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All about offshore investing

October 23, 2009 14:24 IST

InvestmentsMaximising wealth is on everyone's mind. To achieve this, we try our hands at different investment options like funds, stocks, bonds and the like.

If you are one of such people, then most probably you would have heard of offshore investing.

But does everyone know what offshore investing is? Do we know what its advantages and disadvantages are? The answer most of the times is going to be negative.

Moreover, if you dabble in such investments without prior knowledge, it would be a very unintelligent thing to do.

This article aims at providing you with a brief understanding of what exactly offshore investing means.

What is Offshore Investing?

Simply put, offshore investing involves putting money in investment avenues in a foreign country rather than your home country. This is done through targeting benefits offered to investors by firms and governments across the globe.

How does it work?

Offshore investing works in a manner similar to domestic investing. There is no shortage of money-market, bond and equity assets (such as certificates of deposit, bankers acceptances, commercial paper, municipal notes and repurchase agreements or repos) offered by reputable offshore companies that are fiscally sound, time-tested and most importantly, legal.

These can be invested in with the help of reputable financial entities, such as local bankers, portfolio managers and brokers.

Mostly investors choose to open offshore bank accounts in a place where the tax implication is lower as compared to other places such as the Bahamas, the Cayman Islands, Switzerland, the Isle of Man and Bermuda.

However, there may be certain requirements for opening an offshore account.

This may include a minimum amount to be maintained in the account, fees and owning property in the destination country.

What are the benefits of Offshore Investing?

There are many benefits of Offshore Investing, some of which include:

  • Tax Reduction -- Many countries (known as tax havens) offer tax incentives to foreign investors. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors' accounts, shielding them from the higher tax burden that would be incurred in their home country.
  • Asset Protection -- If an individual is concerned about lawsuits or foreclosures, he can elect to have his personal assets transferred to a trust which holds the asset outside of the individual's home country, thereby shielding the individual from financial shutdown.
  • Confidentiality -- Many offshore countries or jurisdictions offer high amount of financial confidentiality shielding an individuals assets from public eyes. This helps investors deal in shares and other investment opportunities without their choices and decisions available for everyone to see. From the point of view of a high-profile investor, however, keeping information, such as the investor's identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. Those this can attract unscrupulous individuals, international laws have been tightened so that identities and information can be obtained for criminal or judicial proceedings.
  • Diversification of Investment -- Because of that fact that a few countries limit the avenues that a investor can invest in, offshore locations open up such avenues for big-time investors. In some countries, regulations restrict the international investment opportunities of citizens. This helps in diversifying an investment portfolio.

What are the disadvantages of Offshore Investing?

  • Tax Laws are Tightening -- Understanding that they lose a lot of tax money over offshore investments, governments across the globe are tightening tax laws to ensure that citizens and corporations alike pay for investments made outside.
  • Cost - Offshore Accounts are not cheap to set up. Depending on the individual's investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company.

Though investment of this kind looks very easy, it is important to note that these investments are meant for high profile investors and have to be done keeping laws of not just one but several countries in mind. This is not for the faint-hearted.

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