Chapter 9 - The Offshore Advantage

“Nothing hurts more than having to pay an income tax, unless it is not having to pay an income tax.”  – Sir Thomas Robert Dewar (1864-1930), Scottish whisky distiller

The offshore industry is one that is not well known and often misunderstood by the general public.  There are several reasons behind this, such as the government not wanting you to know about it.  Therefore it will be both my duty and pleasure to try to shed light on this secret market.  Let’s begin by examining a few of these myths by drawing a line between fact and fiction.

Myths & Facts

There are many myths and lies surrounding the offshore industry.  Let’s take a moment to shed some light on the most common misconceptions that lurk out there. 

Myth #1 – Offshore banking is for criminals and money launderers

Offshore banking is often misperceived by the public as a mechanism through which criminals, drug lords, and terrorists pursue their unlawful activities.  The reality is that this could not be further from the truth.  While some criminal activity may take place offshore, the vast majority of financial crimes take place “onshore” inside Canada, the United States, and several western European countries.  For the most part, offshore banking is used by people and businesses of many different countries for legitimate purposes.  Offshore banks and financial centers exist to provide their customers with a means to protect and hold their assets, reduce their tax burdens, provide superior investment alternatives, as well as render many other services.

Myth #2 – Offshore banking is only for the rich and wealthy

Another common myth about offshore banking and investing is that it is reserved exclusively for the rich and wealthy.  Again, this could not be further from the truth.  For just a few hundred dollars you can open a personal offshore bank account.  Spend a few hundred more and you can set up an offshore brokerage account from which you can place trades online.  For just a little more than a thousand dollars you can establish your own company offshore and use it to hold assets and make investments, all in a matter of days.  Minimal balances to hold in accounts are fairly low and yearly account maintenance fees are fairly reasonable too, although they can be higher than those charged for your domestic accounts.  Moreover, there is no longer the need to travel to the offshore destination to open an account or company.  Everything can be done from your home base and, with the marvels of modern communication, namely the Internet, you can securely check your account statements online, wire transfer funds in and out of accounts, retrieve offshore cash from any ATM machine, and conduct business transactions and meetings online directly from your laptop computer or cell phone.

Although it may appear to be the rich and wealthy, upper-class individuals who have the greater need to protect their assets offshore, it is actually the poorer middle-class who need to do it most.  Wealthy individuals usually have an easier time defending themselves against lawsuits and hungry creditors.  And they can replenish their wealth more easily.  But it is more difficult for lower and middle-class individuals to do so.  Many problems such as business failures, personal bankruptcy, lawsuits, poor investments, and even identity theft can financially ruin an individual.  Placing a portion of one’s assets offshore can greatly guard against such dangers.

Myth #3 – It’s illegal

Again, this is untrue.  Both Canadian and American individuals and businesses are legally allowed to open bank accounts and companies offshore.  Don’t assume that this will always be the case, though.  At the rate our governments are stripping us of our rights, it may not be too long before they prevent us from doing this also.  Meanwhile, practically all of the Fortune 1000 American companies and many of the largest Canadian corporations have accounts and operations offshore which contribute a significant portion of their revenues.  Most Canadian banks and nine out of ten of the top U.S. banks have operations and financial assets offshore.  If banks and businesses can create legal offshore structures to lessen their tax burdens and protect their assets, then why can’t you?  With proper guidance and legal advice you can legally do the same.

Myth #4 – Offshore bank accounts are “numbered” and “anonymous”

Contrary to popular belief, offshore bank accounts are not numbered accounts, nor are they always anonymous.  Some of them used to be but not any more.   In this post 9/11 era, the days of numbered bank accounts are long gone.  If ever you hear of such a bank, beware, as you can easily be conned into feeding your money into such an account, only to be stripped of your funds at a later point in time.  Today, any legitimate bank in the world will require some form of identification and will place your name as the signatory or owner of the bank account.  This is in accordance with a universal treaty that all banks must comply with.  The banks will usually ask for your identification in the form of a photocopy of your passport, driver’s license, or state or provincial ID card.  Some banks may require these documents to be notarized.  That means you need to get them “signed” and “witnessed” by your lawyer or notary.  Then, the photocopies can usually be faxed or sent by courier to the bank.  Only then will you be able to open an account.  Even though your name will be associated with the bank account (either a personal or corporate account), you can still remain “anonymous”, as offshore banks will not disclose account-related information to anyone without a court order.  Therefore, you can feel very secure about retaining your privacy.  Later, I will talk more about the issue of privacy.

What is Offshore Banking and Investing?

Offshore banking means to bank in a jurisdiction where strict bank secrecy laws and privacy legislation are in place.  Such jurisdictions are often called “favorable jurisdictions” or “tax havens” because non-residents pay little or no income tax on personal or business income that is generated outside the country’s borders.  And there are no foreign exchange regulations that oblige offshore banks to report income to foreign authorities.  Furthermore, offshore companies enjoy a more simple, favorable, and flexible legal framework in which to conduct business activities.  Although laws vary from one offshore jurisdiction to another, in general they all adhere to two common principles.  The first one pertains to protecting the privacy of individuals and businesses in all financial matters.  And the second calls for very tough and strict controls that ensure banking privacy.  Bank privacy laws call for strict prison sentences and fines for any bank employee who divulges any personal or financial information about an account holder.  This usually prevents leaks from bank employees.  This is in strong contrast with Canada and the United States, as private investigators, government officials, and other parties can easily get your account information.  In foreign jurisdictions, only by means of a court order may a bank and its officers be obligated to reveal an account holder’s information.  Unless there is a good reason to believe there is criminal activity going on both in your home country and in the foreign country, no judge will grant such an order.  In addition, for your financial enemies to get a court order in the first place they would need to hire a local lawyer and pay him or her upfront (we are talking about at least $10,000 here), as there are no contingency fees as there are in the U.S.  Many jurisdictions also require the party pursuing legal action to post a bond (commonly $25,000) with the court before proceeding.  This is not to mention all the traveling costs of the pursuing agent.  Most importantly, your financial enemy would have to know which country you are banking in the first place which is very unlikely.  Therefore, you can rest assured hat very few cases ever get to court.  These jurisdictions depend a lot on their offshore income.  For example, Panama has 400,000 offshore corporations registered, and each corporation pays $300 a year in corporate taxes which equals $120,000,000.  Do you think they are about to violate any of these privacy and bank secrecy laws?  I don’t think so either.

