Diversification - What is "Offshore Investment"?

"Offshore investment" is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are a commonly accepted means of reducing the taxes levied in most countries to high net worth investors. 

In the past or to certain extent even now, offshore investments is often demonized in the media, which paints a bad picture of investors stashing their money with some illegal company located on an obscure Caribbean island where the tax rate is next to nothing.

No doubt, it's rather true that many poorly monitored and regulated offshore centres have served historically as havens for tax evasion, money laundering, or to conceal or protect illicit or black money from law enforcement authorities in the investor's country.

However, the modern and well-regulated offshore centres now allow legitimate investors be it corporate or individual to take advantage of higher rates of return or lower rates of tax on that return offered by operating via such centres and investing in these offshore centres that are absolutely .... and perfectly legal when repatriate money back to their home country.

Among those well- regulated famous offshore financial destinations located in Asia is Singapore in which it has been risen in stature as a centre for wealth management and ranked fourth in the world in the 2009 Global Financial Centres Index. The state is a hub for hedge funds and its private banking industry is growing at a rate of 30 per cent annually. Singapore is now seriously challenging Switzerland as the world's largest private-banking center, thanks to Asia's burgeoning ranks of millionaires. 

Another well know offshore centre in Asia is Labuan International Offshore Financial Centre in Malaysia. It establishment in complementary to it existing onshore banking in particular Islamic financing. It is an integrated offshore financial centre which offers a wide range of offshore products including the development of Islamic instruments; and providing a legal framework conducive for the development of offshore industry in Labuan.  

Some Basic Information of Offshore Investing

Offshore centers are widely used and are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity. 

Investopedia indicates that, "More than half of the world's assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales."

Payment of less tax is the driving force behind most 'offshore' activity. Due to the use of offshore centers, investors are able to conduct more flexible investment activities in a more profitable fashion and manner. 

Often, taxes levied by an investor's home country are critical to the profitability of any given investment. Using offshore-domiciled special purpose mechanisms (or vehicles) an investor may reduce the amount of tax payable, allowing the investor to achieve greater profitability overall.

Another reason why 'offshore' investment is considered superior to 'onshore' investment is because it is less regulated, and the behavior of the offshore investment provider, whether he be a banker, fund manager, trustee or stock-broker, is freer and less restriction than it could be in a more regulated environment.

The Compelling Reasons for offshore investment

Motivations for investment offshore include:

1. Tax advantages - tax regulations often contain provisions to protect against taxation by multiple jurisdictions which can be exploited for legal tax reductions. Nations intentionally attract business investments through lower tax rates. Many countries (known as tax havens) offer tax incentives to foreign investors. The favorable tax rates in an offshore country are designed to promote a healthy investment environment that attracts outside wealth. For a tiny country like Singapore with very few resources and a small population, attracting investors can dramatically increase economic activity. Many foreign companies also enjoy tax-exempt status in some offshore centers or a low tax rate of just 3%, which capped at a maximum of RM20,000 per year when they invest in Labuan International Offshore Financial Centre . As such, making investments through foreign corporations can hold a distinct advantage over making investments as an individual and investing in such an environment can improve the investor's rate of return on investment.
2. Investment diversification - risk can be managed by diversifying investments among a wider range of options than are available for onshore investment. Offshore accounts are much more flexible, giving investors unlimited access to international markets and to all major exchanges. On top of that, there are many opportunities in developing nations and emerging markets, especially in those that are beginning to privatize sectors that were formerly under government control.
3. Avoidance of forced heirship and asset protection- inheritance may be passed to the preferred heir, regardless of regulations such as community property laws in the jurisdiction of residence/death. Offshore centers 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.
4. Lower levels of regulation and restrictions- a broader range of investment options are available (e.g. hedge funds, which thrive in low regulatory environments due to their highly aggressive investments strategies, thrive in offshore jurisdictions, principally the Cayman Islands)
5. Privacy and confidentiality- confidential financial information helps the individual manage taxes on capital gains, income, and inheritance. 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.
6. Specialist financial services - the leading offshore centres have highly developed financial services sectors with expertise in stock broking, asset management, banking, insurance, trusts, funds and legal services.

One of the demerit factor of offshore investing is "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 and Singapore are known to offer fairly secure investment opportunities. 

As mentioned, more than half of the world's assets and investments are held in offshore jurisdictions and many well-recognized 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 advisor, accountant, and lawyer who specializes 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) specializing in asset protection, wills or business succession. Of course, these professionals come at a cost. In most cases the benefits of offshore investing are outweighed by the tremendous costs of professional fees, commissions, travel expenses and downside risk. (Source - wikipedia and investopedia)