Things You Should Know Before Investing Offshore

Offshore investing may be deemed as deposits or investments held in jurisdictions other than that of one’s residence. Such investments may be considerably more complicated than local investments due to a number of factors as highlighted below:

Risks Unique to Offshore Investing

  • Forex risk

This is the risk attributable to the variation in exchange rates in currencies. One’s foreign-denominated assets may enjoy capital gains but may result in losses when those prices are converted back to the domestic currency.

  • Information asymmetry on the part of the investor

This simply means that you, as a resident in your domestic country, may not know what exactly is going on in another country (in which you have acquired assets) and as such cannot make appropriate investment decisions with regards to these foreign countries.

National Policies affecting offshore Investing

Offshore Investment Allowance

This refers to the maximum allowable amount can have in offshore investments. Typically, most countries cap this amount so as to prevent criminal activities. This was a counter measure to gangs and outlaws who would move illegally-obtained money to other jurisdictions and effectively erase their paper trail. In order to stay within the law, it is advisable for one to consult their local bank, broker or some other credible source of information for this. The last thing you want is to be on the wrong side of the law!

Tax Implications

Offshore investments have quite a bearing on one’s tax obligations. Typically, an investor is liable to paying the following taxes:

  • Capital Gains Tax – this tax is levied on the profit an investor gets when they sell an investment
  • Income Tax – this tax is levied directly to one’s personal income
  • Estate Duty – also known as inheritance tax, this tax is levied on the estate of an individual who has passed away.
  • Withholding Tax – this tax is levied by some countries on interest or dividends paid to an investor who resides in another country

Locally – denominated investments typically have the simplest tax obligations when it comes to the aforementioned taxes. However, when investing offshore one may be liable to paying all these taxes both in one’s local country as well as the foreign country.

Firstly, one may want to consider making offshore investments in countries that may be described as low-tax and/or zero – tax jurisdictions. Such countries are known as tax havens. Examples of such jurisdictions would be Luxembourg, Bermuda, Chanel Islands, Dublin and Lichtenstein. Investment in other countries such as Britain, France and the US are subject to tax within those jurisdictions.

In addition to this, there are plenty more opportunities for tax planning when it comes to one’s foreign investments. One such opportunity would be the establishment of offshore trusts. In certain jurisdictions, foreign – denominated offshore trust investments can save one tax. For instance, a UK domiciled settlor may have an offshore trust operating as a tax shelter specifically if the offshore trust is established for the benefit of their grandchildren.

How much should one put into their offshore investments?

There is a wide variety of views on how much one should ideally invest. One method of determining the optimum amount one should invest is by coming up with an efficient frontier graph.  The efficient frontier is the set of optimal portfolios that offers the highest expected return for a given level of risk.

However, a simpler method of determining your optimal investment may be analyzing the impact of exchange rates on your living expenses. For instance, how will the fluctuations in the exchange rate affect the cost of gas? You may want to reduce/increase your offshore investments to hedge yourself against unfavorable exchange rate currency fluctuations.