I would like to make one final note about offshore banking.  Just because a bank operates in another country, it doesn’t necessarily mean it is “offshore”.  For instance, both Canadian (such as the CIBC) and American (such as Citibank) banks have branch offices in many foreign jurisdictions, including tax havens.  But these are considered “onshore” banks as they are not licensed to operate under the aforementioned offshore banking legislation.  Therefore, they do not need to abide by the same privacy, taxation, and foreign exchange regulations as do true offshore banks.  So be careful. 

Offshore investing is similar to offshore banking.  Pretty much the same principles of privacy and low or no-tax rates are present.  Offshore investing is a good way to shield your investments from excessive interest, dividend, and capital gains taxation.  It is a means by which you can diversify your investment portfolio, reduce risk, and access foreign markets and new investment products.  To invest offshore can be as simple as opening an offshore bank account.  These accounts usually bear much higher interest rates than do North American banks.  In addition, many of them also offer Certificates of Deposits (CDs).  But if you really want to invest offshore, you should consider opening an Offshore Brokerage Account, or create an offshore “Investment” company.  I will describe these offshore strategies later.

Why go Offshore?

There are many reasons for and benefits of “going offshore”.  In my opinion, all investors, at some point, should move a portion of their assets offshore.  We all work very hard for our money and want to be sure that our accumulated wealth will not be taken away by criminals, lawyers, creditors, or the government.  Do you remember the #1 & #2 rules of investing, according to Warren Buffet?  It stated: “Rule #1: Don’t lose money.  Rule #2: Don’t forget Rule #1.”  Well, it is important for you to preserve your wealth at all times.  In previous chapters we explored ways in which you can do so, such as diversifying your asset base, investing in gold or other currencies, etc.  Investing offshore provides you with an additional strategy to protect your wealth.  Your wealth is precious.  You must protect it at all cost, as it is a means by which you will fulfill your dreams.  Keep that in mind.  Now let’s explore the following five reasons why you should go offshore:

1. Asset Protection
2. Financial Privacy
3. Tax Avoidance
4. Investment Diversification
5. Succession Planning

1. Asset Protection

Asset Protection begins with protecting your greatest asset of all, namely yourself.  You must first begin to protect yourself from lawsuits, going bankrupt, and, most importantly, identity theft.  You need not be a high net-worth individual to fall victim to identity theft.  Middle-class individuals are particularly at risk of this financial crime.  Have you noticed how identity theft and credit card fraud have sky-rocketed in recent years?  It is becoming a real epidemic and is largely due to non existent “onshore” bank privacy, as well as leaks from credit bureaus, government agencies, credit card companies, etc.  Thieves can easily steal your identity and in doing so deplete funds from your bank accounts and credit cards.  While credit card companies may reimburse your funds after you have been robbed most banks won’t, leaving you out in the cold.  There are certain safety precautions you can take to help guard against these financial crimes on the domestic front (see link box below).  But moving a portion of your savings and assets offshore can better secure your wealth and identity, as offshore banks and financial centers are very private and do not report to any credit bureaus or government agencies.  This is not to mention all the legal challenges your financial creditors will have to face, should they decide to pursue you offshore as mentioned previously.  Their victims are much more easily accessible onshore, so why would they go through the extra trouble of finding them offshore?

Now that you have taken measures to protect yourself, you must do the same for your assets.  Assets need not only be cash or investments, but can also include jewelry, art collections, expensive cars, boats or yachts, intellectual property (e.g.,: copyrights, patents), and even businesses.  There are numerous offshore strategies (see below) you can employ to protect these assets and shield them from thieves, lawyers, creditors, the government, and even disgruntled family members, such as spouses or former partners.  You are especially vulnerable if you are an American citizen or resident.  As an American, the chance of your being sued more than once in your lifetime is almost a certainty.  Win or lose, you will have to pay attorney fees which can put a serious dent in your finances.  In addition, many lawyers work on a contingency-fee basis which increases the likelihood that someone may come after you, as they need to pay the lawyers only if they win.  Note that even though the United States has only 5% of the world’s population, it harbors 70% of the world’s lawyers.  Be prepared!  Most countries, including Canada, do not have contingency-based legal practices.  And in many countries throughout the world, including many offshore jurisdictions, the loser of a trial has to pay for both his and his opponents’ legal fees. 

You should also consider purchasing offshore insurance for your assets abroad.  One of the best ways in which you can protect your assets is to create an International Business Company (IBC) or corporation, and use it to hold your assets.  This way your assets are not in your name.  They are owned by your company.  Creditors will not be able to touch those assets because legally they belong to the company.  I will talk more about this strategy later. 

Finally, many offshore bank accounts have a federal insurance program as we do in Canada (CIDC - Canada Deposit Insurance Corporation) and in the United States (FDIC - Federal Deposit Insurance Corporation) to protect each bank account up to a certain nominal amount.  Brokerage accounts may also be covered; and some of them are insured by the Securities Investor Protection Corporation (SIPC).  Just be sure to ask the financial institution to see whether they are members of such protection programs.

2. Financial Privacy

Financial privacy is perhaps the single most important reason to go offshore.  One thing that is certain (besides death and taxes, of course) is that “onshore” privacy is nonexistent.  If you think that your personal and financial information in your local bank is confidential, and only the bank and its officials have access to it, think again.  All banks in Canada and the United States have provisions which state that they may disclose your personal and financial information to other parties.  Be sure to carefully read the terms and conditions associated with your bank account(s).  You know, the stuff we never read.  In doing so, you will find some “privacy” clauses that state that the bank (or credit union) may disclose personal or financial information without your consent when required or permitted by law.  You have no choice. 

 If you are an American, you can be sure that Uncle Sam has mandated your bank to spy on you ever since 1970 when he introduced the Bank Secrecy Act.  Don’t let the name fool you, as it is very deceptive.  Instead of protecting your privacy, it strips it away.  In short, the act requires banking and some financial institutions to assist government agencies in detecting and preventing money laundering, tax evasion, and other criminal activities.  Okay, so far that seems fairly legitimate enough.  But financial institutions must make reports of any “suspicious activity”.  A very small sampling of such activities include reporting cash transactions exceeding $10,000 and wire transfers to other banks in excess of $10,000.  And all this is done without the knowledge of the account holder.  No court order, warrant, or subpoena is ever required.  In addition, when it comes to your investments, any interest, dividends, or capital gains earned in any bank or brokerage account are automatically reported to the government.  So much for your Fourth Amendment rights, right?  The Bank Secrecy Act is only a pistol in the government’s arsenal of privacy infringement weapons.  In 1990, it created the Financial Crimes Enforcement Network (FinCEN), which is essentially a network of databases and financial records that is shared between dozens of agencies including the Internal Revenue Service, the Customs Service, the U.S. Postal Service, to name a few.  Moreover, FinCEN is a system that can be used to investigate people instead of actual committed crimes.  With the help of FinCEN, even your friends at the IRS have been snooping and sniffing about in your Visa, Master Card, American Express, and PayPal records.  In recent years, the IRS has used the courts to force the major credit card companies (as well as PayPal) to disclose information about the nature of purchases and identify who uses their cards to access accounts or funds offshore.  In short, they want to compare credit card reports with tax records.  Once more, this is a blatant attack on your privacy.  Finally, we have the USA Patriot Actof 2001 which essentially allows certain government agencies to “listen in” on your personal phone conversations – especially those to offshore jurisdictions.  Trust me, they aren’t just bugging and listening to phone conversations that contain the terms “terrorist plot” or “Osama Bin Laden”; they are undoubtedly tuning into the “offshore accounts” and “tax havens”.  Be warned. 

