Offshore Investments: Guide

Offshore investments are made outside of the country where you reside. You may want to open an offshore account for many reasons, including diversification and tax planning. Here’s what you need to know about offshore investments for your portfolio.

If you’re interested in offshore investments, a financial advisor can walk you through the rules and regulations that apply to these accounts.

What Are Offshore Investments?

Offshore investments are any investments one makes outside of their country of residence. Alternatively, someone might decide to invest in a foreign country where they are living temporarily.

You might hold these investments in an account that looks and acts like one in the U.S., such as a brokerage account. In fact, you might already have some offshore investments, as many foreign stocks are available to U.S. investors. Some mutual funds and ETFs let you invest in foreign markets.

Offshore investments can have their benefits, but they can also be a massive headache for some investors. For example, U.S. regulators are cracking down on foreign investments because some investors have used them as a tax avoidance strategy. Even if you aren’t trying to evade taxes, more regulations can be frustrating as it can mean more extensive reporting requirements.

Nevertheless, there can still be reasons good enough to justify moving your money offshore. Let’s look at some of the reasons you might consider offshore investing.

Reasons for Offshore Investments

Offshore investing is not just for the ultra-wealthy; there’s much more to it than tax avoidance. Here are three common reasons for offshore investments:

Diversification. There are about 4,000 publicly traded companies in the U.S., so investing in the entire U.S. stock market provides a good range for diversification. But international stock exchanges can provide additional opportunities to balance your portfolio since they may rise and fall at different times than the ones in the U.S.

International stocks can also lead investors to opportunities not seen in the U.S. For example, emerging markets abroad can have higher-than-usual returns at times. While emerging markets can be risky, they are often lucrative investments as part of a well-rounded portfolio.

Privacy. Some investors prefer to keep their investments private, and confidentiality is often easier with offshore investments. Offshore markets can have strict privacy laws, meaning it can be easier to keep your investments private.

Privacy can be why offshore investments are viewed negatively. One might assume that someone keeping their investments private is hiding something bad, but that is not necessarily true. Some investors have legitimate trading or investing strategies they want to keep secret. It can also help protect investors from lawsuits.

Tax strategy. Offshore markets may provide tax-efficient investment opportunities for investors. Capital gains rates might be lower, or you might have a small island that incentivizes investors to move their investment dollars there. Offshore investors might also use an LLC or a trust for their investments, which can help reduce taxes further.

However, investors must disclose their offshore assets to relevant tax authorities, like the IRS. The IRS imposes regulations on investments by U.S. citizens, including offshore investments. Failure to disclose them to the IRS can result in prosecution.

Structuring Your Offshore Investments

As mentioned above, people often structure their offshore investments in certain legal entities and structures. For instance, they might hold offshore investments in one or more of the following:

Foundations
Trusts
LLCs
Corporations

Structuring your offshore investments this way can help protect your assets from lawsuits, creditors, and lenders. Doing so can make it more difficult for your assets to be seized as part of a legal battle.

Cautions About Offshore Investment

While offshore investment can be a great opportunity, there are some things you should keep in mind. You could run into significant issues depending on how your investments are structured. Here are three things to consider:

Taxes: Offshore investment has a reputation as tax avoidance measure. But don’t think that you don’t have to pay taxes if you invest abroad. In fact, if you try to use offshore investments to avoid paying taxes and the IRS finds out, you could be prosecuted for tax evasion.
Increasing regulatory scrutiny (domestically): The IRS is not too keen on people using offshore investments to avoid paying taxes. As a result, it is treating offshore investments with increasing scrutiny. New laws require investors to be more transparent about their offshore investments than they had in the past.
Regulatory opaqueness (internationally): While regulations can be seen as a hindrance to investors, they often provide a significant degree of protection. And some countries may have investment regulations that are less robust than U.S. regulations. If you are unfamiliar with a country’s investment regulations or they are unclear, there might be an increased risk of losing some or even all your money.

Bottom Line

Offshore investments sometimes have a reputation as a tax avoidance ploy or something that is reserved for the ultra-wealthy. However, offshore investments are perfectly legal if they are properly disclosed to tax authorities. When done right, offshore investments can have many advantages, including tax advantages, diversification, and privacy. Still, investors should watch out for high fees and increasing regulations.

Tips for Offshore Investments

A financial advisor can help you decide whether offshore investments are right for you. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you are currently considering a foreign investment opportunity, it might help to estimate how much that investment will grow over time. Try using SmartAsset’s investment calculator to see how much you could make by investing overseas.