A lot of people are asking questions about offshore accounts. How do these accounts work? What are the legal parameters involved in an offshore account? If I want to open an account, what are my options?
In this post, we answer some of these questions, hoping your own questions are also covered.
What Are Offshore Accounts?
Offshore accounts are investments or bank accounts in another tax or legal jurisdiction. The account may be in a different currency other than the US dollar, and depending on where the account owner resides, there may be tax and legal pros and cons of keeping his money in another jurisdiction.
For many, owning an offshore account is simply a way of keeping their assets out of their government’s reach, with the purpose of evading the taxation that they would otherwise be subjected to in their own countries.
Generally, one’s country’s laws are not recognized outside its borders, and so offshore accounts enable account holders to by-pass personal/corporate laws pertaining to money, taxation, disclosure, permissible investment, pension, holdings, etc.
In essence, offshore accounts are employed by people to avail themselves of a different banking service, low taxation rate in another country (even zero tax rate) and avoid the taxes in their own country.
Types of Offshore Accounts
When opening an offshore account, you have the following options or types to choose from:
- Savings account – This is the most common type of offshore account and is available as either a fixed-rate or a variable-rate account.
With a fixed-rate account, you can “lock” your cash for a minimum period of time (usually 1 to 5 years), and the accumulated amount you will receive after that period is also fixed.
On the other hand, with a variable-rate account, the amount you will receive is subject to periodical fluctuations of interest rates.
- Trading Account – Offshore trading basically means trading through an offshore company. Trading companies purchase a specialized array of products, maintain a shop, and deliver merchandise to customers.
You don’t have to travel to your target offshore country. Opening an offshore trading account can be done via the internet. The same is true with other types of offshore accounts.
- Brokerage Account – Another option you have is to open an offshore storage brokerage account, which is a bit like a bank account, but instead of a bank, your money is being held by an offshore broker; meaning some agency based abroad will act as an agent buying and selling stocks, ETFs, futures contracts, or bonds in your behalf.
The most basic function of offshore brokers is to execute trades for the investor. In your case, you are the client or the investor and your broker does the trading of the financial instruments (mentioned above) for you.
Your broker may offer additional services like portfolio management and investment advice. He will then collect fees (commission) for the services and trades he makes as the representative of your offshore brokerage account.
Here’s what to look for to ensure that you are dealing with reliable offshore stock brokers:
- Security and money protection
- Investments and availability of different types of account options
- Financial history of the broker
- User reviews
- Performance of funds
- Website performance (access, usability, etc.)
- Mutual Fund – Offshore mutual funds are fantastic investment vehicles based in an offshore location outside of the US. With such a fund, you will feel less vulnerable and have less risk. It works because many people invest money and assets into a fund that buys stocks and utilities in various ways. Even if a couple of investments fail, the risk is spread among all investors.
- Life Insurance Policies – Another excellent offshore investment prospect is life insurance. People use such policies to protect assets for people who they care for. Asset preservation includes cash, real estate and stocks, and you can even earmark funds for charitable institutions or political organizations, if you so desire.
- International Real Estate – Arguably one of the most attractive offshore investment accounts to have is investments related to real estate. For some reason, investors embrace the idea of buying something tangible, like real estate, to diversify their possessions. The investment category that is international real estate is exceptionally large, and can involve so many other types of investment.
International Banking Services
If you’re looking into stashing your cash away in a bank in a foreign location, here are the services you can get from them:
- Savings Accounts
- Corporate Administration
- Foreign Exchange
- Fund Management
- Deposit Taking
- Investment Custody and Management
- Letter of Credit
- Trade Finance
- Electronic Fund Transfers
Benefits of Offshore Accounts
For offshore accounts, the main benefits are – protection, privacy, and tax perks.
Privacy – Offshore accounts follow stringent confidentiality norms, and keep personal information discrete at all times. In addition, these accounts are protected against any legal attachments imposed by governments or any other legal authority.
Protection – Your funds will be safeguarded against unsound banking regulations or political instability in your own country. Your assets are also protected from any upheaval taking place in your country’s economy.
Tax Benefits – Countries that offer offshore investment opportunities are called tax haven countries. Investors are given lots of opportunities to save money from significantly lower tax rate (sometimes nil) compared to their home country.
The only particular eligibility criteria are age and minimum funding, which is generally over $1,000,000, depending upon the country of your choice.
A disadvantage to cross-border accounts is the burdensome tax law. If you are a citizen of the United States, things are even more difficult. The Securities and Exchange Commission of the United States has passed new laws on offshore investments, which had discouraged investment firms to transact with US citizens.
As a matter of fact, some investment companies out-and-out deny applications from citizens of the United States. In the same vein, governments all over the world take offshore investments and tax evasion seriously.
How to Choose an Offshore Account
There are no bad or good offshore account services, but with regard to the options available, you have innumerable choices to choose from. A particular cross-border account service may not suit everyone.
Here’s what you need to consider when determining the most ideal country to invest in.
Minimum Investment Required
Some companies may require a minimum of $1,000,000 and that is typically true for services based in Switzerland. By contrast, some companies in Belize require only an initial deposit of $1,000.
Take note that the usually good jurisdictions for offshore accounts require bigger initial deposits.
Move Money Remotely
This is definitely the biggest deal breaker. Flying out to be in person in the target country of your investment to initiate a wire transfer is certainly of no help. That very thing defeats the need and the purpose of offshore investments.
You also need to know if the company can wire funds straight to your local bank, and needless to say, you should be able to transfer funds from your local bank to the offshore company without difficulties or delays.
Due to the current laws enforced against money laundering, the fees associated with offshore accounts are steadily increasing. Nowadays, offshore account services around the world are passing compliance and KYC (Know Your Customer) costs to customers. That in turn increases fees.