Even Canadians fall victim to invasive privacy violations by their government.  Similar to the Financial Crimes Enforcement Network (FinCEN), Canada has its own organization that is used to monitor its citizens’ financial operations.  It is called the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).  FINTRAC works in a very similar way to FinCEN.  Although FINTRAC was established to fight against money laundering and terrorist financing, it is also used to pry into the financial records of law-abiding Canadian citizens.  Essentially, FINTRAC mandates financial institutions (mostly banks and credit unions), securities dealers (brokerage firms, portfolio managers, and investment counselors), and even accountants to monitor certain financial activities and transactions or “suspicious activities” of their clients.  Such transactions or “suspicious activities” include, but are not limited to, cash transactions and wire transfers exceeding $10,000.  They also use what is called the “24-Hour Rule” which monitors multiple cash transactions or wire transfers exceeding $10,000 conducted within a twenty-four hour period.  For example, if someone attempts to wire funds offshore and tries to conceal it by sending two separate $5,000 amounts over one or two consecutive days, this will be viewed as a suspicious activity.  So keep this in mind if you do decide to move funds offshore.  FINTRAC also mandates Canada Post to keep track of who buys money orders (which are often used to send money offshore).  Later in the chapter I will provide you with some practical tips on how to move money without attracting a cloud of suspicion.

Keep in mind that it is not only the government that is keeping tabs on your financial affairs.  Creditors, private investigators, and identity thieves may also be monitoring your finances.  Take whatever safety measures you can to protect yourself “onshore” (see links above).

That about sums it up with regard to your personal and financial privacy “onshore”.  If you really want true privacy in your financial matters and personal property you can only get it offshore.  It’s a different ball game there.  They take your privacy seriously and take pride in protecting it.  If you do decide to start moving some of your assets offshore, keep in mind the ways in which your government and others are tracking your every move.  Be careful and vigilant.  Later in this chapter I will provide you with some practical tips, should you decide to explore the advantages of true privacy and offshore asset protection. 

3. Tax Avoidance

“The difference between tax avoidance and tax evasion is the thickness of a prison wall.”  – Denis Healey, former British Chancellor

As North Americans, our tax burden is heavy.  Both Canadian and American individuals and businesses pay a significant amount of tax.  What’s worse is the fact that our governments feel the need to tax us on our investment gains which have been purchased with our hard-earned money that has already been taxed in the first place!  This is referred to as double-taxation.  In some cases you can also fall victim to triple-taxation.  But I don’t want to talk to you about that, because it is too depressing and I want you to keep on reading.  Besides income tax, we are required to pay a whole host of other taxes, including estate and inheritance taxes.  All this excessive taxation leaves you, your family, and your heirs with less equity while eroding your dreams one bite at a time.  But there is something that you can do about it.  You can legally use a number of offshore strategies to avoid paying taxes or to reduce your current tax burden.  This is commonly referred to as Tax Planning.  Tax planning entails using both onshore and offshore strategies.  The advice of a good tax specialist, chartered accountant, and offshore provider or lawyer can be a good place to start.  I will not describe the onshore strategies you can use but rather briefly mention a few offshore strategies that you can use.  There are numerous possibilities for reducing your tax burden.  You can establish an Offshore Company, Trust, or Foundation – all of which are described in the next section.  In addition, you can defer taxes by purchasing offshore annuities and life insurance.

I also want to make the distinction between “Tax Avoidance” and “Tax Evasion”.  Tax avoidance is legal, as you are simply avoiding the creation of a tax liability in the first place.  Tax evasion is illegal and it essentially means that you are not reporting all your income when completing and filing your tax return. 

You may also want to consider what your tax situation will be when you retire.  Will you stay in your home country, or will you move to another country where the level of taxation is more reasonable?  You may decide to move and live in a nice sunny destination in the Caribbean.  Your place of residency will, in large part, determine how much income tax you will have to pay.  Foreign income is exempt from taxation in many of these countries.  That means that you will not suffer the consequences of “double-taxation” on your retirement income.  Many Caribbean countries welcome North Americans with open arms and permit them to retire and live within their borders.  The legal requirements for entry are usually quite minimal.  You need not be a citizen to live there.  You can also consider becoming a non-resident of your country to further lessen your tax burden.  Becoming a non-resident doesn’t mean giving up your citizenship; it simply means divesting yourself of major assets, such as your house, car, and the like.  You should start thinking about these issues sooner rather than later.  Talk to your accountant or a tax specialist, and explore what tax-treaties and tax agreements your country has with the country where you plan to retire.  Preparing and planning these things in advance can ensure a bigger and more comfortable nest egg for your golden years.  Plus, you may no longer have to worry about shoveling snow anymore!

4. Investment Diversification

To set the tone for this section I have found a useful article that gives you an initial understanding of why the government doesn’t want you to know about the offshore industry: 

As you can see from the article above, you are being deprived of superior investment products while being ridiculed in the process.  Both the government and the mutual fund industry are trying to prevent you from learning about and accessing these superior investment products.  Could this be?  Are the government and mutual fund industry conspiring against you?  Is it possible?  Could this be a new form of protectionism in the twenty-first century?  You be the judge.  Meanwhile, let’s see how investing abroad can help you achieve better returns while diversifying your portfolio and reducing risk at the same time.

