Banking beyond borders: How big can your savings get with an overseas bank account?
Analysing risks involved when finding an overseas lender that can boost expat savings
It’s easy to see why investors would want to invest internationally, with some of the key perks being offshore banking offers privacy, confidentiality, and new opportunities to diversify one’s assets.
But there are things to look out for when choosing an international bank to transact through, which is what we will explore in detail below.
As there are countless international banking options to choose from, narrowing down the search and settling on one institution can be a mammoth task – especially as you look for one that can possibly boost your personal savings.
Here’s an elaborate checklist to finding the right international bank to invest in!
To find the right international bank that meets your needs and provides financial security, here are three crucial factors to take into consideration as you look for a bank that can better your savings plan.
Taxes are known to erode saved and earned wealth, so finding a jurisdiction with low or even nonexistent taxes should be a priority. For this, one should examine the taxes when selling certain assets at the bank.
What this means is, if you store assets in an international bank account, but then decide to sell them, what will you lose in the process? Ideally, there should be no tax applied for such a transaction.
Tips to choose an offshore bank (#1): Taxes apply differently to permanent residents and international investors
While local residents may have an income tax, foreign investors may not, which is why you should pay close attention to these differences to determine whether a country is the right fit for you.
Destinations like Belize, for example, has a zero-tax regime. That’s just one reason why international banks located in Belize are so popular among experienced foreign investors that want to protect their wealth.
Keep in mind that there are often different tax codes for permanent residents and international investors.
Others include Gibraltar, Guernsey, The Isle of Man Mauritius, Lichtenstein, Monaco, Panama, St. Kitts, and Nevis.
• Opt for a jurisdiction with minimal government intervention
Being ultimately responsible for the future of your assets and investments, is without question a key factor when choosing a bank, especially since you will be banking from miles away.
This is why one must choose an international bank in a location free from government intervention. Governments in most of the tax haven countries listed above are widely known to not unnecessarily intervene.
When its considered positive having laws in place that require banks to have a certain liquidity rate, its less appealing to have laws that allow government agencies to freeze assets or hold funds without warning.
In some countries, government agencies can seize assets because of an impending court case, or rather they can freeze assets involved in a legal inquiry. Investors often lose out in these situations.
Tips to choose an offshore bank (#2): Always ensure you have the flexibility to move or store their assets however they see fit by enquiring or researching how banks operate in the region.
• Seek overseas bank options that can maximize investment
The primary goal of any financial investment is to grow assets while minimizing losses. It’s logical, then, that most savvy investors will look to international banks in order to achieve those objectives.
By eliminating penalties like capital gains tax, it becomes much easier to see holdings increase in value. Otherwise, wealth could start to erode over time, even if you aren’t spending it.
Beyond the tax issue, it’s worth exploring and finding the other investment products the bank has to offer. Although there are several options out there, not all will be the right fit for your financial goals.
By eliminating penalties like capital gains tax, it becomes much easier to see holdings increase in value.
Here are a list of common customer requirements when it comes to foreign banking, which by considering will help you find your preferred bank overseas.
Other investors are willing to accept slightly higher risks, but they are eager to enjoy higher rewards, as well.
Some investors need access to multiple currencies at all times, and others simply need a way to limit taxation.
Tips to choose an offshore bank (#3): So, before deciding on an international bank, ensure that the financial institution offers the structures you will benefit from most.
• Know the regulatory strength of offshore jurisdictions!
While tax is an important consideration for many to opt for lower or no tax jurisdictions, the question you need answered before investing is how safe are your savings and can changes in tax laws benefit your investments.
(FATCA and CRS ensures tax compliance at a global level, allowing tax authorities from countries to access information about their citizens’ finances.)
How offshore banks came under pressure on increased scrutiny?
In light of new regulations, traditional offshore banking hubs like Switzerland and the Cayman Islands had to either comply with directives like CRS or risk losing many of their customers.
A number of high-profile scandals involving the use of foreign bank accounts for tax evasion called for increased oversight!
In the past two decades, a number of high-profile scandals involving the use of foreign bank accounts for tax evasion and other illicit purposes came to light, calling for increased oversight of the offshore financial sector.
Then, a number of large-scale document leaks further intensified this push to regulate offshore banking.
The 2014 Luxembourg Leaks exposed multiple tax avoidance schemes conducted in this small banking jurisdiction.
Also the infamous Panama Papers detailed a number of questionable offshore practices by notable individuals and corporations.
These scandals aren’t obviously representative of most people who use offshore banking for legitimate reasons.
