Clients often
ask us, "Is it true. Is it really possible to invest tax free with an
offshore account"?
Yes, It is
true. But there are some things you need to be aware of when contemplating
your investment strategy.
For example,
most people do not know that US brokerage accounts titled in the name of
a foreign person or entity are exempt from capital gains. As a result,
there is no "Tefra" or back-up with- holding on profitable
stock trades. Clients of course are required to complete a W-8 form,
stating it is a foreign account in order to take advantage of this (if
the account is titled directly in the name of offshore structure or foreign
client).
However, while
the US is a good place to do your stock investing, it is not advisable
for "fixed income" investments. Fixed income investments would
include any type of interest bearing investment, such as Bonds, Bank Certificates
of Deposit, Bank Savings Accounts or Commercial Paper.
The reason
for this is, while capital gains are exempt, US Banks and Brokerage
Firms are required to with-hold up to 30% of any dividend or interest
payment at source. Stated another way, any US account coded with
a "W-8", will result in an immediate deduction by the computer system
when the interest payment is credited. Banks and Brokerage Firms
then in turn must remit this "Tefra" or tax deduction to the IRS
within 30 days. You can of course file a tax return the following
April, claiming this money back. But with plenty of tax-free
higher interest bearing alternatives readily available elsewhere, why
even bother?
Many countries
do offer special incentives for investors to deposit their money without
local taxation. In some jurisdiction, bank account interest is completely
tax-free for both locals and foreigners alike. An example of
a so-called "high tax" country that imposes high income taxes on
it's citizens, but absolutely no taxes on bank account interest for foreigners,
is the country of Sweden. In fact there are a number of other "high
tax" jurisdictions that have this same policy. Icount" with "ABC
Offshore Bank", that happens to be valued at say ten million dollars.
In these cases,
many countries would with-hold income tax payments directly "at source"
for their own residents or citizens, but allow foreigners (or a foreign
entity such as a Foundation or Company) to enjoy bank account interest
100% tax-free. If an account is coded as "foreign", it does
not even get included in the reporting information the bank would send
to the local government. So in essence, you have a tax-free bank
account in a country not even considered to be a tax haven, (but for
you as a foreigner, it is).
The other option
is to do your banking in a country that offers completely tax-free
banking, regardless if you are a local resident or not. Such countries
on this list would include Panama and the Dominican Republic.
In the case of the Dominican Republic especially, investors have
the opportunity to earn up to 8% or more with US Dollar Bank Certificates
of Deposit or 90 day commercial paper.
Since the
only reason why any financial institution would report bank account information
is for the assessment of taxes, and there is no local taxation on bank
account interest in these two countries, there is no local reporting that
takes place. With that said, there certainly is no reporting to foreign
governments as well.
Setting
Up An Anonymous Brokerage Account
Almost all
non US or "Offshore" Banks maintain a relationship with a US
Bank or US Stock Broker for the purpose of providing access to the
US markets for their clients. There are two ways that this is done.
One of these ways is known as a "fully disclosed" basis, where in
effect all accounts carried with the US Bank or Broker are directly
in the name of client.
In essence,
the foreign or offshore bank is really acting as a sort of branch office
in this regard. With this type of relationship, the client would
receive a statement directly from the US Bank or Brokerage Firm,
since of course "they know who you are". Not necessarily the
best route to take, if confidentiality and privacy are your goals.
The other
and more common type of relationship, is through what is known as an "Omnibus
Account" or "Custodial Account". With this type of relationship,
the client is not disclosed to the US Bank or Brokerage Firm at
all. Instead, the foreign or offshore bank has one master
account, titled in the name of the bank, which is being used to
execute and carry all investment activities of the bank's clients.
Your brokerage account is then directly carried with the offshore bank,
and any statements would come from them.
In reality,
your offshore bank is really performing what is called "sub-accounting",
which means that they are "breaking down" the master-account and
are issuing a monthly statement to you with your holdings and activities.
The US Bank or Broker does not know who the underlying clients are,
or what investments each client owns.
They simply
know that they have a "custodial account" or "omnibus acThis
really is the best route to take, because what you in essence have
is an anonymous US brokerage account (just remember what we said earlier
about capital gains vs. interest or dividends). With the same SPIC
or insurance protection of any other direct client that maintains
an account with them.
The only down
side to some offshore banks or offshore brokers are the fees
involved. In the past, anyone that has dealt with some of banks
in the Bahamas or Europe can tell you that full service brokerage fees
look like a good deal after getting a rate schedule from some of the
offshore banks offering similar brokerage services. The good
news is, that is starting to change, and there are some very good banks
in both Panama and The Dominican Republic offering very very competitive
fee schedules.
For additional
information about establishing an offshore account or offshore structure
for tax-free investing, please contact our office.
