Offshore Banking: 9 Frequently Asked Questions

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1. What Is Offshore Banking?

An offshore bank account is an account held outside the account holder’s country of residence.  The holder can be either an individual (personal/private offshore banking) or a company (business/corporate offshore banking).

2. Why Is It Called “Offshore”?

Traditionally the main offshore banking locations have been small islands (such as the Channel Islands), but these days the term can apply to any country.  For example, Switzerland and Luxembourg are popular offshore banking jurisdictions in continental Europe.  Even the UK or the USA can be very attractive as offshore banking locations for non-residents.

3. Is Offshore Banking Legal?

In one word, yes.  While offshore bank accounts are often used by individuals or groups involved in illegal activities such as money laundering, drug trafficking or tax evasion, holding a foreign bank account is not illegal by itself. Offshore banking services are being openly advertised by major banks in most developed countries – they wouldn’t be able to do that if offshore banking was illegal.

That said, depending on your country of residence or domicile, you may be required by law to report your foreign assets, including offshore bank accounts, to tax authorities.  Failure to do so may be considered an offence.

4. Why Open an Offshore Bank Account? Do I Need One?

Motivations for opening an offshore bank account are diverse, as different people have different needs and circumstances.  Most common reasons include risk management, asset protection, estate planning, confidentiality, tax optimization or international business activities.  It is often a combination of these.

Importantly, particular benefits of offshore banking do not apply to the same extent in all jurisdictions and in all situations.  Other tools and measures may be needed to achieve the desired results.  For example, you may need to combine an offshore bank account with an offshore company, trust or pension plan.

5. What Are the Risks and Limitations?

Low regulation is a double-edged sword.  Besides greater flexibility it also means less protection if something goes wrong.  If your offshore bank goes bankrupt, the local government might not be willing to compensate foreign depositors for their losses.  There is considerable political risk, especially when banking in smaller, less reputable countries.

Additionally, changes in financial and tax laws, regulations and international treaties are very frequent and may negatively affect your existing arrangements (the trend has been clearly towards more regulation, more restrictions and less privacy).

Not least, some offshore banking providers and consultants are unlicensed, unqualified and charge excessive prices (and a few are outright scams).

6. Can I Get a Debit or Credit Card with My Offshore Account?

Generally yes, an offshore bank account works just like any other bank account, in that you can have a card linked to it and use the card to make payments or withdraw cash.  If you choose a reputable and well-connected bank, you will be able to use the card virtually anywhere in the world. With smaller or less reputable offshore banks there may be more limitations.  Consider this when deciding about a particular location and bank.

7. What Is the Best Country for an Offshore Bank Account?

If you were asked to name the best bank in your country, you might be able to pick one or two banks which are the best for your particular needs, but no bank would objectively be the best for everybody.  One offers the best interest rates, another has the lowest fees, yet another has the best branch network and so on.  It is the same with offshore banks and entire offshore banking jurisdictions, although the criteria might be slightly different – including privacy, taxes, regulation or reputation. Furthermore, everything changes very fast and a country which seems perfect now might not be that attractive next year (Cyprus following the 2012-13 financial crisis is a good example).

8. Can I Have a Completely Anonymous Offshore Bank Account?

Offshore banks have traditionally offered outstanding levels of confidentiality.  Unfortunately, the efforts to tackle terrorism and organized crime have gradually put true banking secrecy to an end.  Some countries (like Switzerland) have been more reluctant to give up the privacy of their banking clients, but even these are unable to resist the overwhelming trend, as they can’t risk becoming completely isolated from the international financial system.

Even when you are promised complete anonymity by an offshore banking provider, you can never be 100% sure that your ownership of the account won’t be revealed at some point.  A higher degree of confidentiality can still be achieved when combining offshore bank accounts with other asset protection tools, such as offshore companies or trusts.

9. Can I Avoid Taxes by Having an Offshore Bank Account?

In general, you can’t legally avoid taxes merely by redirecting your salary or other income to an offshore bank account. Trying to keep the account (and your income) hidden from tax authorities is also a bad idea, as numerous examples have shown in the recent years.  Governments are increasingly willing and able to go after tax evaders. In other words, simple solutions don’t work (anymore).

Nevertheless, when combined with other measures, an offshore bank account can be a powerful tool in a more comprehensive tax optimization, retirement planning or estate planning strategy.  Being an expat and having legal residence in a place such as Dubai opens up wider opportunities for this. It is obviously a very complex and constantly changing area and professional advice is essential.

 

 

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