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Glossary

 



401-K Plan

In the US, pensions legislation allows deferral of tax on pension contributions through a number of methods, of which (section) 401-k is the most widely-used. Employers often set up individual pension arrangements for their staff under section 401-k. An individual with a 401-k scheme can use the assets it contains to make approved investments into mutual funds and other types of asset.


Annuity

A series of annual (or monthly) payments offered by an insurance company in exchange for payment of a capital sum. A deferred annuity commences on a pre-determined date in the future, but the rate at which it is purchased is determined at the beginning of the contract. Therefore, a lump sum can be applied during a person's working life to purchase an fixed annuity on retirement, whatever is the movement in interest rates in the meantime.


Asset Protection Trust

A trust designed to accomplish a number of estate planning goals of its settlor, before and after death, including planning for the preservation of the settlor's estate from a variety of risks which would threaten to dissipate the estate if one or more of the risks materialised. An APT is typically established in a jurisdiction other than the settlor's home country.


Defined-Benefit and Defined-Contribution Plans

A defined-benefit pension plan is one in which the levels of benefit (pension, death benefit etc.) are defined in advance. Usually this type of plan is not available on an individual basis, but only through company pension schemes, since variations in investment performance make it impossible to predict the behaviour of a fund in advance. A defined-contribution plan is the normal choice for individual pensions investment - contributions are pre-set, but the eventual result will depend on the behaviour of the underlying investments. This is the type of product normally offered by life assurance companies.


Domicile

Domicile' normally relates to the country or state which an individual regards as their permanent/ultimate home location. A person's domicile is established at birth and this remains until an individual resettles with the firm intention of remaining in that new location.


Double Taxation Treaty

An agreement between two countries intended to relieve persons who would otherwise be subject to tax in both countries from being taxed twice in respect of the same transactions or events. By and large, most offshore jurisdictions have traditionally not had double taxation treaties, since they don't have much local taxation. Offshore jurisdictions which do have double tax treaties usually cannot use them to benefit investors receiving complete local tax exemption.


Keogh Plan

In the US, a Keogh plan is a section 401-k plan for self-employed people or the owners of small businesses to make tax-exempt contributions up to quite generous maxima into pension plans. Money in the plan can be used to buy certain types of asset including certificates of deposit, mutual funds and listed securities. Direct offshore investment would not be permitted.


MRD

In the US, a pension fund which has benefited from tax-deferral must be paid out after a certain age as an income flow (which is taxable). The rules for calculating the Minimum Required Distribution (permitting the rest of the fund to remain tax-exempt) are complex and depend on the life expectancy of you and your spouse.


Offshore Company

An offshore company can take many different forms, some of which are not of interest to the individual expatriate investor. However, if you have a large and diverse investment portfolio, or provide a professional service (for example consultancy in the engineering or finance industry), then this type of structure may be of interest to you.

If you are engaged in providing a personal or professional service, you may be able to achieve considerable tax savings by setting up a 'personal service company'. You can contract to supply the service regardless of residence, and the fees earned can accumulate offshore while you work for a low salary in the country where you are taxed. It only works in some countries, and you may have to do something more complicated than just owning the company yourself, if it is not to be 'looked through' by the taxman.

There are, of course, many other types of offshore company that can be formed to deal with the needs of large corporations, or expats with very specific needs, i.e. globetrotting entertainers or sportsmen.


Offshore Equity

An offshore equity is one that is listed on a stock exchange in an offshore (= low-tax) jurisdiction. Usually there are no withholding taxes on dividends paid out, and very low local taxation of corporate profits. An offshore equity brokerage is simply one that is based offshore, and allows you to buy regular 'onshore' equities from an offshore base. This won't directly help you to escape withholding taxes, but it may help with national stamp duties and capital gains tax, as well as preserving confidentiality.

 

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