Pros & Cons

Offshore investments are often discredited within the media, which gives the impression that they are used by investors who wish to conceal their money through an illegal investment outfit located on an obscure Caribbean island which carries no tax obligations.

While there is some truth in that there will always be instances of underhanded offshore investment schemes, the vast majority of offshore investments are perfectly legal. In fact, depending on your financial circumstances, investing offshore may be highly advantageous.

What Is Offshore Investing?

Investing offshore refers to a diverse range of investment strategies and/or investment vehicles that capitalise on advantages offered outside of an investor's country of residence. Below is a brief outline of the advantages and disadvantages of offshore investing. The finer details are far beyond the scope of this introduction, but can be spoken about in detail with one of our specialist offshore consultants.

There are a plethora of money-market, bond and equity assets offered by reputable offshore companies that are monetarily sound, time-tested and legal.

Advantages

There are several reasons why people invest offshore and they are as follows:

Tax minimization - Many traditional tax havens offer tax incentives to foreign investors. The favorable tax rates in certain offshore jurisdictions are designed specifically to promote a healthy investment environment that attracts wealthy individuals from abroad to invest in their country.

For small, sparsely populated countries with very few natural resources and viable business opportunities, attracting the right investors from abroad can dramatically increase the countries economic activity.

Offshore investments generally occur when an offshore investors forms a corporation in a foreign country. The corporation will then act as a shell company for the investors' accounts, shielding them from the higher tax obligations that would be incurred in their country of residence. Due to the fact that the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation. As a result, investing through a foreign corporation can provide distinct advantages over making investments as an individual.

Asset Protection - Offshore jurisdictions are popular locations for restructuring the ownership of assets. Utilising trusts, foundations or an existing corporation it allows individuals to transfer wealth ownership over to another legal entity.

Many individuals who are concerned about lawsuits or lenders foreclosing on outstanding debts can opt to transfer a portion of their assets from their personal estates to an entity outside of their country of residence therefore rendering it impervious to those chasing funds and/or assets of the individual.

By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles.

Confidentiality – The majority of offshore jurisdictions offer the benefit of confidentiality. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality agreement is breached, there are serious consequences for the offending party.

An example of a breach of banking confidentiality would be divulging a customer's identity; and disclosing the identity of shareholders is a breach of corporate confidentiality in some traditional offshore jurisdictions.

However, confidentiality agreements do not mean that all offshore investors are criminals with ill-gotten gains to hide. Offshore laws will disclose the identity of an individual, in the event of clear instances of drug trafficking, money laundering or other illegal activities taking place.

In the case of high-profile investors, keeping information, such as an investor's identity, a 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 wider public to know what securities they're investing in, because if your everyday small-time investor was to buy the same stock, it will push up the price which will have a huge impact if the big-time investor had targeted a large volume share purchase beforehand.

Due to the fact that countries are not required to accept the laws of a foreign government, offshore jurisdictions are, on the whole, impervious to the laws applicable in the investors country of residence.

Diversification of Investment - In some countries, regulations restrict the international investment opportunities of their citizens, which are seen by many investors as a hindrance when structuring a fully diversified investment portfolio.

Offshore accounts are far more flexible, giving investor's unlimited access to international markets and to all major indices. There are also many opportunities in developing markets, especially those that are beginning to privatise sectors that were previously under government control, which are viable investment opportunities with an offshore account.

Disadvantages

Tax Legislations Tightening - Tax regulatory bodies such as the IRS and Inland Revenue aren't ignorant of offshore investment strategies. In recent times regulatory bodies have clamped down on some of the traditional ways of tax mitigation. There are still loopholes out there, but most are shrinking by the day.

Cost - Offshore Accounts are not cheap to establish, and the ongoing costs are high as well. Depending on the individual's investment requirements and the jurisdiction he or she chooses, an offshore corporate entity may need to be incorporated. Establishing an offshore corporation may involve high legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they intend to set up an offshore account or operate a holding company.

Additionally many offshore accounts require a minimum investment of between $100,000 and $1 million. Also businesses that facilitate offshore investment and company formation know that their service is in high demand by high net worth individuals and they charge accordingly.

Are offshore investments safe?

Popular offshore jurisdictions such as the Bahamas, Bermuda, Cayman Islands and Isle of Man are known to provide comparatively secure investment opportunities. More than half of the world's assets and investments are held in traditional offshore jurisdictions and many well-known companies have investment opportunities in offshore locales.

However, like any investment opportunity, due diligence is required and working with a reputable offshore investment firm is always a helpful. It is also a good idea to consult an experienced investment advisor, accountant, and/or lawyer who specialises in international investment and taxation to ascertain whether or not the opportunity is viable and worthwhile, when taking into consideration your personal financial situation.

If you want to protect your assets, or are concerned with estate and/or succession planning, it would be wise to find an attorney (or a team of attorneys) who specialise in asset protection, wills or business succession.