What is Offshore Investing and Why You Should CareAugust 5th, 2012 by The JetSetter Team | Comments Off on What is Offshore Investing and Why You Should Care
as far as the current presidential election to understand how offshore investing is demonized in the media. Rarely a day goes by that President Obama or one of his minions don’t make a public swipe at presumed-Republican candidate Mitt Romney. As most of us are aware by now, Romney has amassed a fortune worth at least a few hundred million dollars through work at a company called Bain Capital. Much of that money is now held in a blind trust and invests in various offshore assets. Contrary to what Mr. Obama would have us believe, offshore investing is QUITE legal and makes no statement whatsoever about one’s patriotism.
That’s as far as we want to go with the politics of offshore investing. The real point to be addressed here is that offshore investing is no panacea, there are pros and cons to the practice, but everyone owes it to themselves to at least understand what it’s all about. As you might suspect, basing your sum knowledge of the practice on biased political sound bites leaves you with somewhat less than the full story.
Offshore Investing – What is it?
The idea of offshore investing is simple in concept, referring to the wide range of investments that capitalize on advantages found outside an investor’s home country. The same sorts of investments to be found here in the United States – stocks, bonds, money-market funds, bonds, and real estate, don’t magically end at our national border. Most developed countries in the world have some sort of stock trading index, and real estate is at a premium all over the earth. By the way, the assets we’re talking about holding are perfectly legal. Despite the terms Mr. Obama likes to use when publicly castigating his opponent, there is nothing intrinsically illegal about these types of investments. As with anything either overseas or stateside, there’s a legal way to do things and an illegal way. We’d advise you to always refrain from the latter.
The question then becomes what are the advantages of investing outside America? Here are the main reasons.
Pay Less in Taxes
Some countries, often those with little in the way of natural resources, have set themselves up as “tax havens,” which simply means they offer tax incentives to foreign investors, usually in the way of low tax rates. For small countries, this influx of wealth can make a serious difference in the standard of living.
The normal arrangement goes something like this:
1. Investors form a corporation in a foreign country, which essentially acts as a shell protecting investor accounts from higher US taxes.
2. Since the corporation does not engage in much actual business activity in the host country, few, if any taxes are incurred there.
3. At the same time, foreign companies often enjoy tax-exempt status when investing in US markets. After all, the government wants to encourage stock market activity. The end result of this is that the shell company allows US investors to participate in the American stock market from the other side of the fence – as a foreigner – at a cheaper price.
Other advantages to be found in offshore investing include stronger asset protection for individuals, confidentiality (a trait the Swiss and their banking industry are famous for), and greater diversification than is possible when keeping your portfolio confined to US markets.
The Downside of Offshore Investing
Of course, few issues are black and white. There are disadvantages to this style of investing also. One of the first to consider is that tax laws are in a perpetual state of tightening. With a current administration seemingly intent on giving away the entire wealth of the country, raising additional money through taxes to fund the next boondoggle becomes of primary importance. The IRS might be annoying but it’s not stupid. They know how offshore accounts work and consider it money lost that should go into their coffers. Consequently, one should expect that the agency, in conjunction with Congress, will do their dead level best to eliminate as many of the tax advantages as they can.
investors, the expense of creating and funding an offshore account might be cost prohibitive. Expenses would likely include legal fees (which could be VERY costly), corporate or account registration fees, and initial deposits might be required to be anywhere from $100,000 to one million dollars. Offshore investing is a service in high demand by the ultra-wealthy, and expenses related to it are priced accordingly.
A final thought on the topic: is offshore investing safe? The answer is a solid – maybe. It depends almost entirely on the political and economic stability of the host country. Well-known tax havens like the Bahamas, Bermuda, and the Cayman Islands have few known issues. The thing to keep in mind is that, if you drift outside the traditionally recognized tax specialty jurisdictions, do so at your own risk! (Top image: Flickr | roger4336)
The Jetsetter Show Team
Tags: Bermuda, Cayman Islands, how to open an offshore account, international tax havens, offshore banking, offshore investing, offshore investments, tax haven, the Bahamas, what is an offshore account