BG654 Offshore Investments
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Introduction
Offshore investment is the keeping of money in a jurisdiction other than in your country of residence. Offshore jurisdictions are a commonly accepted solution to reducing excessive tax burdens levied in most countries to both large and small scale investors alike. Locations favoured by investors for low rates of tax are known as offshore financial centres or (sometimes) tax havens.
Offshore solutions are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity.
What is Offshore Investments?
Offshore Investing
Offshore investing refers to a wide range of investment strategies that capitalise on advantages offered outside your home country. Offshore planning affects any South African resident that owns assets or investments in countries outside of South Africa. In addition to offshore investments, it covers areas such as offshore wills, offshore bank accounts, offshore trusts and tax planning for investment and career income earned abroad. Despite the strengthening of the Rand in recent years, diversifying a portion of your investment portfolio still makes excellent sense.
This is a specialised area, and the services of a financial planner operating in this field are essential.
You’ll have the freedom to invest offshore on the New York Stock Exchange or the London Stock Exchange or any of the other major international exchanges utilising your own foreign investment allowance. This gives you complete control over a unique offshore portfolio. You can use your own funds transferred with Reserve Bank approval or you can use local Rand to invest offshore.
If you do not know how to invest offshore and are not comfortable with making all the offshore investment decisions on your own, we can match your requirements to a financial adviser who will be able to manage a portfolio of offshore investments on your behalf.
You will receive an offshore investment trading account with the same flexibility and benefits as a local portfolio. You can manage your offshore investment account on your local share trading platform, combining easy access to your local and offshore investment accounts - and your derivative and currency trading accounts.
Under current South African law, you are entitled to apply to the South African Reserve Bank to invest up to R2 million in foreign investments. Certain criteria will have to be met though. For instance, your tax matters should all be in order and you will need a clearance certificate from the South African Revenue Service. Once your application is approved, you may convert your funds into any currency of your choice and invest overseas. Your returns will be paid into an offshore bank account.
Choosing what to invest in can be a bit tricky, especially in the current financial climate. Consulting an accredited financial adviser will assist you in mitigating the risk but you should always proceed with caution. Although you can make a significant amount of money with a good investment, you can also lose your life savings if you invest poorly.
The Pro’s & Con’s of Offshore Investing
Offshore investing is often demonised in the media, which paints a picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing. While it's true that there will always be instances of shady offshore deals, the vast majority of offshore investing is perfectly legal. In fact, depending on your situation, offshore investing may offer you many advantages.
Advantages
There are several reasons why people invest offshore:
Tax Reduction
Many countries (known as tax havens) offer tax incentives to foreign investors. The favourable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country with very few resources and a small population, attracting investors can dramatically increase economic activity. Simply put, offshore investment occurs when offshore investors form a corporation in a foreign country. The corporation acts as a shell for the investors' accounts, shielding them from the higher tax burden that would be incurred in their home country. Because the corporation does not engage in local operations, little or no tax is imposed on the offshore corporation.
Many foreign companies also enjoy tax-exempt status when they invest in U.S. markets. As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual.
In recent years, however, our government has become increasingly aware of the tax revenue lost to offshore investing, and has created more defined and restrictive laws that close tax loopholes. Investment revenue earned through offshore investment is now a focus of regulators and the tax man alike. According to the SARS, RSA residents are now taxed on their worldwide income. As a result, investors who use offshore entities to evade RSA income tax on capital gains can be prosecuted for tax evasion. Therefore, although the lower corporate expenses of offshore companies can translate into better gains for investors, SARS maintains that RSA taxpayers are not to be allowed to evade taxes by shifting their individual tax liability to some foreign entity. Double taxation agreements and tax treaties between countries further complicate matters.