As mentioned in earlier chapters, not all markets boom at the same time.  Some economies and markets are hot while others remain stagnant.  As a savvy investor you don’t want to wait a few years before investment products in your local markets bear fruit.  Therefore, you should seek investment products in markets that show promising growth and opportunity.  At the same time, you will diversify your portfolio against slower periods on the domestic front.  It is difficult for me to tell you where to invest or what you should buy when it comes to offshore or foreign funds and stocks.  Because of the advertising ban imposed by the government, it is quite challenging to locate good offshore funds to invest in.  Business Week magazine used to publish a list of the 500 best-performing offshore funds.  But unfortunately, they no longer publish the list.  I assume that it is because of the advertising ban in place, but I have been unable to verify this since they will not tell me.  Nevertheless, you can still access the list from a few years back (see link box below).  And they do still offer a “Mutual Fund Scorecard” in which you can select “Foreign” funds.  In addition, I have added a few more international market indices that indicate the performance of foreign markets.  This lets you compare the hot spots with the weaker ones.   Be sure to refer back to the links on indices in Chapter 2 for more on the subject.

5. Succession Planning

Another popular reason for going offshore is that it ensures that your family and heirs benefit from the wealth you have accumulated over the years.  Both in Canada and in the United States, there are a series of taxes designed to strip your family and heirs of your wealth.  Such taxes include inheritance taxes, estate taxes, and real estate transfer taxes.  It is no wonder so many individuals want to move some of their assets offshore.  Numerous strategies can be employed for planning your succession.  An offshore Trust or Foundation can be created to hold and protect assets.  I will describe both strategies later.  For now, suffice it to say that a trust is simply an agreement by which a designated party (the trustee) manages assets on behalf of another party or parties.  Foundations can also be used to protect assets.  Life insurance can also be purchased offshore.  Another strategy can simply entail creating an offshore “Asset Protection Company” (consult Offshore Strategy #3. Offshore Company in the section that follows).  Finally, a family business doesn’t necessarily need to be run “onshore”.  Depending on the type of business, it may be opened, moved, and operated in a less bureaucratic jurisdiction that is safer from financial predators.  The best thing you can do to successfully plan your succession is to get an offshore agent, lawyer, and/or tax specialist to advise you based on your personal situation.

Offshore Strategies

Depending on your particular needs and interests, there are a multitude of options to choose from by which you can move assets offshore, diversify your investment portfolio, and create foreign legal entities, whether it be for personal or business interests.  To keep things simple, I will only briefly review some common and popular strategies, namely:

1. Personal Offshore Bank Account
2. Offshore Brokerage Account
3. Offshore Companies
4. Offshore Trusts
5. Offshore Foundations

Whichever strategy you decide to use, you will have to go through an “Offshore Service Provider” that will introduce you to the offshore banks, brokerage firms, or legal authorities.  So be sure to ask them a lot of questions before deciding on a particular strategy and jurisdiction.  Later, I will give you some links and tips to help you get the most out of these offshore service providers, so be sure to read on.  In case you are wondering why you have to go through an offshore service provider, the reason is simple.  Offshore banks and financial institutions are not legally allowed to advertise their services and directly solicit your business.  But nothing is legally preventing you from engaging with them.

Now let’s begin with the simplest and least expensive means by which you can secure some of your wealth in an offshore tax haven – the Personal Offshore Bank Account.

1. Personal Offshore Bank Account

Firstly, the bank account will be opened and held under your personal name; therefore it is less “anonymous” than an account held by a company or other legal entity.  Bank secrecy is still applicable, but if you wire transfer funds to the account, it may be more easily traceable back to you.  To open any kind of bank account in a tax haven will require you to provide proof of identification in the form of a photocopy of a passport, driver’s license, or state or provincial ID card.  Some banks require a “notarized” copy which must be signed and witnessed by your lawyer or notary.  Some banks may also ask for copies of your utility statements or even a bank reference.  Try to avoid banks that ask for credit references from your local bank as this may disclose your request to your financial creditors. 

Most offshore banks permit you to open an account in another currency than the one from your home country.  Not all currencies are available, but the U.S. dollar, Canadian dollar, euro, and British pound are usually commonplace depending on the jurisdiction.  I would strongly recommend to you to open the account in a currency different from the one in your home country, as it will offer you an extra layer of diversification while reducing your “currency risk”.  Who knows which particular currencies will rise or fall in value in the next few years?  The euro is definitely a currency that is likely to remain strong, while the U.S. dollar may continue its decline.  The Canadian dollar can gain momentum in the next few years if the price of oil continues to rise.  Just do your homework and talk to knowledgeable people about the subject.

The next thing you should look for is whether the offshore bank provides online banking.  Check which services are available, how secure and private their website or servers are, what their monthly and yearly account-related fees are, and what interest you can earn on the account.  You can also ask them what type of Certificates of Deposits (CDs) they offer, what the rates are, and what the minimum purchase amount is.  Just do the same thing you would at home – shop around.  You also want to ask them if they offer other investment products.  Some accounts can be linked either to a separate trading account or they may have their own securities trading capabilities.  See what is available.  You also want to make sure that you are dealing with a reputable bank that has many branch offices and that operates under strict privacy legislation and banking secrecy laws.  Ask if interest (or other types of) income is subject to taxation by local governments.  If it is the case, then look for another jurisdiction where there is zero tax.  Usually, when the account holder is a non-resident, no tax should be paid.  

Credit and Debit cards can usually be obtained as well.  You may have to pay a few hundred dollars to get a credit card (such as Visa, MasterCard, or AMEX) associated with the bank account.  My advice to you is don’t bother with this because of the cost and the issues of privacy and safety.  Keep in mind that the IRS has already gotten court orders forcing the credit card companies to disclose the names of their card holders.  So unless you plan to use this credit card offshore, forget about it.  Use the Debit card instead, as it is usually free and you can access your funds securely and privately at any ATM location worldwide.

Finally, you may want to see if the bank account is federally insured like bank accounts in the U.S. with FDIC and in Canada with CDIC.  Banks in some jurisdictions offer this type of coverage.

Costs related to opening an account can be as low as $350 (U.S. dollars), although the offshore service provider firm may charge a few hundred for introducing you to the offshore bank.  You may perceive this fee to be a bit high, but it is money well spent because they usually do a lot of research on many different banks in order to recommend a favorable one.  Minimum amounts to open (and hold in the account) can be as low as $1,000 to $1,500 (U.S. dollars), which is quite reasonable.  Just a few years ago most offshore banks required $15,000, $50,000 or even $100,000 as minimums.  But with the advent of the Internet and online banking, this has changed as they have access to a much larger customer base and need to better compete with other offshore banks.  Try to find a bank that charges no monthly fees and for which transaction costs (e.g.,: wire transfers) are not too expensive.  Some accounts also provide exchange services with outside accounts like e-gold.  This can be practical for transferring funds in and out of your account. 

