"Offshore" describes a place beyond one's national borders, whether that location is land-based or water-based. The term "offshore" might be used to define international financial institutions, companies, financial investments as well as deposits. A business might legally relocate offshore for the purpose of tax advantages or relocate because of less regulated laws.
Breaking Down Offshore
Offshore can describe a selection of foreign-based entities or accounts. In order to qualify as offshore, the accounts or entity need to be based in any type of country aside from the client's or investor's home country. Many countries, jurisdictions, and territories have offshore financial centers (OFCs). Some of the popular ones are the Cayman Islands, Cook Islands, Switzerland, the Channel Island, and Bermuda, as well as some of the lesser-known centers such as Dublin, Belize, and Mauritius. The degree of regulatory requirements, as well as transparency, varies extensively amongst the different OFCs. The supporters of OFCs say that they enhance the flow of resources as well as promoting worldwide business transactions.
With respect to business activities, offshoring is commonly described as outsourcing — the act of developing specific business functions, such as call centers or manufacturing industries, in a country other than the country where the business usually operates. This is more often than not to capitalize on the more beneficial conditions in a foreign country, such as lower wage demands or more lenient regulations which can save the business a lot of money.
Offshore investing involves any form of situation or transaction in a country that an investor does not live in. As using offshore investment accounts can be a very costly business to operate it is primarily used by wealthy financiers. It usually requires the investor to create accounts in the country where they want to invest.
Offshore banking includes the protection of assets in foreign countries and financial institutions, which might be restricted by the laws of the client’s home country. In certain circumstances, a person could be penalized for possessing these assets in their own country whereas they would not be penalized in an offshore country. Sometimes, economic or political climates in offshore banking countries are a deterrent because they might not be able to offer the same level of protection that stable nations do, however, the most popular offshore banking nations typically offer both stability, advantageous tax laws, and incentives for businesses.
Offshoring and Company Profits
Companies that have considerable overseas sales (e.g. Amazon or Apple) may turn to using offshore accounts to gain an advantage of lower taxation for their related profits. It was estimated that around 304 US companies had approximately $2.10 trillion in offshore accounts in 2015. This was an 8% increase in comparison to 2014.
Legitimate Reasons to Have an Offshore Company
“Offshore” entities have been getting a lot of “bad press” recently. One of the more recent scandals, the Panama Papers, released an extensive list of political leaders, and celebrities among other high-profile individuals, who allegedly participated in illegal offshore activities. Before the Panama Papers scandal, most of the media focus had been on big businesses taking advantage of creative tax planning.
Undoubtedly, due to highly publicized scandals, public opinion of ‘offshoring’ is sometimes negative. However, it is essential to remember that offshore entities are legal entities and they can be used to protect hard-earned assets.
The second essential point to understand about offshore entities is that they can be very beneficial for the average person. In other words, you don’t have to be privileged or extremely rich to benefit from having an offshore entity.
Do not hesitate to make use of an offshore entity for a genuine purpose, such as ...
Holding property in another country. Lots of people make use of a local entity to own property in another country. Actually, in many cases, as a foreigner, you can be allowed to hold title to a property in another country. A good example of this is an American who decides to purchase a property in Mexico. If that property is within 50 kilometers of the sea, then a foreigner cannot own that property in their own name. Because you are legally bound to use a Mexican trust (a fideicomiso) to purchase the property...in other words an offshore entity. Other countries enforce constraints on using an offshore entity to own property in their country.
Additionally, you might also want to use an offshore entity to...
Minimize probate when you die. If you own property in your own name in another country, when you die, your beneficiaries must handle the probate of your estate in that country. Sometimes, this can mean you have to navigate inheritance regulations that need assets to be distributed based upon local regulations, which might or might not match your wishes.
Making use of an offshore entity that is can provide further advantages depending on the jurisdiction. If you make use of an entity from a jurisdiction that permits direct inheritance of the entity or its shares, you can prevent probate completely.
Using an offshore holding company is a very sensible management technique for someone who owns several properties in several different countries.
Provide some asset protection. In the legitimate offshore world, the word “offshore” is associated with asset protection and not with illegal activities.
A company or an LLC can offer asset protection using one of the most efficient entities, an offshore trust. One of the biggest advantages and one of the best ways of keeping your assets safe and out of reach of a vengeful complainant is to relocate them to an entity.
It is important to note that having your stock portfolio in an offshore LLC will not change your tax responsibilities in the USA, however, it will place an obstacle between lawsuits in the U.S. (estimated at 15 million) and your hard-earned assets.
Provide for investment diversification. Maybe you’re not concerned about asset protection. However, you should be keen to diversify your investment portfolio internationally. Setting up an offshore entity can facilitate this.
Operate an active business. In some instances, an offshore corporation is, in fact, a real company. That is, an offshore company can be used to run a business in another country, or to divide the main business operations of the company at home from an overseas subsidiary. You set up your company overseas for the same purpose you incorporate it in the USA — to restrict any liability the shareholders might incur (which once again is asset protection).
Several of the media companies that have been covering the Panama Papers scandal have stressed that owning an offshore entity does not mean involvement in illegal activity. However, others are using the Panama Paper documents as a chance to portray all offshore entities as being of dubious origin and totally illegal.
The reality, however, is that having an offshore entity is not unlawful and has the ability to offer vital benefits to help everyday folk to secure their assets, and as such ensure that they have a healthy and happy retirement. The truth is that offshore entities are merely a set of legally binding functional and administrative procedures to provide a person with a means of security for their assets.
Here are the most commonly used structures in asset protection. Click each to learn more.