Asset Protection
Offshore centres are popular locations for restructuring ownership of assets. Through trusts, foundations or through an existing corporation individual wealth ownership can be transferred from people to other legal entities. Many individuals who are concerned about lawsuits or lenders foreclosing on outstanding debts elect to transfer a portion of their assets from their personal estates to an entity that holds it outside of their home country. By making these on-paper ownership transfers, individuals are no longer susceptible to seizure or other domestic troubles. If the beneficiary is a U.S. resident, their trustor status allows them to make contributions to their offshore trust free of income tax. However, the beneficiary of an offshore asset-protection fund will still be taxed on the trust's income (the revenue made from investments under the trust entity), even if that income has not been distributed.
Confidentiality
Many offshore jurisdictions offer the complimentary benefit of secrecy legislation. These countries have enacted laws establishing strict corporate and banking confidentiality. If this confidentiality is breached, there are serious consequences for the offending party. An example of a breach of banking confidentiality is divulging customer identities; disclosing shareholders is a breach of corporate confidentiality in some jurisdictions. However, this secrecy doesn't mean that offshore investors are criminals with something to hide.
It's also important to note that offshore laws will allow identity disclosure in clear instances of drug trafficking, money laundering or other illegal activities. From the point of view of a high-profile investor, however, keeping information, such as the investor's identity, secret while accumulating shares of a public company can offer that investor a significant financial (and legal) advantage. High-profile investors don't like the public at large knowing what stocks they're investing in. Multi-millionaire investors don't want a bunch of little fish buying the same stocks that they have targeted for large volume share purchases - the little guys run up the prices.
Because nations are not required to accept the laws of a foreign government, offshore jurisdictions are, in most cases, immune to the laws that may apply where the investor resides. RSA courts can assert jurisdiction over any assets that are located within RSA borders. Therefore, it is prudent to be sure that the assets an investor is attempting to protect are not be held physically in the Republic.
Diversification of Investment
In some countries, regulations restrict the international investment opportunities of citizens. Many investors feel that such restriction hinders the establishment of a truly diversified investment portfolio. Offshore accounts are much more flexible, giving investor’s unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations, especially in those that are beginning to privatise sectors that were formerly under government control. China's willingness to privatise some industries has investors drooling over the world's largest consumer market.
Disadvantages
Tax Laws are Tightening
Tax agencies aren't ignorant of offshore strategies. They've clamped down on some traditional ways of tax avoidance. There are still loopholes, but most are shrinking more and more every year. In 2004, SARS amended the tax legislation and began to collect taxes from both South African companies that operate out of another country and SA citizens and residents who earn money through offshore investments.
Cost
Offshore Accounts are not cheap to set up. Depending on the individual's investment goals and the jurisdiction he or she chooses, an offshore corporation may need to be started. Setting up an offshore corporation may mean steep legal fees, corporate or account registration fees and in some cases investors are even required to own property (a residence) in the country in which they have an offshore account or operate a holding company. Furthermore many offshore accounts require minimum investments of between $100,000 and $1 million. Businesses that make money facilitating offshore investment know that their offerings are in high demand by the very wealthy and they charge accordingly.
How Safe Is Offshore Investing?
Popular offshore countries such as the Bahamas, Bermuda, Cayman Islands and Isle of Man are known to offer fairly secure investment opportunities. More than half of the world's assets and investments are held in offshore jurisdictions and many well-recognised companies have investment opportunities in offshore locales. Still, like every investment you make, use common sense and choose a reputable investment firm. It is also a good idea to consult with an experienced and reputable investment adviser, accountant, and lawyer who specialises in international investment. If you are looking to protect your assets, or are concerned with estate planning or business succession, it would be prudent to find an attorney (or a team of attorneys) specialising in asset protection, wills or business succession.
Conclusion
Offshore investment is beyond the means of most investors, and above the risk tolerance of others.
Despite the many pitfalls of offshore investing, it can still pay off to shift some investment assets from one jurisdiction to another. As with even the most insignificant investment, our advice is to do your own research, confirm the facts and consult one of our professionals to assist you BEFORE parting with your money - unless you're prepared to lose it. Contact Us Now.
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