2. Offshore Brokerage Account

Opening an offshore brokerage account is very similar to opening a bank account, although it may cost a few hundred dollars more to do so.  Some brokerage accounts may require a minimum investment of $15,000 or even $100,000 depending on the firm; but you can open one for less, so shop around.  The brokerage account is usually accessible online and is operated by a large brokerage house.  So you can purchase all sorts of investments from different markets around the globe.  Please refer back to Chapter 2 for information about global stock markets and market indices to get a feel for what is available outside your country’s borders.  Basically, you have access to most exchanges and even those within Canada and the U.S.  You can decide to buy stocks, bonds, mutual funds, ETFs, currencies, commodities, bank CDs, etc.  Offshore mutual funds are particularly interesting since many of them have far superior performance than those found in North America.  The cost of placing trades is similar to what you would see with onshore online brokerage firms.  Accounts may or may not be insured by an investment protection fund.  Be sure to ask if the account has any coverage, by which amount it is covered, and by whom.  Income generated through investment activities in the account may or may not be subject to taxes, depending on the jurisdiction; ask the offshore provider to be certain.  One of the most private, secure, and tax-free means by which you can open an offshore brokerage account is to start an offshore investment company (see next section) and hold the brokerage account in the name of the company.  This provides an extra layer of privacy and protection and, when well structured, virtually ensures that your gains are tax-free.

3. Offshore Companies

Offshore companies or business entities can be created for a multitude of purposes.  Some of the main reasons why North American individuals and businesses want to start an offshore company include:

• Ease of company formation and incorporation procedures
• Significantly lower costs and time-frames to start the company
• More privacy in financial and operational matters
• Less bureaucratic and regulatory environment
• Less government interference
• Access to more diverse markets, customers, workers, suppliers and partners
• Less complicated taxation laws (the U.S. tax code has seven million words!)
• More reasonable and favorable taxation environment
• Customs and duty exemptions
• Access to tax treaties
• Better security of property rights

I will not get into a lengthy discussion about all the different types of legal structures business entities can assume because it is a subject matter that is somewhat complex in nature and is well beyond the scope of this book.  Furthermore, company formation varies from one jurisdiction to another.  Nonetheless, common legal types of company formations include, but are not limited to, IBCs (International Business Company) and LLCs (Limited Liability Company).  Bearer Share Corporations are also popular due to their near complete anonymity.  A Bearer Share Corporation and its assets are owned by the bearer (i.e.,: whoever possesses) of the physical shares of stock, and there are no owner name(s) on record with any government registry.  This type of corporation has mostly been eliminated since 9/11 but Panama still offers it.  Different jurisdictions have varying requirements regarding the structure of a corporation or company.

Some jurisdictions will permit one director per company, but many require that there be three directors on record (i.e.,: a President, a Secretary, and a Treasurer).  Directors usually don’t need to be local citizens or residents and can even be other corporations or entities.  In addition, formation types in some jurisdictions may require company officers.  These officers are usually local residents and are often recommended and appointed by your offshore service provider.  They have no real say in the operations and affairs of the company, nor do they have access to company assets or accounts.  The purpose is more regulatory in nature. It is more a formal requirement that ensures local representation for the firm. 

Offshore companies may decide to issue shares of stock (for the owners) while others won’t.  Shares can either be issued with or without nominal values stated on the certificates.  This really depends on your (and your partners’) needs.

Most offshore companies need to be registered with an official corporate registry within the jurisdiction.  Finally, anyone opening an offshore entity should research the local and regulatory environment regarding how the business can conduct its operations both “onshore” and “offshore”, and how this may affect the taxation of company profits.

Now that we’ve gotten some legal stuff out of the way we can explore what types of companies you can create and what you can use them for.  Although there are many different types of offshore companies that can be created, the following represent some interesting and popular choices:

a. Asset Protection Companies
b. Property-Owning Companies
c. Shipping Companies
d. Trading Companies
e. Investment Companies
f. Professional Services Companies
g. Licensing Companies
h. Internet/E-Commerce Companies

I will only briefly describe the purpose of each.  To obtain more information about the nature and particulars of each, feel free to contact an offshore service provider and/or a qualified attorney or tax specialist.

a. Asset Protection Companies

There’s nothing too complicated here.   This type of company is created to protect assets from financial creditors (or predators) and especially lawyers.  If you are an American citizen with a significant number of assets (especially liquid assets), you should consider moving some of them into an asset protection company for safe keeping.

b. Property-Owning Companies

This is a particularly interesting option if you are considering the purchase of a commercial or residential property (i.e.,: building, land, lot, house, or condo) abroad.  In fact, it is a definite must.  By using this strategy, the property can be held under the company’s name and not under your personal name.  This makes it nearly impossible for a financial foe back home to sue you and seize the property.  And there are two more definite advantages of employing this strategy.  First, you can use the company to rent your property to others for profit.  Second, upon sale of the property you will avoid “Transfer Taxes” that are usually charged by the local jurisdiction.  Such taxes can be as high as 5% or more; on a property worth $100,000 or more, that amounts to a lot of “wasted” money.  With the property-owning company you can simply sell and transfer the shares to the new owner, thus avoiding paying any transfer taxes whatsoever.  Do the math!  In Chapter 8 – Alternative Investment Strategies I talked about the benefits of buying foreign real estate as an investment.  Perhaps you may want to prepare for your retirement early and buy a nice property in a country under the sunny Caribbean skies or other offshore heavens.  If you are thinking about this, then be sure to consider establishing a property-owning company.

c. Shipping Companies

Here you can create the company to own either a private pleasure craft, yacht, or merchant ship.  A shipping company provides a simple and efficient means by which you can protect a valuable vessel from the prying hands of jealous financial predators.  The other significant advantage is that it shields personal liability should you decide to charter the vessel.

d. Trading Companies

Trading companies are extremely popular for companies engaging in various international importing and exporting activities.  They can significantly (and legally) reduce or even eliminate the tax burden on the sale and delivery of goods from a foreign supplier to a domestic customer, partner, or subsidiary.  Let me clarify this by using a very simple example.  Suppose an offshore trading company located in an offshore tax haven such as Panama decides to purchase goods from a supplier/distributor in China.  Once the goods are confirmed for delivery, the offshore company then sells them to a customer or foreign subsidiary located in North America, while instructing the Chinese supplier to ship the goods to them.  The transaction or commercial activity occurs outside Panama’s borders, and profits arising from the sale are booked in the tax haven, thus avoiding any tax liability.  This process is commonly referred to as Triangular Trading or Transfer Pricing.  When properly structured, this practice is perfectly legal.  It can even be used for the sale or export of services.

e. Investment Companies

Investment companies can be created by individuals or businesses to hold various investments such as stocks, bonds, funds, currencies, precious metals, and other commodities.  Investment companies are usually linked to one or more brokerage accounts.  All trades are placed under the company name rather than an individual’s name.  This ensures complete confidentiality and privacy while trading. 

