that simple, as there are other considerations, such as the fact that you should declare the sale, but you see where we are coming from.

Confidentiality - Many offshore jurisdictions, such as Switzerland, 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.


Tax Laws are Tightening - The UK 'Offshore Disclosure Facility' is just the start of an assault on tax loopholes and the IRS already tax US citizens on their worldwide income. However, where there is a will from investors and fees for the offshore practitioners and jurisdictions, there will be armies of accounts and advisers working on structuring further strategies for clients.

Cost - Although the general myth is that offshore investing is for the very wealthy, this is not necessarily true. In years gone by this may have been the case but with the information age and specifically the Internet, services are becoming more freely available and cheaper. However, services do not come free and the old adage is true "pay peanuts, get monkeys". Many companies offer a quick fix... set up an offshore company for $300 and away you go. Offshore tax planning is simply not this easy, it requires thought and planning, and with that comes fees.

How Safe Is Offshore Investing?

More than half of the worlds assets are held in offshore jurisdictions. If you ever go down to Monaco, have a look at the flags hanging off the super yachts. Ask yourself the question as to why a country such as St Vincent and the Grenadines (with 120,000 population and a low average income) is represented very well by multi million dollar yachts being registered there. St Vincent just happens to be a very tax efficient jurisdiction for such assets.

The question of safety is relative to what you are investing and where. Registering your super yacth in St Vincent is safe, because someone there is hardly likely to steal it, Would you invest your multi million portfolio from there? Maybe not. Places such as the Bahamas, BVI and of course, the daddy of all jurisdictions, Switzerland, have first class reputations for safety, privacy and security.


Investing offshore is different for every investor, depending on their home country, their wealth, the assets that they are looking to protect or the kind of investments that are being made, so each person requires a selected strategy. Creating this strategy may take lawyers, accounts and investment advisers to create the right structure. In the end, however, if the correct structure is created the benefits can be very good indeed.

There is, after all, a reason that the wealthy have been doing it for years....

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