An offshore or overseas bank account is an account that you have in a country where you are not a resident.
They allow you to make and receive payments, make deposits, and open savings and investment accounts in multiple currencies.
Definition of Offshore Banking
Although many people tend to associate it with the shady dealings inherent to the elite, the actual definition of offshore banking is pretty straightlaced. Any person or entity that has a bank account outside of their home country is automatically involved in offshore banking. If a US citizen opens a bank account in Canada, they are technically engaging in offshore banking even if it has nothing to do with business activities. As it stands, the term refers to the usage of financial institutions in foreign countries, though more broadly, it can also include assets held in international companies and other foreign investments.
Why Use Offshore Accounts?
Even if you don’t actively engage in international business practices, offshore savings accounts are an effective tool for managing your securities, IRA savings, and other personal financial investments outside of your home country.
One of the more common applications for these accounts, specifically among the general public, is managing international transactions and transfers such as receiving or making payments.
But let’s run through the main functions of an offshore account. Most common applications include:
- For those already living outside your home country;
- For those planning to work, study, or live in a foreign country, for instance when planning their retirement;
- For establishing saving accounts, owning property, and investing in local real estate;
- For supporting relatives that live in other countries, for instance, people of retirement age or children studying abroad;
- For government and corporate workers with regular international assignments that require them to frequently move across regions;
- For frequent business travellers that need financial backing in other countries;
- For freelancers and other workers that receive payments in foreign currency.
The Advantages and Disadvantages of Offshore Banking
Offshore accounts allow you to hold your assets in multiple currencies and generally enjoy safer banking, especially in territories with unstable economic environments. This way, you can receive payments in local currency without having to pay a fortune in conversion fees while ensuring your savings are protected from outside factors like political instability and rapid inflation.
Certain countries set fairly lenient tax rates when it comes to remittance. This means that it’s more cost-effective to hold the money earned or received abroad in the local bank account and then transfer it to the account back home as a non-commercial transaction. Offshore accounts often exempt the interest from tax, making the filing process easier.
Working with the same bank
Many banks branch out internationally on a fairly wide scale or sometimes, partner with foreign banks to optimize transactions in overseas territories. This is why offshore accounts are so popular among expats—it allows them to retain their financial network back home while forming another one in their current country of residence.
Certain countries make a point of enhancing the privacy of their clients by enforcing data protection laws on their financial institutions. Opening an offshore account in specific jurisdictions puts an additional protective layer between your assets and wrongful litigation.
Real estate and investments
Holding your retirement savings, estate assets, and other investments in an offshore account owned by an offshore company or trust is a great way of reducing taxation, specifically for inheritance and estate. Additionally, your offshore finances don’t fall under the same level of scrutiny, so there are more beneficial options for managing and attracting investments.
Even though a great number of banks have reliable safety nets to support their clients in the event of fallout, some territories with unstable political and economic climates are not completely foolproof. Banks may be unexpectedly nationalized, currency devalued, and whole governments could cease to exist in record time—and offshore account holders are not in the priority group when it comes to immediate compensation.
Apart from the initial cost for the account set-up that could range from $500 and $1,250, the bank may impose additional fees throughout the account’s existence based on the local economic and political situation.
Offshore accounts are fully legal and are still subject to certain taxes. But it’s undeniable that over the past decades, the term has become unflattering to the point of being used as an indicator of illegal activities. While it’s not the fault of the holder, it may still be damaging to their reputation among their peers.
The initial steps for getting into offshore banking are pretty close to the process of starting an onshore account. First and foremost, you will have to qualify for the bank’s programs or plans—for instance, not everyone may be eligible for expat account privileges. Then there is the process of identity verification, as well as other KYC requirements. Finally, you have to cover the costs that go into opening an offshore account or tying it to your business.
The criteria for qualifying potential offshore account holders varies depending on the bank and its location. More general qualifiers stipulate that the owner must be of the age of majority and be a resident in said country. Other banks also set specific income requirements.
Just like with domestic accounts, banks will need to verify your identity before setting up an offshore account in your name. Some basic information naturally includes the holder’s name, date and place of birth, occupation, citizenship, and residential status.
In most cases, the bank will request personal identification (state ID, passport, driver’s license, etc), documents that prove your factual address for tax purposes, typically utility bills or mortgage statements.
Not all agencies need to see the proof of the documents’ legitimacy, but most will ask you to either verify each copy through a notary or with an apostille. The latter is more reliable since it has international validity.
Depending on the bank, you may be charged monthly and annually for maintaining an offshore account. The fee also varies based on the account’s type. International transactions may also end up costing you quite a lot in transfer and currency conversion fees. Before settling on a bank, learn more about their offshore policies or better yet hire a financial consultant.
How to Open an Offshore Bank Account
The complexity of the setup largely depends on the type of account that needs to be opened, as well as the host country’s eligibility regulations. Offshore accounts can be broadly classified into two types: commercial and private, each requiring a different set of documents.
Note that most financial experts highly advise hiring an advisor to complete this process in compliance with all local laws. If you miss out even on the tiniest detail, consequences could be exceedingly grave, including incarceration.
The process itself is pretty straightforward and usually consists of the following steps:
- Drafting a financial plan that covers income objectives and investment strategy;
- Choosing a foreign bank capable of meeting your goals;
- Checking your eligibility and submitting documents for verification;
- Paying initial fees to open the account;
- Depositing the initial sum (some banks have a minimum amount for offshore accounts depending on individual income or commercial profit);
- Remaining compliant through regular reporting (annual reports, taxes, etc).
As for the documents, there are certain differences in requirements depending on the purpose of the account.
For personal accounts, you will likely need to provide:
- Valid identification (original or notarized copy);
- Confirmation of current residency;
- Proof of funds;
- Reference from a current or former workplace;
- Reference letter from the domestic bank;
- Financial plan.
For commercial accounts, the organizer may need to submit:
- Entity’s formation documents;
- Owners’ personal identification;
- Proof of residency;
- References from the domestic bank for each entity owner;
- Newly issued Certificate of Good Standing;
- At least one professional reference;
- Business plan.
Depending on the host country, you may be able to open your account online instead of travelling to do it in person. That said, banks that consider themselves highly reputable prefer to maintain their reliability by only accepting in-person applications.
Countries that allow online applications include Belize, Cook Islands, Dominica, Puerto Rico, and St Lucia. Incidentally, Belize is one of the most lenient territories out there when it comes to offshore banking, with St. Lucia and St. Vincent followed closely behind.
The Cayman Islands is a popular choice for investments, while Singapore and Hong Kong are the current favorites among high revenue earners. If you primarily look for increased protection of your securities, Nevis and Panama are equally efficient for maintaining personal and corporate accounts.