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by Caroline Maxwell and Jeremy Hetherington-Gore, January 2010
22 January, 2010
So you have decided that offshore is the way forward. The three most pressing concerns, then, are what type of investment you feel is right for you, where you choose to invest or bank, and how involved you are prepared to be in offshore life.
The range of offshore investment and banking options available to today's expatriate can sometimes seem a little bewildering to those not well-versed in finance, so before we deal with the choice of jurisdiction, here is a brief rundown of your options, and the advantages and disadvantages of each for an expatriate.
Offshore banking is worth considering whatever the length of your expatriation or future plans, as in many jurisdictions you can ensure that interest is paid out or added to the balance gross, and your balance and transaction details will be subject to greater confidentiality and protection. Even if you still have currency commitments at home (for example mortgage payments), there may be no need to maintain your account there to deal with these expenses, as most offshore banks are well equipped to deal with every aspect of expatriate money management, including remittances to your home country, and by now most of them provide Internet banking services in any case.
It is, however, worthwhile bearing in mind the charges levied for different facilities, for example credit and debit cards, cheque books and electronic transfers. By the very nature of offshore, these all involve your money being transferred across the globe, and how much this costs varies widely from bank to bank. So think carefully about what you want to be able to do with your money, and if you decide that you really need extra facilities, check who offers them at the most reasonable price, and use them wisely, otherwise the charges will mount up. If you are going to maintain substantial balances on your account, there may well be scope for bargaining over charges. If you don't ask, you don't get!
Offshore fund investment is another option which is especially suitable for expatriates, as going offshore offers a much greater variety of investment opportunities than domestic investment funds, and many more markets and providers can be accessed. The different categories of offshore fund investment require varying levels of commitment, openness to risk, and capital, so whatever your circumstances, you should be able to find something to suit you. Investment in an offshore fund also provides you with greater peace of mind, as not only is the risk spread, but the fund is likely to be managed by an expert with specialised knowledge and up to the minute resources. But stick to well-known names, and never believe extravagant promises: only if there is cast-iron evidence of superior returns over a long period of time should you consider any investment which seems unexpectedly rewarding. If it seems to good to be true, it is too good to be true!
Funds can be either open or closed-ended; open-ended funds can include mutual funds, tracker funds and UCITS, and are usually listed on stock exchanges, although the units are bought and sold via the fund manager, and not traded as such, unless they are exchange-traded funds, which have begun to make their way in some jurisdictions. The Net Asset Value (NAV) per unit is calculated frequently, and the information is readily available for the investor to act as she sees fit. This type of fund is intended more for ordinary investors.
Closed-ended funds, on the other hand, are more suited to professional investors, as there is less protection, and this being the case, they are rarely (if ever) listed on stock exchanges, as the degree of considered risk involved would generally be in contravention of the investor protection measures necessary for publicly listed funds.
It is usual for investors in closed-ended funds to set up limited partnerships, or limited liability companies for the purposes of tax transparency, and to enable them to offset profits and losses. Although the nature of closed-ended funds means that there is a pre-agreed closing date at which profits will be distributed (and as a result, this type of investment requires a greater degree of commitment) matching and crossing services are now offered, meaning that the needs of international investors in closed-end funds can often be dovetailed, to their mutual advantage.
For a more detailed description of offshore investment funds, please click here to visit the Investorsoffshore Guide to Alternative Investment.
Pensions Provision For Expatriates
As an expatriate, you will doubtless be involved in a pension scheme already, or at least be thinking about the issue of pension provision. Although offshore pension planning can be more complicated than domestic pensions arrangements, it can also (done right) be more rewarding. The first question must always be about your existing scheme: if you have a substantial investment in a tax-privileged scheme in your home country, and if you are thinking about going back there to retire, and if retirement is imminent, then it will probably not pay to change existing arrangements. If on the other hand you are quite young, and may not return to live in your home country, then you may do better by setting up offshore arrangements, and may be able to combine these with your existing pension assets through (for UK domiciliaries) QROPS (Qualified Recognized Overseas Pension Schemes) or their equivalent in other countries.
There are different ways of approaching the provision of offshore retirement income, but designated pensions investment may at first seem the most attractive to the bewildered expat.
Many large and reputable organisations offer reasonably flexible offshore pension plans (which are basically investment schemes structured within life policies, which can grow tax-free offshore). This type of investment can be attractive, as much of the work is done for you, and there are sometimes other benefits and incentives offered as part of the package. However, although limited flexibility is available, it can be costly if your circumstances change dramatically, as heavy front-end charges and cancellation fees could negate any savings potential.
