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Personal Finance for Expats

Some Reasons to Invest Offshore

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When discussing the topic of investing offshore with friends, family, colleagues, and acquaintances, the question of “why invest offshore?” invariably comes up.

In my mind, there are a myriad of reasons to invest offshore, but here are some of my favorite ones:

Increased privacy – Protect yourself from the increasing loss of privacy, and prevent domestic credit reporting bureaus from collecting information on you and your assets. Many offshore financial centers have strict banking and confidentiality laws. As long as one is not engaging in arms trafficking, money laundering, or other illegal activities, investing offshore will better enable you to protect your privacy.

Earn higher returns – Offshore funds may have more freedom in terms of what they can invest in, whether they go long or short, as well as more freedom to take advantage of market fluctuations and cyclical movements. As a result, you have the potential to earn higher returns than you could in your country of residence, where there is probably more regulation and red-tape, and where fund managers might be restricted as to the investments they are allowed to make.

Avoid high taxes – Depending on your citizenship and where you reside, many low-tax districts can offer you products that have little or no tax at source. In addition to this, by forming an offshore corporation or trust, you can potentially lower your tax burden.

Protect your assets from being forfeited – Many offshore financial centers are not required to accept the laws or civil judgments of a foreign government. By creating a foreign corporation and/or trust, you can prevent your assets from being seized by our government and/or lenders who want to collect on outstanding debts. As societies are becoming more and more litigious, it is a good idea to invest offshore so you can protect yourself against any potential lawsuits that may occur in your country of residence.

Avoid having to depend on a state pension – Even if you live in a country that offers a state pension, it is doubtful that a state pension alone will provide you with the money to have a quality retirement. With an aging workforce, diminishing returns, and fewer workers to contribute into state pensions, depending entirely on such a vehicle to provide you with a quality retirement is not the best idea.

While there are risks associated with investing offshore, and there may be increased complexity when managing an offshore portfolio (not to mention tax implications), I believe the benefits are too tantalizing to ignore. Also, there are risks even when one invests in familiar investment vehicles in their home country. There’s no way to completely eliminate risk, but with the right strategy and right knowledge, in addition to the correct team of advisors (financial and tax), one can reap huge benefits investing offshore.

The Difference Between Tax Evasion and Tax Avoidance

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To build upon the previous article (on myths about investing offshore), I wanted to briefly explain the difference between tax evasion and tax avoidance, in particular because there is so much confusion around this topic.

Institutions such as banks, investment firms, and insurance companies might not be required to report their clients’ assets or income to foreign governments or foreign tax authorities. However, depending on where you are resident and what passport you hold, not reporting your foreign assets or income may be considered a crime in your home country or country of residence.

For example, for Americans, purchasing foreign funds and not reporting the capital gains to the Internal Revenue Service (IRS) would be considered tax evasion. Additionally, opening an offshore bank account and not reporting it to the Department of the Treasury (either through the IRS and/or the Financial Crimes Enforcement Network), might constitute tax evasion, depending on whether the balances of the accounts exceed the threshold for filing.

However, deciding to hold on to a foreign investment for longer than one year before selling it in order to pay the lower long-term capital gains tax is an example of tax avoidance and is perfectly legal. Also, taking advantage of various tax credits that are available in order to directly reduce your tax liability is an example of tax avoidance.

Therefore, tax avoidance is the act of minimizing your tax burden through legal means, and tax evasion is the illegal act of not claiming your assets, under-reporting income, or overstating deductions in order to reduce your tax burden.

It goes without saying that one should never resort to tax evasion, as the penalties are harsh and include heavy fines and possibly even a prison sentence.

Before investing offshore, it is wise to enlist the services of a tax advisor experienced with foreign taxation, just to ensure that you are fully compliant with the tax laws in your country of citizenship/residence.

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