Offshore investing has recently been demonised in the media, thanks to the release of the so-called Panama Papers. This case paints a picture of investors stashing their money with some illegal company located in an obscure location where the tax rate is next to nothing. While it’s true that there are some instances of shady offshore deals, the vast majority of offshore investing is perfectly legal and carried by law-abiding citizens. In fact, depending on your situation, offshore investing may offer you many advantages, and given that the majority of residents are expatriates, an offshore investment can be useful for many bona fide reasons.
What Is offshore investing?
Offshore investing refers to a wide range of investment strategies that capitalise on advantages offered outside of an investor’s home country. I will briefly touch on the advantages and disadvantages of investing internationally. There are no shortage of investments offered by reputable companies that are fiscally sound, tested and, most importantly, legal.
Tax Reduction - Many countries offer tax incentives to foreign investors. The favourable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth.
In recent years, however, many governments have 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.
Offshore centres are popular locations for restructuring ownership of assets. Through trusts or 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.
Many offshore jurisdictions offer the benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality.
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.
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 privatise sectors that were formerly under government control.
Tax Laws are Tightening — Due to political pressure, tax agencies are tightening up on many of the traditional tax efficiency-enhancing measures.
Offshore Accounts are not cheap to set up. Depending on the individual’s investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. However, most offshore funds have similar charging structures to their onshore equivalent.
How safe is offshore investing?
Popular offshore countries are known to offer secure investment opportunities. More than half of the world’s assets and investments are held in offshore jurisdictions and many well-recognised companies have investment funds located in offshore locations. Like every investment you make, use common sense and choose a reputable investment firm. It is also a good idea to consult with an experienced and reputable advisor to get the best possible advice, especially if you are looking to protect your assets, or are concerned with estate planning or business succession.
James Thomas, Managing Partner, DeVere Acuma