Offshore trading has many advantages.
The word offshore normally evokes negative reactions because it tends to get associated with high profile white-collar financial misdoings.
Words like money laundering, tax evasion, and the like are often thrown around by the mainstream media whenever a discussion on offshore trading takes place.
However, you may be surprised to know that not everything offshore is bad. Offshore is simply a word which means a location outside of your home country.
Offshore trading and offshore investment, when done legally, can actually be a great thing for wealth preservation and growth.
Understanding the concept of offshore trading will allow you to make an informed judgement about the concept and perhaps even benefit from it.
Offshore trading basically means to invest in the global markets from a trading or brokerage account that is located in an offshore jurisdiction.
The term offshore is used to describe a bank, corporation, investment, or deposit that is usually located in a tax haven location.
Investors and companies set up such offshore accounts or subsidiaries so as to enjoy a lower tax outgo among other benefits.
For an investor, an offshore trading account is usually a bank account opened at an offshore branch or an account opened with a financial institution located at an offshore country.
The investor does not have to travel to the offshore country, as the account opening can be done remotely through the internet.
This offshore account allows the investor to invest in stocks, bonds, futures, options, and other financial securities in markets around the world.
The offshore trading account is generally opened in the name of a company rather than in the name of the individual investor.
This is because opening the account in the name of a company established in the offshore jurisdiction delinks the revenue earned from the offshore investments from the individual’s name.
The offshore trading account can be operated either by the individual investor or by a broker assigned by the investor who opens the account.
It is better to let a broker operate the account if a person is new to offshore investing or trading in general. The investment capital in order to trade will have to be provided by the account holder.
This investment capital can either be cash transferred by the account holder or funds from a line of credit that the account holder may have access to.
Thus, the offshore trading account is simply a bridge that connects the account holder’s capital to the broker and makes the capital accessible for trading.
As with everything else in the business world, offshore trading has its advantages and disadvantages. Let us first look at the disadvantages of offshore investing.
Offshore investing costs money. It is not as simple as opening an account on e-trade and start clicking buy and sell buttons.
The first barrier to entry for offshore investing is the minimum balance that one needs to have in order to even open an offshore trading account.
These minimums generally run into hundreds of thousands of dollars to even millions of dollars. Besides the initial capital outlay, you also need to pay fees and commissions regularly to trade securities and maintain the account.
If you open a company and then operate the account in the name of the offshore company, then there will be expenses related to opening the offshore shell company as well.
Certain offshore countries might even require you to own property in that country before you can open an offshore trading account.
So, you may have to factor in the cost for such a property investment. In conclusion, offshore trading will have certain costs associated with it.
The second disadvantage to offshore trading is the cumbersome tax law. If you are a US citizen, then things get even trickier.
The SEC has new rules regarding offshore investing, and that in turn has discouraged offshore investment companies and banks to deal with citizens of the United States.
In fact, some institutions will flat out deny services to US citizens. Similarly, governments around the world are taking offshore investing and tax evasion seriously.
The tax laws are tightening and you will have to declare your offshore income and bank accounts when you file your taxes.
This might increase the compliance and accounting burden for you. So, before you open an offshore trading account, understand the legal and financial responsibilities with your tax attorney or your chartered accountant.
Once you are familiar with those responsibilities, and if you are ok with the compliance requirements, then you can look forward to opening a new offshore trading account.
There are plenty of attractive reasons for engaging in offshore investing.
Firstly, by investing through an offshore trading account, you can get a major tax saving.
The basic premise of investing offshore is the fact that the offshore jurisdictions which encourage offshore investing often do not have any capital gains tax or have significantly lower taxes as compared to taxes in US, Europe, or other major economies of the world.
Countries like Panama, Switzerland, and Singapore fall in the category of zero capital gains tax. And the good part is that this exemption from capital gains tax or the lower rate of tax is not just limited to citizens of the offshore countries.
Even foreign nationals who open an account in the jurisdiction of the offshore tax haven are allowed to enjoy the tax benefits.
When the offshore investment is done through a company, there is very little to no tax on the company because that shell company is not involved in significant operations.
It is only a vehicle for managing investments and does very little in terms of operations.
Secondly, investing through an offshore trading account adds an element of confidentiality for the investor.
If a high net worth client wants to make substantial investments without alerting others or if an investor wants to keep his/her financial dealings confidential, then doing so in their home countries may be almost impossible.
In this age of information technology and transparency, all dealings tend to be made public. But offshore countries have strict rules regarding secrecy and client confidentiality.
Another scenario of confidentiality in investing could be a stock investor taking a large position in a company.
If the investor is famous and if the position is to be taken in tranches, then the news of the investment will become public in the very first tranche.
That will attract many small investors and drive up the price of the stock to the detriment of the well-known investor.
By investing in the company through an offshore company, a degree of confidentiality can be maintained.
Thirdly, and possibly the best reason for offshore investing is diversification. By investing in only your home country, you concentrate all your assets in one market.
But what if the country goes through macroeconomic challenges or is part of a trade war? In such scenarios, wouldn’t it be better to have a certain portion of your wealth in another market across the world where the correlation to such events happening in your home country is low?
You would protect your wealth from adverse movements in the home market by investing in securities of other countries. Besides, it is a well-known fact that most of the global growth is coming from emerging economies and not from places like Europe, US, or Japan.
As an investor, you would want to have the opportunity to invest in higher-yielding assets. Offshore trading allows you to place your bets in growth markets.
Lastly, protection of your wealth from political or other legal risks is a reason for investing in offshore accounts.
If you happen to live in a country which is going through political instability or adverse times, then you would want to protect your money from being unlawfully confiscated. Certain governments turn against wealthy business owners if it helps them gain political support.
In such cases, having some funds in an offshore account can insulate those funds from being targeted.
So, you understand the concept of offshore trading, know the pros and cons, and find yourself wanting to take that next step and open an offshore trading account.
The next logical step would be to go online and search all about such offshore investment services.
When you do that, you will find that there are plenty of companies offering such services. But, you must be careful in selecting who to work with, because not only must the service be genuine, but it must also provide you value in terms of features.
The following features are most common in offshore trading accounts and you must look for them when you do your research:
Broker license: The company should be legally allowed to engage in trading.
Limits on withdrawals and transactions: Every company will have different daily and monthly limits, check and choose the one that fits your needs.
Currencies supported: Offshore accounts often support multiple currencies. Check which ones are on the list and whether the currency you prefer is included on that list.
Asset type: Offshore accounts can be used to hold cash and even precious metals. If you plan to deposit gold or something of that nature, then verify if the offshore account allows such deposits.
Customer service: Very important metric. Call the toll-free number and speak to customer service to evaluate the quality and commitment. See if the service is 24/7 or only offered at certain times.
Research tools: Not a deal breaker, but if you will be engaging yourself in serious investing, then having the right information will help you make decisions.
Margin account: Normally, trading accounts are cash accounts. However, if you are a sophisticated investor and want to trade on margin, check if a margin account is offered.
You will have to fill out an online application on the website of the company offering the service.
Next, you will have to submit identification or financial documents. They might have to be certified as well.
You will then choose the currency for your new account.
Finally, you will transfer the money and begin trading.
If you are going to open the account in the name of a shell company, then you will have to first register the company and then follow the steps to open the account.