|
|
Definition
of Offshore Equity Investment |
|
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.
|