You might alternatively decide that you are more interested in the DIY approach, and opt to make the decision about the mix of investments yourself (although sound financial advice is a necessity here, in order to maximise both security and capital growth in the period before retirement). This is a cheaper option without a doubt, as there are few (if any) administrative costs, and no penalties for cancellation or withdrawal if your circumstances change. However, it can be less of a 'safe bet', and you will need to consider the tax consequences of a change in circumstances or relocation.
Offshore Trusts And Companies
And finally, if you are interested in streamlining your financial management, or protecting your assets against possible future threat, then an offshore trust or company may be of interest to you as an expatriate. (It has been said before, but bears repeating, that if you are attempting to protect your assets against imminent or current attack, whether from the tax- man, creditors, or a litigious ex-spouse - DON'T BOTHER! Trying to transfer assets offshore in order to defraud is not only pointless, but is likely to get you into untold trouble if you are caught out. Which you probably will be. The time to transfer assets offshore is before you have problems, not afterwards, and it can then be very effective, although nowadays more for asset protection purposes than in order to save tax or for confidentiality, which is no longer guaranteed after the long campaign waged against it by the OECD and assorted major high-tax countries such as the UK, the USA, Italy, France and Germany.)
In terms of making financial management more efficient, however, an offshore trust or company, or a combination of the two, can be very useful, in that all assets are essentially 'wrapped up' in one jurisdiction, cutting down on administrative costs, and leaving the expatriate free to acquire assets anywhere in the world.
In the case of an offshore trust, the settlor (you) can be distanced from control and ownership of assets, with the trustees 'owning' and administrating the trust on behalf of the beneficiaries (of which the settlor can be one, if he so chooses). Although for the purposes of transparency (and by extension effectiveness as an asset protection vehicle) the trustees must be seen to have ultimate control, the settlor will usually present them with a letter of wishes outlining his desires and concerns for the trust. It is therefore essential that there is a good relationship between the settlor and trustees, and that the persons chosen to fill the role of trust managers are trustworthy and reputable. In most jurisdictions there are stringent laws governing the registration of trust management companies and individuals.
An offshore company is somewhat different, in that transfer of ownership is less absolute, as although the company will own the assets, the transferor will still own shares in that company. This being said, an offshore company can still provide effective confidentiality, as the company will be a separate legal entity, with a separate name disassociated from that of the individual. These vehicles also carry limited liability status, which means that there is no financial obligation on the part of an offshore company shareholder.
It is worth bearing in mind, however, that offshore trusts and companies are not cheap to set up and maintain, and the more complicated a structure needs to be, the higher the annual management fees will be. If you decide that this type of offshore vehicle is for you, consider your jurisdiction very carefully, as the rules and legislation regarding trusts and companies vary widely. Some jurisdictions do not recognise trusts as such, but have established local variations on the theme, and different IOFCs offer different company structures and business formats.
Before setting up an offshore asset structure, you also need to consider whether your country of residence has 'Controlled Foreign Company' rules, which might bring the profits of such a company under the income tax umbrella of your home country.
As you can see, though, there are a variety of banking, asset protection, and investment options open to you, and the choice of jurisdiction is intertwined with the choice of offshore structure, which is intertwined with your personal circumstances, obligations, and preferences. So without further ado, onto the tricky matter of choosing a jurisdiction!
The Choice Of Jurisdiction
In terms of relocating offshore, this article aims to provide assistance for expatriates in a variety of situations. Although obviously, your prime consideration is to find a secure and profitable location for your assets and income to be remitted to as you move from country to country, you may also need to consider other factors. You may choose (or be obliged by your company) to work and become temporarily resident offshore, or you may have dreams of spending your autumn years skiing, or soaking up the sun. Whatever your situation, you need to make sure that you choose an offshore jurisdiction which fulfils all of your needs, and with which you can, (if you so desire) maintain a life-long relationship.
There are several basic points to be considered when looking at jurisdictions (for whatever reason), and briefly, these are:
If your plans are to spend some time working in the jurisdiction in which you settle your financial affairs, you will need to look into areas such as residence regulations and taxation, cost of living, and employment regulations. (i.e. is a work permit necessary? How easy is it to get one? How long are you allowed to stay, and can you bring your family with you?)
And finally, if you would eventually like to retire to your jurisdiction of choice, you will have to consider nearly all of the above points, but will also need to look into the lifestyles, languages commonly spoken and climate, leisure possibilities, and retirement income options offered by the various jurisdictions, in order to choose the one which best suits you and your family.
But don't panic! This special feature addresses all of these aspects of offshore living, banking and investment for 20 of the major jurisdictions.Click on the flags below to find out more about each country!
