GETTING IT AND KEEPING IT. The How, Why, When And Where Of Offshore Investing.
by Caroline Maxwell

In a previous special report we discussed the structure of various offshore vehicles, and looked broadly at why they might be useful to an expatriate. This month, 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.

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:

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. 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) 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 GURANTEED!' '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):

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.

Bahamas .	Bermuda .	Cayman Islands	Cyprus .	Dubai .
Gibraltar .	Guernsey .	Hong Kong .	Ireland .	The Isle Of Man
Jersey .	Liechtenstein .	Luxembourg .	Malta .	Mauritius .
Monaco .	Netherland Antilles	Panama .	Seychelles .	Switzerland .

For a comprehensive treatment of offshore legal and tax regimes in over 30 jurisdictions, please visit the Lowtax Jurisdictions Guide.