Definition
of Offshore Equity Investment |
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Of
the four types of offshore investment described in this
section, equity investment is probably the most rapidly
developing sector, not least because of the explosion
of interest in direct private stock market dealing that
took place in parallel to the growth of the Internet.
Under this
particular heading of equity investment we will deal
with direct, personal investment into publicly-quoted
equities, whether from an onshore or offshore base,
and whether by an individual, or through a corporate
vehicle or a trust. Equity investment of course can
form part of all four investment techniques dealt with
in this section: a private banker may well advise and
supervise equity investment; investment or mutual funds
invest in equities more often than not; and pension
arrangements are often based on equity investment. See
the other three sections for relevant details.
Choosing
an Investment Base
The first
decision any direct equity investor ought to make is
where to base her trading. Probably, few investors actively
consider this question until it's already too late,
and the tax damage has been done. That's understandable
if investment begins with a few thousand dollars or
equivalent, almost as a hobby, and gradually builds
up. The investment range we are dealing with here is
bigger (from $100,000 to $5m) and forethought is essential
if more than $100,000 is to be put into equities.
The introduction
to this section contained some general comments on the
choice of onshore v. offshore; the decision where to
base equity trading or investment does not necessarily
have to follow the general decision, and the different
tax profile of equity investment may require that it
doesn't. Thus, low-yielding Internet stocks held for
the long-term are a capital gains tax problem, not an
income problem, whereas money-market investment is the
reverse.
There is
a vast range of individual situations, and this section
will concentrate on finding and buying investments,
rather than on location. See the investorsoffshore.com
DIY investment selector for investment guidance
based on specific residential and investor profiles.
The
Benefits of Offshore Equity Investment
This is
not the place for a survey of the development of equity
markets, which is well covered in many types of publication,
but it is worth focussing on the virtues of offshore
listings, at least for those individuals who can make
use of them. Equity investment used to mean investment
in one's local stock market, to the more or less complete
exclusion of foreign stocks. There were good reasons
for this:
- Capital
controls prevented or complicated the purchase and
sale of international securities;
- Absence
of double tax treaties resulted in double taxation
of dividends and sometimes even sale proceeds;
- Research
on foreign equities was poor or completely absent;
- Brokerages
did not offer foreign stocks, or charged very high
commission rates on their purchase;
- Currency
risk was not easy to lay off.
All of
these factors have more or less disappeared, except
to a degree the last one, and it is far easier nowadays
to hedge a foreign exchange exposure if one needs to.
It has
traditionally not been all that easy to buy foreign
equities, but this has changed somewhat, although not
initially thanks to the established stock exchanges
and their parochial dealers. Perhaps it is unfair to
blame the dealers, because they are hamstrung by regulation
in the same way as are other types of financial provider
and intermediary. Most countries employ the concept
of 'recognised exchanges', whereby stocks listed on
a foreign exchange can be sold provided that the foreign
exchange in question has a regulatory regime that is
up to international standards.
As is also
the case with private banking and fund management, this
means that share dealing in high-tax (= highly regulated)
countries tends to be constrained by regulation, and
excludes shares offered on unrecognised exchanges. The
high level of regulation needed to become 'recognised'
inevitably tends to increase costs both for listed companies
and for dealers. Partly for this reason (but mostly
because the growth of the mutual fund sector created
demand for tax-efficient listing regimes) offshore jurisdictions
began to open stock exchanges.
This was
the situation when the Internet began to make it possible
for an electronic dealing network to bypass national
regulatory regimes altogether, and rapid growth took
place in electronic share-dealing networks which offer
freedom from stamp duty (still applied at 0.5% in the
UK, for instance) and access to a very wide range of
international securities.
It is impossible
at this stage to tell where this process will end. At
present, most share offerings are made through geographically-fixed
exchanges, but it may happen in the future that this
trade moves elsewhere.
The Taxation
of Offshore Equity Investment
An important
consequence of the nation-state-based model of share
trading was that countries could and did apply withholding
taxes to dividend payments without hurting their exchanges.