Offshore jurisdictions come in all shapes and sizes, and the standard of living, investment options, and professional support vary enormously. However, we hope that this article has clarified at least some of the areas of concern for you, and possibly helped you to decide where to go, and what to do when you get there!
The second part of this feature deals in more depth with the characteristics of offshore investment vehicles and the mechanics that are involved in making investments, including the due diligence you need to do to safeguard yourself against scams and fraud.
For a comprehensive treatment of offshore legal and tax regimes in over 30 offshore jurisdictions, please visit theLowtax Jurisdictions Guide.
In the first section of this special report we discussed the structure of various offshore vehicles, and looked broadly at why they might be useful to an expatriate. In this second part, as well as summarising the lifestyle, investment and banking opportunities available in 20 of the major offshore jurisdictions, we will be focusing primarily on offshore investment, looking at what type might be most suitable in terms of your eventual goals, openness to risk, and time frame. We will also be looking at due diligence which should be done in order to avoid falling for some of the more obvious offshore scams.
But first things first. Why invest offshore? Expatriates, in the vast majority of cases, have a great deal more freedom than the average moderately wealthy high-tax country resident, and as such, are more able to explore the possibilities presented by alternative investment opportunities.
What Is Offshore Or Alternative Investment?
'Alternative' investment is a fairly nebulous concept, and is best defined by what it isn't. In domestic markets, the investment options tend to narrow themselves to local stock markets, funds which conform to tight and restrictive regulatory guidelines, and the savings products of high street banks and institutions. Alternative investment could be defined, then, as everything else, and as an expat, you are ideally placed to explore alternative channels, with offshore prominent amongst them.
One of the reasons for the increasing popularity of offshore investment (especially among expats) is the rise of the internet, which has allowed individual investors to research and reach the financial institution that they feel best serves their needs and has all but removed geographical restrictions. Alongside (or possibly as an indirect result of) this increase in accessibility has come an increase in the diversity of products and vehicles available, and also of ownership techniques. Offshore investment is normally a great deal less regulated than onshore investment, with the result that the investment opportunities are far more varied, and can sometimes offer greater potential returns (the other side of the coin sometimes being a greater degree of risk). Depending on your circumstances, as an expat, you may also benefit from more relaxed taxation on your investment income and capital gains if you choose to invest offshore.
The most basic form of offshore investment is an offshore bank account. For income or assets that you will need access to in the short term, it may be the best vehicle. Interest is paid on the balance gross, account and transaction details are more secure and protected than they would be in an onshore account, and whatever your currency commitments (expats are quite likely to have currency commitments elsewhere) an offshore bank can usually deal with them at least as effectively as an onshore bank.
For European expats looking to open such an account in a participating country, however, the impact of the European Savings Tax Directive, introduced in 2005, must be borne in mind, since a number of jurisdictions with relationships to EU Member States are applying withholding taxes to 'returns on savings' including interest payments.
If you have money over and above what you need short term, or if you have a specific goal in mind, for example retirement income or capital acquisition without any specific end commitment for the time being, other types of offshore investment may be more effective. The range of investment options open to the 'mass affluent' expat is dizzying, and can sometimes seem a little overwhelming, but there are a few simple questions which may narrow down the options a little, helping to decide which types of investment may suit your end goal, and which are potentially unsuitable:
Whatever the eventual aim, the underlying need is to make as much profit as possible on the investment, but profitability has got to be set against risk. The greater the potential return is on an investment, the higher the risk may be - for instance, if you are investing to provide yourself with an income in retirement, you may not want to jeopardise that by investing your assets in potentially profitable, but risky 'hot pick' stocks.
Types Of Alternative Investment And Their Degree Of Risk
Although there is an element of risk in almost any investment process, there are some areas in which that risk is considered high, and some in which it is widely held to be low. Here's one view of the risk spectrum from lowest to highest, although it must be remembered that opinions about risk vary from person to person, so this should not be considered as a definitive list. When trying to decide how and where to invest assets, it is always best to seek professional advice both on the general investment strategy and also on the choice of particular investment targets.
Deposit accounts. There are many hundreds of these available offshore. Interest on the deposit varies according to both jurisdiction and institution, but is usually an improvement on what is offered for onshore bank accounts, or offshore instant access accounts. The only way that you will lose any of your assets is if the institution with which you hold the account fails, but if you choose a well-respected offshore bank, this isn't really very likely, although investors in Icelendic banks in 2007 may beg to differ. See our guide to offshore deposit protection schemes. In an increasing number of jurisdictions now, investor compensation schemes are being introduced which mean that in the event of your banking institution meeting with an untimely demise, you will receive some of your investment back. Anyway, if you do your due diligence, this shouldn't be a problem. There is also a potential currency risk: Russian rouble bank accounts in 1998 were paying 30% per annum - but then the currency was devalued by 300% overnight!
