What is Offshore Investing?

UTC by Adedamola Bada · 8 min read
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What is Offshore Investing?

For many, offshore investing is quite a shady subject associated with some illegal activities. Here, you’ll find core information about this type of investment and learn why so many businesses choose to move their money offshore.

Offshore investing was always linked to some shady deals conducted by companies as a cover for stashing their ill-gotten money. Though such reports are not off the mark because they do exist, a very large number of transactions relating to offshore are done by the book.

If an individual or a company sees a good business deal outside their home country and wishes to take advantage of it, offshore investing is a legal means of seeing it through.

Understanding Offshore Investing

Offshore means a location beyond someone’s jurisdiction and it could either be a water body or solid ground. The term is not restricted to only the earth’s surface but can also describe corporations, deposits, foreign banks, and investments.

Some countries have laws that tend to hinder the growth of businesses and companies there may choose to move offshore to stay functional. Offshore investment firms can also serve as avenues for fraudulent activities like tax evasion and money laundering.

Offshore financial centers can be found in many countries like Bermuda or the Cayman Islands, Belize Switzerland, Mauritius, and Dublin. They all have regulatory standards though it differs from one to the next.

For offshore investing to occur, there must be an attraction and in most cases, it is a lucrative business opportunity. If you are looking for an investment opportunity, you are rest-assured that offshore companies have loads of them. However, take care to ensure the companies are legal, time-proven and fiscally sound.

There are advantages as well as disadvantages to offshore investing. For the advantages, privacy, tax benefits, and asset protection are to be enjoyed by investors. On the other hand, its disadvantages include the costly maintenance fee for offshore accounts and the creation of more regulations globally.

Offshore Investing Pros

Offshore Investing comes with a lot of benefits and we’re considering them below.

Tax Advantages

Quite a number of countries go with the title “tax haven”. They are destinations many foreign investors find irresistible because of the tax benefits. These countries use favorable tax rates to woo investors to come invest in their countries, thereby positively impacting their economy.

Asset Protection

When there is a need to reorganize asset ownership, one popular option is offshore centers. They act as safe grounds for the assets of individuals. For instance, when an individual runs the risk of losing a hefty portion of his wealth through lawsuits, payment of outstanding debt or foreclosing lenders, they resort to moving some of their assets to an offshore company.

Confidentiality

Many who patronize offshore agencies do so because they are guaranteed confidentiality. This is not out of the offshore company’s goodwill, rather it is backed by the law of the country in which the offshore company is located. The law requires offshore service providers to give the added benefit of secrecy to their clients. If at any point the company decides to renege on its confidentiality pledge, it will suffer serious consequences.

For instance, banking confidentiality involves keeping the identity of customers secret and a breach of that trust will attract penalties in some places. All these measures put in place to protect the interest of clients. This may be mistaken to mean those clients have something to hide but it is not necessarily true. If there is an actual reason to disclose the identity of a client, say in a case of money laundering, and drug trafficking or any manner of illegal activity, offshore laws will permit it.

Diversification of Investments

Investment opportunities abound all over the world but certain countries have regulations that deny its citizens the chance to partake in them. Because of such restrictions, investors find it difficult to diversify their investment portfolios. This is actually where offshore investing makes more sense. Through it, investors have the freedom to access international markets to carry out their businesses.

Portfolio diversification is one thing no investor can afford to overlook especially when there are boundless profits from the strategy. Places like developing nations have proven to be good investment grounds, esp. those moving key sectors that were previously controlled by the government to the private sector.

Offshore Investing Cons

Taking part in offshore investing is a wonderful thing but at the same time, there are disadvantages associated with it.

Increasing Regulatory Scrutiny

The government of the United States has become more thorough in identifying and correcting the lapses in its tax laws that are taken advantage of by investors to avoid certain tax payments. This has cost the government a lot of revenue loss, especially when foreign countries are benefiting from the loss through offshore investing. Now the government has put in measures to tighten any tax loophole.

Such measures include the U.S. Foreign Account Tax Compliance Act (FATCA), which makes it mandatory for citizens of the United States, whether they are living in the States or not, to submit reports containing annual activities on any foreign account they might have.

Even with all the measures put in place, tax loopholes still exist, though they are not as many as before.

Cost

The fact that offshore accounts have such amazing benefits has made its set up cost a very high one. This means that owning an offshore account is not for everyone but only for those with deep pockets. For instance, before an offshore account can be set up, the investor may be required to purchase a property in the country which, of course, does not come cheap.

Also, to go into business with offshore companies, in most cases, a certain amount of money must be paid. The minimum amount may range from $100,000 to $1 million, depending on the company. The investment fee is high because of the caliber of clients these companies receive, as most of them are very wealthy. Therefore, the charges are tailored to mirror the net worth of their clients.

Why Invest Offshore?

There are many reasons why an investor should consider investing in an offshore company. In this section, we shall look at some of them.

Diversification

Records have time and again proved that portfolio volatility can be controlled if special attention can be given to diversification of industries, asset classes, currency and geographic regions. This will go a long way to enhance risk-adjusted returns.

Sector and Industry Exposure

Offshore Investing casts a wider net across industries and markets that an investor may not have access to in his country. It helps investors to tap into opportunities that are not abundant or completely nonexistent in their jurisdiction.

Currency Hedge

When a currency begins to feel the effect of a bad economy and starts depreciating, one of the ways to offer help to it is through offshore investments. A practical way of doing this is via importation of products or traveling to foreign countries for vacation.

It is, however, not advised to speculate on the market movement of a currency by using offshore investments as a base, because negative results may be recorded. Alternatively, such investments should be channeled into global diversification of portfolio as it is more profitable in the long run.

In the end, your financial adviser would be in the best position to suggest the best offshore allocation your portfolio should have and it will rely heavily on the peculiar circumstances surrounding you and whatever financial plan you already have laid out.

Summary

Offshore Investing countries are homes to investments and assets that account for over half of the world’s financial dealings. No one is immune to offshore investing, even well-known companies. They all have hands in various degrees of investment in offshore locations.

However, the difference in the success or failure of an offshore investment rests on the type and reputation of the investment company used. This is where common sense ought to be applied to avoid all forms of investment errors. Due diligence should be practiced before wading into international businesses like offshore investing and competent professionals like lawyers. Investment advisors and accountants, well versed in foreign investment, should be consulted for their advice.

There are many reasons why one might choose offshore investing but if any of it happens to be for estate planning or asset protection, then seeking the services of an attorney who is an expert in the areas of business succession, asset protection or wills should be made a priority.

Nevertheless, the advantages and disadvantages of any offshore investment should be considered before going ahead with it or even hiring the services of professionals. On its own, this type of investment is very capital intensive and unless the rewards outweigh the risks and cost, the investor needs to make another choice. By taking into account the cost of legal fees, travel expenses, commissions and the tax implications of the investment, a proper decision can be made whether it is worth pursuing or not.

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