Most shareholders were nationals, and could offset withholding
tax against their total tax liabilities. Foreign buyers
mostly lived in other high-tax areas, and double tax
treaties offered them an equivalent tax credit on foreign
dividends. Mostly, withholding tax rates in high-tax
countries vary between 15% and 30%.
Almost
universally, offshore jurisdictions with stock exchanges
exempt non-residents from withholding taxes on dividends,
thus encouraging companies to list. www.lowtax.net
contains full details of the withholding tax regime
in all 40 offshore jurisdictions covered (within each
jurisdiction, in the section Offshore Legal and Tax
Regime). As liquidity develops outside the 'legacy'
exchanges, so companies and their shareholders are likely
to want to transact their business away from withholding
taxes, leading to an explosion in offshore corporate
listings.
All this
to explain why investment into companies listed offshore
may be a major component of future corporate financing,
and can be used now to a limited extent by investors
who have the ability to take in gross dividends without
incurring further taxation.
How
To Make Offshore Equity Investments
Anyone
can buy equities from anywhere, but if there is to be
an offshore dimension, then there are two components
that can be optimised: dealing costs, and taxation.
Dealing
costs are a combination of trading fees, stamp duty,
and making sure that one gets best execution.
Nothing
in life is simple, and these three factors interact
with each other. It seems obvious to avoid London stamp
duty, but if execution is 1% better in London on average,
then the stamp is saved back twice over. The situation
is volatile, and no direct advice can be offered here,
other than to stress that an investor should consider
all three factors before deciding how to deal.
On the
surface, it seems that one of the brokerages offering
Internet service may be the best route - but delays,
crashes and other obstacles often get in the way.
As explained
in Who Can Benefit From Offshore
Investment, in order to optimise taxation, it is
necessary either to have residence in a low-tax area,
or, for a high-tax resident, to have an offshore structure
that distances income and capital gains from the investor's
domestic tax regime. Either way, the ownership of equity
assets is going to be offshore, and the main question
is, where to base it?
The choice
of an offshore jurisdiction is in itself a difficult,
and to some extent a circular task. You will not find
it easy to distinguish between the merits of different
offshore jurisdictions, or the facilities they offer,
until you have got to know them quite well. This is
the point at which you might think that an onshore adviser
in your own home country can help you - and it may be
so, but remember that only a very skilled, knowledgeable
and above all, objective, adviser is going to be useful.
Such a person is hard to find.
www.lowtax.net
is designed to help people who do not have access to
the perfect adviser we just described. www.lowtax.net
is not an investment adviser, and is no substitute for
professional advice, which is an absolute necessity
for anyone planning a move offshore. But the www.lowtax.net
site does contain a wealth of information about 40 offshore
jurisdictions, which is designed to help you to make
a preliminary choice of one or a few offshore jurisdictions
suited to your circumstances, which you can then explore
in depth.
The choice
of an offshore jurisdiction as a base needs to be guided
mostly by your own particular circumstances, but if
investments are to be made into companies (or funds)
listed offshore, or if an offshore brokerage is to be
used, then these aspects need to be borne in mind when
making a choice.
Purely as a factual guide,
here is a list (in alphabetical order!) of those offshore
jurisdictions with developed mutual fund regimes; in
most cases, this also means that they have stock exchanges
(an SE in parentheses) and, you may want to assume,
a fairly high level of sophistication in terms of investor
protection:
Bahamas
(SE)
Bermuda (SE)
British Virgin Islands
Cayman Islands (SE)
Cyprus (SE)
Guernsey (SE)
Hong Kong (SE)
Ireland (SE)
Luxembourg (SE)
Malta (SE)
Mauritius (SE)
Netherlands Antilles
Seychelles
Switzerland (SE)
Turks & Caicos Islands
www.lowtax.net
has information on the stock exchanges and the regulatory
regime for each of the above jurisdictions. Our section
Gateways To Offshore Information
Providers will lead you to further sources of such
information.
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