Offshore investments work by allowing investors to capitalize on financial advantages that are offered outside of their own country. Simply put investors from one country make a corporation in another country, this corporation acts like a shield to the investors accounts protecting them from the higher rates of tax that they would have to pay if they were investing in their own country. This corporation has limited or no involvement in the local affairs so they are not taxed. Investing offshore using this type of corporation often offers a greater advantage than when investing as an individual.

There are a number of great advantages to investing money offshore in other countries but just like any other type of investment they also have their downside, in this article we aim to highlight the pros and cons involved in offshore investing so you can decide if it is right for you.

Pros of offshore investment

Reduced rates of tax – This one has to be the single most attractive benefit to investors, a number of foreign countries offer decent tax incentives to investors from other countries, these countries are often referred to as tax havens by savvy investors. The fundamental idea of offering favourable tax rates to outside investors is to promote an environment that attracts wealth from other countries. Smaller countries that have limited resources and a tiny population can benefit from investment from foreign countries as it can help promote economic growth.

Confidentiality – Many countries offer investors from abroad the benefit of secrecy and confidentiality, laws in these countries enforce strict banking confidentiality for both individuals and companies. If there is a breach in this confidentiality there are very serious consequences for whoever is involved, a breach of confidentiality could be divulging the identity of an investor. Just because offshore investors are allowed to bank in secrecy this does not make them criminals or mobsters like in the movies, in fact offshore banks will disclose the identity of any investors if they believe there is any type of money laundering, fraud or drug trafficking  attached to the money.

One of the main benefits of this type of confidentiality is that big investors don’t like people knowing what they’re investing in as they don’t want everyone to start investing in the same shares as them and running up the prices.

Cons of offshore investment

Changes in tax laws – Whilst there are still a few places that can be considered tax havens changes in the tax laws are lowering the profit margins off offshore investments. Many of the loopholes that had been used by savvy investors to avoid taxes have now been shut down. Before you consider investing any money with offshore investment you should do your homework regarding the relevant taxes that you may be subject to pay.

Setup charges – Depending on the amount you want to invest you may want to consider whether it is worth your time as the charges of setting up offshore accounts are not cheap. As well as setup charges there may be legal fees and some offshore accounts even require the investor to own a property in the country in which they wish to invest. A lot of offshore accounts will also have a high minimum investment amount required to open an account.

Is offshore investing safe?

The main countries that are still considered secure and offer a good opportunity in which to invest are the Cayman Islands, Isle of Man, Bermuda and the Bahamas. A lot of investments from around the world are made in these offshore locations including many big name companies. Before investing in any foreign country you should seek independent financial advice and make sure that offshore investing is right for you. There are a lot of scams related to offshore locations such as Nigeria so you do need to be prudent.

Offshore investment can definitely be beneficial in some cases but there are certainly a lot more potential risks and pitfalls than investing at home, for the big investors that make money from offshore investing they would say that while the risks are big so are the rewards. If you are considering investing abroad you should seek financial advice before doing so.