An offshore investment company is usually set up as an IBC (International Business Company).  Capital gains and other investment income in an offshore IBC are usually not subject to tax.  The owner may be required to set up the account (or another IBC) in a different jurisdiction to the IBC so that the income is generated “offshore” and thus not taxable.  You see, in general, a jurisdiction usually taxes its “onshore” residents (individuals) and businesses who conduct business with locals; but parties who reside and conduct business or financial activities “offshore” (i.e.,: outside the country) are not subject to taxation.  This is an important rule or principle.  It sounds a little bizarre, but offshore companies never conduct business with locals.  Although this principle applies to most offshore jurisdictions, be sure to ask the offshore provider what the exact requirements are for the jurisdiction you are looking at. 

For just a few thousand dollars you can set up an IBC linked with both a corporate bank account and an online brokerage account.  Investment IBCs represent one of the most popular offshore strategies out there.  Favorable jurisdictions to create an investment company or IBC include the tax havens of Panama, Nevis, and Belize; just to name a few.  Panama in particular is a very solid choice because of its very strong privacy and bank secrecy laws and friendly tax regime.

f. Professional Services Companies

This type of company is particularly interesting for individuals such as consultants, IT (Information Technology) professionals, engineers, architects, and entertainers who want to offer their services to international clients.  Under this type of structure, the professional services company employs the individual and contracts with the buyer of the services.  Therefore, all fees earned can accumulate offshore in a tax-free way.  Keep in mind that the income is generated by the company and not the individual.  Should the individual wish to repatriate income back “onshore”, it can be structured in such a way as to minimize the personal income tax liability in the country of residence.  Here is where the advice of a very competent tax attorney can be both essential and worthwhile.

g. Licensing Companies

Licensing companies are sometimes referred to as Intellectual Property (IP) and Royalty companies.  Under this type of arrangement the offshore company can own Intellectual Property (i.e.,: patents, trademarks, and copyrights).  Examples of intellectual property companies or individuals may own include patented inventions or processes, copyrighted literature, books, music, or software, as well as trademarks.  Once the offshore company has acquired the rights to the intellectual property, it can then license or franchise those rights to other companies or individuals around the world while collecting royalty payments.  The royalties or profits can then accumulate tax free.  Often, the rights to the intellectual property are owned by a Trust which then licenses the offshore company to exploit the rights.  One must carefully select the most favorable jurisdiction so as to minimize any tax liability that may exist under this structure.  Finally, one should also keep in mind that in order to protect one’s intellectual property it is advisable to register it with the appropriate IP office of any country or jurisdiction you are dealing with.  The help of a competent IP agent or lawyer is a must.

h. Internet/E-Commerce Companies

Thanks to the Internet, anyone who decides to do so can set up shop online and sell goods or services to customers all around the globe.  A well designed and promoted website coupled with good e-commerce capabilities can facilitate the process.  There are even online tools that will translate your pages into other languages; this can be useful when selling to foreign customers who may not understand English. 

Merchants often decide to create an IBC or another offshore business entity for a multitude of reasons.  Some of those reasons were mentioned earlier in this chapter.  Offshore Internet/E-Commerce companies are mostly created to protect the anonymity of the owner or owners, to shield them from personal liability, and to provide for a more favorable (and reasonable) taxation environment.  You can very easily create an IBC that has Internet and e-commerce capabilities.  Many offshore vendors offer complete packages in which you get the company, a corporate bank account (with online banking), a debit/ATM and/or business credit card, as well as a merchant account that has credit card processing capabilities for all the transaction needs of your business.  The accounts are usually also able to accommodate transactions in multiple currencies.  This provides for flexible payment options for all your international clients.  In addition, some accounts can be linked to online exchange services such as e-gold.

Once a business finds a presence online in the realm of cyberspace, it really doesn’t matter in which country the business and its website are located, as this is all transparent to the customer or viewer.  Website setup, hosting, and maintenance can be done from virtually any computer in the world that is connected to the Internet.  Keep in mind that both Canadians and Americans are legally allowed to create businesses in other countries.  If you want to create an online business, ask yourself whether it is an absolute necessity to have it in your own country.  Depending on the product or service you or your business may have to offer, this strategy may be a wise option given today’s extremely competitive business environment. 

So these are some of the different types of offshore companies.  I have provided you with a very simple overview of these strategies.  Should you decide to pursue any of these strategies, I strongly recommend that you seek additional information from an offshore service provider, a competent lawyer, and/or an international tax specialist, as it is imperative that you properly structure the offshore entity in order to ensure absolute legality in terms of business operations and tax obligations you may have towards your local tax authorities.  Each year, governments both in Canada and the United States are going to great lengths to make it more and more difficult for their citizens and businesses to pursue offshore strategies.  New reporting requirements, tax modifications, and snooping mechanisms are continuously being added in order to discourage the practice.  Therefore, I would strongly advise you to consider some of these offshore strategies while they are still both legal and accessible.  It may not be too long until our invasive governments make going offshore illegal.  Feel free to exercise some of your few remaining rights before they are stripped away from you.

4. Offshore Trusts

As mentioned earlier, a trust is an arrangement whereby a designated party (the trustee) takes ownership of assets on behalf of the person establishing the trust (the settler).  The trustee is responsible for managing the assets in the trust for the benefit of the beneficiary or beneficiaries in accordance with the terms of the trust.  Trusts can also have different members such as advisors or protectors who ensure that the assets are well managed to best serve the interests of the beneficiaries of the trust.  What’s interesting about trusts is that they offer greater flexibility over the management and distribution of assets.  In addition, trusts offer a greater level of protection against various financial risks.  Such risks include civil litigation, expropriation, marital or family disputes, mismanagement of investment portfolios, and punitive estate and inheritance taxes.  Therefore, a trust is the ideal tool for wealth protection and preservation, as well as estate or succession planning.  Many different types of assets can be held in a trust.  Investment portfolios, shares of public or private stock, bank deposits, life insurance policies, real and intellectual property, as well as many other types of valuable assets, can be held in a trust.

An offshore trust is simply one that is based in an offshore jurisdiction where its profits are not taxable.  If you are shopping around for the ideal jurisdiction, you must find one that meets the following three essential requirements.  First, the trust must be in a tax-free jurisdiction.  Second, it should absolutely be in an English common law jurisdiction.  The reason for this is simple.  English common law jurisdictions have specific and advantageous asset protection laws.  Such laws are particularly stronger and more favorable in offshore jurisdictions than in high-tax jurisdictions such as Canada and the United States.  High-tax countries have had many years to change the rules of the game.  Nevis and St. Vincent are popular jurisdictions for trusts.  The third essential requirement involves choosing a jurisdiction which does not recognize the judgment of a foreign court.  In other words, assets held in a trust are beyond the reach of the courts in the owner’s country of residence or citizenship.