Money Market Funds. These are mostly a US phenomenon, although offshore variants do exist. Money market funds are mutual funds which invest in short term debt instruments, usually in a particular currency. Domestic money market funds are usually highly regulated by the investment authorities of the countries in which they are established (i.e. in the US, by the Securities and Exchange Commission), but offshore money market funds straddle national borders, and so are not subject to any specific high tax country's regulatory regime. The advantage of this type of investment is that it is short term, so you can access your assets pretty much whenever you need to. Money market funds (if issued by a reputable institution) protect your money in the denominated currency, but the returns are usually only a little more attractive than a straightforward deposit or savings account. As with a bank deposit, you are taking on a currency risk with a money market fund, so their best use is often to provide an income flow to satisfy liabilities in the same currency as the fund. As with bonds and other types of investment fund, access to offshore money market funds can be direct (contact a suitable fund manager who offers offshore funds), but many people will prefer to deal through a bank, or use a 'wealth management adviser' if they have one).
Bonds. These are basically loans, except that it is you doing the lending by buying one unit (bond) either at the time of issue or in the after-market. When bonds are purchased in a bank, company, or government, a set amount is paid for them, with the promise that the nominal capital will be paid back at a pre-arranged time, with interest. The total return is a mixture of interest and the difference between the purchase price and the amount due at maturity. There is an enormous variety of bonds, ranging from investment grade sovereign debt (almost riskless, or so they claim) on which returns will be equivalent to bank deposit rates, to so-called 'junk' bonds, which are company debt issues with a significant degree of risk. Junk bonds often pay up to 4% over investment grade bonds, but there is no free lunch: the companies concerned can and do go bust, and bond-holders come way after the banks so that they usually get nothing. All bonds are rated by organisations such as Standard and Poors. Most investment grade bonds are registered offshore (mostly in Luxembourg), and pay interest gross, even if you buy them from an onshore issuer. Junk bonds are usually issued in domestic markets and are not tax-exempt. Bonds are denominated in particular currencies (not necessarily the currency of their issuer). There are many sophisticated financial instruments available to lessen currency risk (known as financial derivatives) but it is probably easier to invest in suitable hedge funds (see below) which combine end investment with risk-minimisation techniques.
Mutual and investment funds. In a mutual fund, a group of investors pool their money, and a fund manager invests that money as he (or she!) sees fit, in order to make profit for the unit-holders and protect them from any big changes in the market. Mutual funds are a useful alternative to investing in stocks and shares directly, and can also prove a more cost-effective way of building up a diversified portfolio than direct investment. Funds are either open- or closed ended, with the former being more suitable for the average investor, due to the fact that there is no specific 'lock-in' period, and the required investment is usually smaller. 'Offshore' mutual funds are those which are registered in offshore jurisdictions, and which are therefore more attractive for an expatriate investor who can often (depending on tax-residence) make use of their more or less untaxed returns. National regulatory regimes vary, but in most high-tax countries only certain low-risk types of mutual fund can be publicly marketed; again, expats or other globe-trotting or offshore investors have access to a wider range of funds with varying risk and return profiles. 'Hedge' funds are simply mutual or investment funds which use a greater range of investment techniques than is permitted to regulated, onshore funds. They are not necessarily riskier, but in many cases they are. Mutual funds can under-perform, but there are many different types of fund, specialising in both risky, and relatively secure areas, so you can choose the level of risk with which you feel comfortable. However, you need to remember that having once abandoned the relative safety of regulated investments, you need professional advice on your investment strategy and on your choice of individual investments.
Stocks. These are basically shares in a company, and as a shareholder you own a part of the assets of a company, and a share of the cash generated by those assets, reflected, if all goes well, in a stream of dividends. However, you also own a share in the risks inherent in the running of a business, and if things go awry, the value of your stock could decrease, or it could become worthless. Shares are listed on one or more stock exchanges, and dividends are usually paid out of taxed income in the country of main listing. Most shares in companies you have ever heard of are listed in high-tax countries, so that an expat can't obtain gross dividends (Hong Kong is an exception to this rule). The advantages of being offshore are that if you use a on-line brokerage you can probably avoid stamp duty in those countries that still apply it (eg the UK), and that capital gains on the sale of successful holdings will escape capital taxation (depending on your tax-residence). Shares listed on offshore stock exchanges tend to be local and these markets are often not very liquid, so they don't offer many opportunities to an expat investor unless you have specialised knowledge about a particular offshore jurisdiction. The proliferation of on-line dealing services and exchanges has made it easy for expats to invest in stocks anywhere in the world but new investors should seriously consider using a broker (either traditional or online depending on your preference), because the DIY approach is risky until you have accumulated a great deal of investing know how, and even then it is possible to get it wrong. Although the returns on this type of investment can be veeery good, you can lose your money in the most spectacular way if you get it wrong.
