Quite often, the news media portrays offshore investing as a method for the very wealthy to avoid paying taxes in their home country. Although there are offshore investments that are not above-board, the majority of this type of investment is legal and may offer significant advantages to the investor.
What is Offshore Investing?
Much like the name says, offshore investing refers to investing outside of the home country of the investor, normally in jurisdictions with better tax advantages than that offered where the investor lives. There are many types of offshore investing, ranging from simple to complex, and investors choose to invest offshore for many different reasons.
One of the biggest reasons that people choose offshore investments is the tax advantages offered by other countries. Small countries often offer tax benefits in order to attract investors as they may have a small population with a limited tax base available. Many times, the foreign investor form a corporation in the other country, and the company acts to protect investors from higher tax burdens they would incur in their home country. Another method for investing offshore is to invest in foreign companies who enjoy tax-exempt status in the United States. However, the government recognizes that offshore investment leads to a loss of tax revenue, and regulations are changing regarding what is considered taxable income with offshore investments.
Another reason that investors choose to place assets offshore is to protect assets through trusts, foundations or corporations. This often occurs when individuals are concerned about lawsuits or foreclosure proceedings. It is also used during contentious divorces when one spouse wants to protect assets from the other. For those that choose offshore investments in an effort to protect assets, the tax advantages are not the primary focus of the investment, and the trustor is often taxed on the income of that investment.
Many out-of-country jurisdiction offer stricter corporate and banking confidentially than that of the United States and other larger countries. In cases where drug trafficking or other illegal activities are suspected, even countries with strict confidentiality laws will disclose information in order to identify those using offshore investment for illegal purposes. High-profile investors often desire privacy as it keeps smaller investors from targeting large volume stock purchases and running the price higher.
Offshore accounts offer better flexibility to investors as most of the countries known for offshore investments do not restrict international investment opportunity. In addition, developing nations often have more opportunities for investment than those that are better established. Many countries whose investment opportunities were under strict government control that are now beginning to privatize sectors of industry offer the best opportunity for investment diversification.
Offshore investments are an excellent way to realize lower tax responsibilities and protect assets from others. In addition, they provide better investment diversification and confidentiality that home countries may not offer.