5. Offshore Foundations

Foundations are usually created for family, charitable, or commercial purposes.  Family foundations are created to help protect and preserve accumulated wealth.  Moreover, they can be used to ensure that assets can be passed on from one generation to another.  This is commonly referred to as estate-planning.  In addition, family foundations offer a means by which one can lessen an inheritance tax burden and also avoid forced heirship rules and laws.  Charitable foundations are popular as well because they offer greater flexibility in management and, when placed in a tax haven, can generate more net income for the cause or chosen charity.  Assets of a corporation can also be held in a foundation which offers owners and employees added protection and security.  But just what is a foundation, anyway?  A foundation is a separate legal entity that is established to fulfill the wishes of its founder.  The founder can be either an individual or a corporate entity.  A foundation can be established for a fixed or indefinite period of time.  Furthermore, a foundation can become effective either immediately or upon the founder’s death.  Foundations don’t have members or shareholders.  Generally, a foundation has a founder, beneficiaries, a council, and a protector.  The protector is optional but can be appointed by the founder to ensure that the affairs of the foundation are carried out in strict accordance with the founder’s specifications.  The council is simply in charge of carrying out the objectives of the foundation.  A foundation charter is also needed and is used to state the purpose of the foundation.  For instance, it may include terms that dictate how assets such as real estate will be dealt with, how investments are to be managed, and how other assets or money  will be distributed to family members or other parties.  Finally, a foundation needs rules and regulations that dictate how the foundation will be governed.  These rules can be private and need not be registered with local authorities. 

Foundations can be established in most offshore jurisdictions.  Even though they are more popular in civil law jurisdictions they are also available in countries that follow common law.  Panama and the Bahamas are popular choices for establishing foundations.

Choosing an Offshore Jurisdiction

When deciding to go offshore, it is important for you to choose a jurisdiction that best suits your particular needs or goals.  A good place to start is to clearly define those goals and needs and write them down.  This will come in handy when you start communicating with Offshore Service Providers (see next section).  Dozens of different jurisdictions exist, and each offers various advantages.  If you are considering creating an offshore company, you may even wish to consider multiple jurisdictions to spread around your business, banking, and investment operations.

Jurisdictions

You can find offshore jurisdictions or tax havens all around the world.  Without naming all of them, I will group some popular ones by region in the following table:

Table 22 – Selected Offshore Jurisdictions by Region

Although geographic location is an important consideration, it is not as critical as it was a few decades ago.  In the not so distant past, you literally needed to travel to the foreign country and walk into an offshore bank to deposit or retrieve funds or conduct certain business operations.  This made it difficult and costly for the average person or small business to do any type of offshore banking, business, or investing.  But with radical improvements in telecommunications and the explosion of the Internet in the mid-1990s, the rules have changed to level the playing field.  Nowadays, virtually anyone can go offshore without ever having to physically travel to the tax haven destination.  All communications and operations can be done electronically by phone, the Internet (i.e.,: e-mail, online banking and trading, wire transfers, e-commerce, etc.), and courier mail services.  Encryption technology and digital signatures have also made it possible to communicate in a private and secure way.  Geography is history; borders no longer matter.

Attributes of a Good Offshore Jurisdiction

There are a significant number of important criteria to consider in choosing the ideal offshore jurisdiction.  To simplify matters I have grouped them into the following four categories as listed in the following table:

Table 23 – Selection Criteria for a Good Offshore Jurisdiction

1. Essentials

The first three criteria listed in the table above are all absolutely essential for any offshore jurisdiction to be considered worthwhile.  If the jurisdiction you are considering does not have each of these criteria then it is best to move on to another one that meets all three requirements.  An offshore jurisdiction may or may not be considered as a tax haven.  You want to make sure that the jurisdiction charges no tax (or very little tax) for foreign individuals or entities that have derived income from outside their borders.  A corporation may have to pay an annual tax or remittance to the government, but the amount should be quite small.  No interest, dividend, or capital gains tax should be levied on your (or your company’s) investment profits.  The jurisdiction in question should also have strong privacy laws in place.  These laws are in place to prohibit and penalize anyone from disclosing offshore clients’ personal and financial information to locals and foreign government authorities (without due cause, such as a criminal offence).  The same goes for bank secrecy laws.  You want to look for jurisdictions with very strict bank secrecy laws that call for prison and/or civil penalties for any bank employee or official who violates them.  It also doesn’t hurt if the jurisdiction requires any foreign government or legal authority to post a huge bond in order get a case heard by a local judge.  This usually quickly deters your financial enemies.  Finally, you want to see what kind of taxation treaties exist between your home country and the jurisdiction in question.  Taxation Treaties (also called double-taxation treaties) are bilateral agreements that exist between countries to ensure that individuals and businesses are not taxed twice on the same income, profit, or capital gain.  In general, tax treaties tend not to exist when there is a tax haven in the equation.  In short, you want to avoid jurisdictions that have tax treaties with your home country, as your personal financial information may be compromised. The exception would be if you were to work, retire, or set up a business “onshore” in an offshore jurisdiction; in this case you would want to have a double-taxation treaty.  I hope that you are not getting confused by all this!  Panama is a country that has no tax treaties with any country. 

There is one final essential criteria of importance, especially if you are a resident or citizen of any country that is part of the European Union or its territories (this includes any Canadian or American with dual citizenship with an EU country).  Since July 1st, 2005 the EU Savings Tax Directive has essentially mandated the automatic exchange of financial and transactional information (for tax purposes) between EU member countries and territories.  These territories include offshore centers both in the Channel Islands (Guernsey, Isle of Man, and Jersey) and in Caribbean territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Montserrat, and Turks and Caicos).  The directive essentially strips away the confidentiality and financial privacy of any European individual who holds a bank account in a member offshore jurisdiction.  For example, an offshore bank in Bermuda that holds an account for a Spanish citizen is required to report financial and transactional information to the Spanish authorities.  For now, the directive only applies to individuals and their personal accounts.  But don’t be surprised if corporations are next.  And you never know, the Canadian and American governments may seek to negotiate with the EU and try to obtain this kind of information from these specific offshore jurisdictions.  Nothing surprises me any more with our governments.  So keep this in mind when you are choosing a jurisdiction for the long term.

