Back Door Tax Free Offshore Investing -
An Anonymous Offshore Brokerage Account
by John Schroder
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. 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
account" with "ABC Offshore Bank", that happens to be valued at
say ten million dollars.
This 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.
About the Author:
John Schroder
Ascot Advisory Services
Tel. 809-334-5387 or 809-293-9427
Email: info@ascotadvisory.com
http://www.ascotadvisory.com
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