Although the purchase of real estate is also an investment option, in an offshore context, it is probably less viable than the others mentioned. Because of the crowded nature of many tax havens, property prices are sometimes beyond the reach of all but the super-rich, and there are often restrictions placed on the purchase of real estate by foreigners. Investment into real estate in high-tax countries from offshore is more interesting, but you need to check the tax situation very carefully before beginning.
Scams And Avoiding Them
So you've decided the level of risk with which you are comfortable. What now? Keep it in mind, and don't allow yourself to be swayed from what you are comfortable with and understand. Your openness to risk may change as you become more comfortable with investing, or as you acquire more capital, but in the meantime don't allow greed or gullibility to cloud your better judgement.
' 200% PROFIT IN JUST 80 DAYS!' 'MONEY BACK GUARANTEED!' 'RISK FREE INVESTING!' Just some of the promises made by the numerous vaguely suspect, slightly breathless sounding websites that come up on an 'offshore' search of any major search engine. However, there are scams to be found in pretty much every sector of the finance industry and the trick (for both domestic and offshore investing) is to be able to see through the purple prose and glowing 'customer' testimonials to what lies beneath- a person or organisation trying to part you from your money, and offering you little or nothing in return. It is important to bear in mind when assessing any potential investment opportunity, that there is no such thing as 'risk free' investing, and if an offer sounds too good to be true, then in the vast majority of cases, it is.
Investors should also be wary of any company that asks them to sign a certificate of non-disclosure. In the case of one prominent investment scam, 'clients' are asked to sign one of these, with the result that by the time they realise that they have been ripped off, and that the exorbitant amounts of money that they paid for motivational tapes and seminars in far-flung locations were a complete waste, they are legally prevented from sharing their experience with others, in order to prevent them from falling into the same trap. Then, in usual 'pyramid' scheme fashion, the only way they are offered to recoup their losses is to enlist others into the scam, and fleece them in the same way.
If you do your homework before you invest, you and your money stand a far better chance of continuing a meaningful relationship. If the operation with which you are thinking of investing offshore with is unfamiliar to you, it may be helpful to ask the following questions (and make sure that you follow up and verify the answers):
Obviously, though, these are just the preliminary issues to be raised as part of the due diligence that needs to be done before an investment is made; professional advice and assistance should also be sought in the case of any significant investment that is other than absolutely safe and standardised.
Creating An Offshore Investment Strategy
As a beginning investor, you will need to do a lot of research before you can finally dip your toe in the water. Although this may sound dull, the work you put in now will be nothing compared to the work you will have to put in if you lose all of your money! Even if you have a good relationship with your broker, and he/she/it (if you are using an online brokerage) is prepared to offer lots of help and advice, you still need to have a basic idea of the type of portfolio allocation you are after, the risks involved, and things to look out for in order to avoid being fleeced. In the fast paced world of investment, knowledge is power.
Once you have established yourself as an investor, there is the question of portfolio management. If you are successful with your investment strategy, there could come a time when you need to streamline your financial management, and protect the assets that you have accumulated. When this happens, you may want to consider the establishment of an offshore trust, an offshore company, or a combination of the two. These structures essentially work by 'wrapping up' your assets in one jurisdiction, which can substantially reduce administration costs, legally distancing you from ownership of your assets, which means that they are more protected from attack by creditors, or litigious family members should you run into problems later in life. They do, however, need to be established before the problems arise; if you attempt to squirrel your assets away during your divorce proceedings, or under threat of litigation, you will almost certainly be unpleasantly surprised.
In terms of investment, however, your choice of jurisdiction will, to some degree, be affected by your chosen investment strategy, as each jurisdiction has areas in which it is particularly well regarded, and investment vehicles for which it is particularly well suited. Factors such as the political stability of the jurisdiction, the standard of the professional support and business infrastructure, and any changes in legislation being enacted that would affect your investment either now, or in the future also need to be considered. Below are summaries of the offshore banking and investing situation in twenty of the major jurisdictions, as well as general information on the lifestyle available for the expat thinking of working or retiring offshore.
For a comprehensive treatment of offshore legal and tax regimes in over 30 jurisdictions, please visit the Lowtax Jurisdictions Guide.
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