However, the rare-but-tarnishing instances reinforced the idea that going offshore is synonymous with evading taxes and breaking the law.
Hong Kong, for instance, used to be a hub for offshore banking, but thanks to mostly increased compliance standards, many banks in that jurisdiction decided that low-value foreign accounts simply aren’t worth it.
As a result, the drive for regulation did make offshore banking more difficult on the one hand, with banking privacy just about dead, turning a number of people away from opting for foreign banks.
On the other hand, some favour it now all the more as offshore banking has become more accessible to everyday users, and increased transparency has weeded out shadier actors that put your money at risk.
More regulation once made offshore banking difficult, but now, more accessibility and transparency are making it an expat favorite!
The mentality behind using foreign bank accounts has shifted from this idea of burying money in secretive jurisdictions to using international banking as a tool to grow and protect your assets legally and transparently.
This means taking a more pragmatic approach to your offshore planning.
Tips to choose an offshore bank (#4): Instead of seeking a bank on a tiny, nondescript island in the Caribbean, seek banks in stable jurisdictions with benefits like high interest rates or high-quality deposit insurance.
Whether you agree with measures or not, you need to account for them as you plan your banking strategy to enhance your wealth.
And remember that most banks worth their salt are going to comply with FATCA, and the vast majority of quality offshore jurisdictions are a part of CRS.
So, here is a summary of how an expat can go about choosing the right overseas bank!
With so many international banks out there, choosing one for your holdings can be tricky. So as you make your choice, look for a offshore banking jurisdiction that offers the following:
Low or nonexistent taxes, minimal government intervention, banks that avail financial options that can maximize investment and a strong regulatory presence.
The reality is not all banks offer lending services that are uniformly convenient to every overseas customer’s investment need.
There are also a list of other potential risks (possible disadvantages) when it comes to banking abroad, and one should consider them before initiating the process.
Understanding the key risks to choosing an overseas bank
• Tax ramifications are a serious concern for some
Some governments treat money held in foreign banks differently than money held in domestic bank accounts and they discourage the process of opening bank accounts overseas.
An example? Most foreign banks nowadays do not want deposits from US citizens – not even those in the traditional destinations, such as Switzerland and the United Kingdom.
Their reluctance is due to the increased aggressiveness from the US Internal Revenue Service (IRS) and the US Department of Justice (DOJ).
Tips to choose an offshore bank (#5): So while you may be opting a foreign bank that is in a jurisdiction with low or less taxes, ensure the governments in your home country has no legal instruction against it.
What this means is an American expatriate living and working in Germany, say, has to pay income taxes to both the German government and the US federal government.
• Some foreign banks may need new accounts to be opened in person
There have been instances where banks overseas have sought that the accounts be opened in person for security purposes, while also often needing specific identification.
A passport will typically work, but some banks require two forms of ID – only one of which can be foreign.
Tips to choose an offshore bank (#6): Most banks allow opening an account digitally, while others allow a self-authorized personnel/nominee/assignee to open the account on your behalf.
However be it, research is vital beforehand in finding out what is specifically required to open an account.
• Bank reference or recent financial statement from one’s home bank
• Credit history report
• Employment contract or letter from the employer, including salary information
• Proof of address, such as a utility bill or rental contract
• Certificate of registration with the local police
• Some countries have very strict regulations
Like with the example seen earlier w.r.t. taxation rules on US expats, different countries have varied pre-requisites on what must happen before an account can be closed.
Take Brazil for instance: The country requires local payment of some portion of the salary if an account needs to be closed. It can be shut down only after the payment and if taxes have been settled.
Often within the same bank, you could be faced with differing interpretations of rules with each branch.
Key takeaways?
Most international banks now offer wealth management services for expats seeking investment options. Depending on the level of capital you have to invest, the services offered vary greatly.
By investing in banks located in countries that have a low-tax or even no-tax status, you would already be seeing an effective boost in earnings.
The key, like with any other investment, is to minimize your losses and maximize your gains.
So when it comes to choosing an overseas bank, seek to do the same while educating yourself well on the conditions surrounding the lender before investing.
This includes looking into what governmental red tapes they are obligated to follow, how the lender profits from foreign investments, what is the general banking strategy or end game with every investment.
Most people consider wealth managers and financial advisers to be 'independent', however, to be considered independent and adviser must be able to choose from the whole of the market.
Most wealth managers and advisers who work for international banks, unless stated otherwise, are restricted to the products available from the bank.
This means you may be missing out on your most suitable investment option(s), which is why experts recommend that by going instead to others who have invested in the particular bank will make you more aware of the risks.