There is absolutely nothing illegal in moving your businesses and personal assets to offshore countries where taxes are levied at low rates. Although you could be accused of violating the spirit of the tax code in your home country, minimizing your tax liabilities is a sound wealth and business management strategy practiced by both individuals and corporations. In fact, about $7.6 trillion or roughly 15 percent of the world’s wealth, is held in offshore financial centers, according to a 2016 report published by Oxfam International.
Before going offshore, develop a tax strategy that lowers your liabilities. Don’t ship your wealth to a certain island just because it has an attractive tax-regime or somebody you know and trust recommends it. Do your own extensive research to find a country that meets your individual and business needs. Focus on finding the pitfalls of investing in the various offshore jurisdictions that are on your list before making the move.
Here are six tax tips to give you a head start as you prepare to sail into the world of offshore investments and low-rate tax jurisdictions.
1. Tax Evasion vs. Tax Mitigation: Don’t Get Caught in Between
There is a thin line between tax evasion and tax mitigation. How thin this line is depends on your understanding of the relevant tax laws. If you are not very careful, you might think you are reducing your tax burden while you're in fact slowly digging yourself into legal trouble.
Tax evasion, which is the intentional avoidance to settle all your tax liabilities, is an illegal offence that can expose you to hefty fines and even get you jailed. If you willingly underreport your taxable income or provide false information about the nature of your businesses to tax authorities, you will be guilty of tax evasion. Simple mistakes, sometimes innocent ones – like ticking the wrong box on your tax return forms – can easily get you in trouble for tax evasion.
On the other hand, tax mitigation or minimization is the use of inefficiencies or loopholes in the tax code to reduce your tax burden. It is an acceptable practice. For instance, if the law in your country is silent on whether foreign income is subject to tax, then failing to report the amount of money your overseas business makes could be a legitimate tax mitigation strategy. With many western governments developing tighter regulations to seal the loopholes individuals and businesses use to reduce their tax liabilities, moving assets offshore is going to get a lot harder.
2. Understand the Local Tax Code
From the onset, you need to realize that you are dealing with two tax authorities, which, in most cases, will have vastly different taxation laws and policies. You need to intricately understand the tax code in both countries. Consider the following points:
- Does your home country require reporting of foreign businesses and bank accounts? – If it does, then moving your wealth offshore for secrecy reasons may not make any sense, since you will be required to furnish your local tax authority with information about all your foreign assets
- What tax obligations do you face when you decide to move assets back into your country? – In the event that your native country levies tax on repatriation of taxes, consider the rate and find out whether repatriation tax holiday exists.
- How easily will you be able to move your assets from between the two countries – While setting up an offshore company and opening bank accounts are fairly straightforward processes, cross-border transactions involving vast amounts of money may be met with stiffer regulations. To promote domestic investment and prevent fraud, some governments like China control the amount of money banks can transfer overseas. In such countries, offshoring may not be a practical option.
- How will you prepare for tightening of the local tax code? – It is advisable to analyze how your country’s changing regulations will affect your offshore investments in the future.
3. Understand the Foreign Tax Code
After getting familiar with your local tax obligations, carefully examine the tax laws of the offshore jurisdictions in which you want to start a company or open a bank account. Read the fine print; because you may spot little clauses that could potentially expose your money to some tax levy. For instance, if you are not hawk-eyed you could easily think Hong Kong levies zero percent corporation tax on foreign-owned companies. Well, this is accurate, but on the condition that the company makes all its money outside Hong Kong! Besides corporation tax, check whether the country enforces capital gain tax (money gained when you sell property situated within its territory), inheritance tax, rental property tax and withholding tax on foreign-owned entities.
Going offshore can expose you to double tax taxation. This means your foreign income will be taxed in both the foreign jurisdiction and in your country of residence. To avoid it, settle for a foreign country that has an active double tax treaty with your home country. The agreement stipulates which of the two administrations has taxing rights over your offshore income.
4. Focus on Information Protection
Although tax havens are also known for financial secrecy, various jurisdictions offer varying levels of privacy protection. In your research, find out whether your preferred country has extradition treaties or mutual legal assistance agreements with your country of residence. The existence of such agreements means the foreign jurisdiction can and will obtain information about your offshore assets and in some cases, freeze or hand them over to your home government. Ensure the country has legislated bank secrecy, so that even if a warrant to seize your property is issued by a court in your home country, the offshore jurisdiction will be under no obligation to cooperate.
According to the Tax Justice Network’s 2015 Financial Secrecy Index, Switzerland and Hong Kong are world leaders in providing heightened financial secrecy. Singapore, Cayman Islands, Panama, Marshall Islands and Luxemburg are some of the other popular offshore locations that feature in the top 20.
5. Plan for the Future
Beyond tax mitigation and banking secrecy, holding your money in offshore bank accounts comes along with a number of additional benefits. You will have the opportunity to hold money in the foreign currencies of your choice, and the interest rates are usually higher. If you choose a country like Hong Kong, you will be able to open accounts with some of the world’s best international financial institutions.
However, to enjoy these benefits you must plan ahead of time. Have a clear plan on what you want to do with your money once it has landed in your offshore accounts. Do you want to hold it in interest-earning savings accounts, or you want to actively engage in investment activities?
With that being said, it is necessary to note that taking your assets offshore doesn’t entirely shield you from risk. Just like any other country, offshore territories are susceptible to economic and political turmoil. Jersey, a onetime hotbed for offshore investments, is a perfect example of how poor governance can push a country into bankruptcy, a situation that can jeopardize the safety of your offshore assets.
Another scenario that could put your money at risk is if a dispute arises between you and your bank. What options do you have if the bank, for some reason, decides to hold or freeze your money? Pressing charges can be a very costly affair, since your attorneys must travel to the country to file a police report and sue the bank. If the foreign country where the bank is located doesn’t have efficient customer protection laws in force, you could lose your money.
Effective future planning mean assessing your risks and taking appropriate risk mitigation strategies, such as choosing reputable, white-listed jurisdictions, and diversifying your offshore investments. Don’t put all your money in one offshore bank account; consider investing in two or more foreign jurisdictions and deposit a succession plan with your banks, so that the funds can be accessed in your absence.
6. Seek Expert Financial Advice
Without professional training in the tax management or financial planning field, developing an effective offshore tax strategy can be difficult. Even if you are a seasoned investor, you will need help moving your businesses into a new territory. To avoid making costly mistakes, seek the services of a financial manager or tax planner with vast offshore investment experience.
In some instances, especially where several companies and vast amounts of money are involved, you may need to work with two experts: one based in your country of residence, and another in the offshore destination of your choice. While your local professionals will help you to minimize offshoring costs and advise you on your local tax reporting obligations, the offshore professional will help you to quickly set up your offshore companies, bank accounts and trust funds. Although these professionals come at a cost, they are your best chance of ensuring you get your offshore tax strategy right.
Done right, taking your wealth or business offshore can legitimately help you to lower your tax burden and protect your assets from being seized by creditors and overzealous governments. Done wrong, it can turn out to be a bad move; one could get you sued or fined for tax evasion. With these tips, you will be armed with all the information you need to set up your offshore companies and bank accounts without violating any tax laws.