CHOOSING
YOUR JURISDICTION - PART TWO
GETTING IT AND KEEPING
IT. The
How, Why, When And Where Of Offshore Investing.
by Caroline Maxwell and Jeremy Hetherington-Gore,
January 2010
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:
-
What
is the time frame? For example, imminent retirement,
or investment with the aim of funding a future
commitment, may determine your investment
time-frame.
-
How much money is needed to achieve your goal?
-
Are there any short-term financial needs to
be considered?
-
Is the investment intended to provide income
in years to come?
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):
-
How
long has the company been in business, and
who are the principals? It is always worthwhile
checking out the background, educational history
and work experience of each of the principals,
general partners, and deal promoters.
-
Is it an investment programme? Ask to see
audited records of the previous year's performance,
and if the name of the auditing body is unfamiliar
to you, check them out too.
-
Will my investment be segregated from the
other monies available to the business? Obviously,
with an internationally recognised and listed
fund or company, this concern does not apply,
but with an unregulated fund or company, you
need to check on how your investment will
be recorded, and on the methods that will
be used to attribute profit or loss to it.
-
Is the organisation physically contactable?
(and how easily?) The rise of the Internet
as a research tool has meant that it is increasingly
easy for an organisation to cover up an underlying
lack of substance with a glossy, appealing
looking website, so if there are no offline
contact details available, it may be a bad
sign. Even if there are details available,
you should probably check them out, as the
phone number may just go to an answering service,
or the physical address may just be a mail-box.
-
Are the returns so unbelievably good because
it is a limited offer, or because the organisation
has knowledge only known to a privileged few?
If either (or both) of these claims are being
made, it is a distinct possibility that the
'opportunity' is a scam. The confidentiality
that the company claims is essential in order
to maintain the privileged status of the investment
opportunity also, conveniently, prevents you
from obtaining customer references, or verifying
their claims in any way
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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