2. Country-Specific

As mentioned earlier, location isn’t critical when choosing a tax haven.  Nonetheless, you may want to choose a location that is closer to your home base should you decide to travel there.  For North Americans, a sunny tax haven in the Caribbean or Latin America makes for a good choice.  In addition, you want to choose a jurisdiction where you can do banking and business in English as it makes things much easier.  If English is not an official language, then make sure that it is commonly used.  Political and economic stability must be taken into consideration especially if you are creating an offshore company.  Political stability essentially means that the country is a neutral and stable democracy and that its government is very unlikely to be overthrown.  Economic stability means that the economy is doing well and inflation and unemployment are under control.  You can refer back to Chapter 2 – A Global Market for more tools that you can use to better gauge a country’s economic well being.  You are also looking for a jurisdiction that has a solid infrastructure.   This means that the country possesses modern telecommunication facilities (i.e.,: widespread telephone and Internet access), an efficient transportation system (especially air transport), and mail services (courier services like UPS, FedEx, etc.).  The law of the land is another consideration.  Most offshore jurisdictions are based either on common law, civil law, or U.S. law.  Here, it is more a question of familiarity.  The choice is not critical (unless you are establishing a trust) but some like to choose a jurisdiction where the law is founded upon the same principles as those of their home countries.  One should also consider what kind of corporate or commercial law prevails.  Finally, a very important country-specific consideration, at least in my opinion, is whether foreigners are allowed to own property or land.  This is a must, because owning foreign property can be a superb investment strategy as discussed in Chapter 8.  This is especially important for any business that will want to own property.  A property (house, condo, villa, building, etc.) can be rented out by its owner for profit.  So you want to be sure that you are allowed to own property in the first place.

3. Corporate

If you are considering creating an offshore company, then you must do your homework with regard to corporate structures permitted in the offshore jurisdiction.  First you want to look at what types of companies you can create.  Refer back to the earlier subsection 3. Offshore Company of the Offshore Strategies section for a refresher.  For the most part, an International Business Company (IBC) or Limited Liability Company (LLC) is what you are looking for.  In either case, you are looking to limit the liability that the owner(s) may have.  This basically means that, should financial or legal problems arise with your business, you are not personally liable for damages caused to other parties and, consequently, they will not be able to go after your personal assets.  Choosing an appropriate corporate structure for your offshore company can be a confusing process.  Therefore, you will want to get help from a competent offshore service provider or introductory firm (see next section).  I will just briefly mention a few items you should look for.  First, you want to be able to have both nominee and corporate directors on your board of directors.  Nominee directors include yourself and any other individual you would like to have.  A director can also be another company.  This is most useful when setting up multiple offshore businesses.  The same goes for shares.  You should be able to have shares issued to both nominee and corporate directors.  This makes cross-ownership and exchange of assets and funds between companies painless and easy.  Some jurisdictions allow for bearer shares as well.  This is a very good feature, as bearer shares are essentially anonymous since the owner of the shares is not required to be on any government corporate registry.  You also want the offshore service provider to be able to provide you with local company officers.  Most offshore businesses usually require at least one local resident to be an officer of your company.  As I mentioned before, don’t worry, because the officer will not hold any shares or have any say in your company’s affairs or operations.  The role of the officer is simply to act as a liaison between locals and your corporation.  Next, there should be no requirement to have your company’s financial statements audited or reported to government officials.  Finally, the annual directors’ and shareholders’ meetings (usually obligatory) should be able to be held anywhere in the world and conducted by phone or Internet.

When choosing a jurisdiction it is also important to look at what type of company law your company will fall under.  The three main models of company law are: English Common Law, European Civil Law, and U.S. Corporate Law.  It can also be a mixture or hybrid of two sets of laws, but this is less common.  I will not give much detail about the characteristics of each.  In general they are all quite good, and provide for a flexible business climate.  You also want to choose a jurisdiction with competent lawyers, accountants, and tax specialists to help you properly set up and manage your business affairs and obligations.  Depending on the nature of your business operations, you may also want to choose a jurisdiction that has state-of-the-art e-commerce or e-merchant capabilities and infrastructures.  And finally, if your company manufactures, sells, or licenses any intellectual property, see if it can be registered with a local patent or intellectual property office.

4. Banking & Investing

Next you want to examine the banking and financial services, or investment, climate and infrastructure.  Are there many players in the industry?  Usually, the more participants there are, the better it will be for you, as you will have access to a wider range of service at more competitive rates.  You are definitely looking for a jurisdiction with a solid banking industry.  This means that there should be good bank privacy laws in place, as well as many different banks with multiple branch offices.  Make absolutely sure that the bank is licensed as an offshore bank and not an onshore one.  Furthermore, you are looking for banks that offer online banking services and that deal in multiple currencies.  The same goes for financial institutions or brokers.  They should offer secure online trading capabilities, along with access to world equity, bond, and commodities markets. 

Choosing an Offshore Service Provider

When deciding to go offshore, you will need the assistance of an introductory firm.  These firms go by different names, but Offshore Service Provider or Offshore Investment Provider are commonly used.  Don’t be surprised if you have never heard of their existence, as both Canadian and American governments have made it illegal for them to advertise their products and services directly to you in your own country.  Despite this, it is not illegal for you to solicit their products or services.  Since you won’t be receiving any flyers on offshore-investing in your mailbox you will have to use the Internet to find a reputable offshore provider.  There a literally hundreds of firms located both inside and outside North America that offer offshore introduction services.  So you will have to do your homework in order to select a competent and reputable firm for all your offshore needs.  In the process, you will also have to be careful not to fall victim to certain offshore scams (consult the section for tips on going offshore near the end of this chapter).

The first thing you can do to evaluate an offshore service provider is to thoroughly examine the content of its website.  How useful, informative, and clear is the information provided therein?  Do they offer a variety of products and services to both individuals and companies?  Do they deal with multiple jurisdictions?  How well do they seem to know the legal intricacies of those jurisdictions?  Who founded and who is running the company?  What’s their story?  Good providers will usually have a section describing the history and mission of their company.  You want to look for people with good credentials and many years of experience in the field.  You also want to google the company to see if any bad press is associated with it.  If it is part of any professional associations, then that is a definite plus.  Most importantly, you want to make sure that the provider is physically located in an offshore country.  Make sure that they provide a mailing address and telephone numbers.  Don’t do business with a provider that is located in Canada or the U.S., as there is practically no privacy legislation in place to protect you.  The general rule of thumb is to use a provider that is located in a different country from where you are a citizen or resident.

Although many offshore providers promote the merits of the low or no tax jurisdiction that they deal with, you want to choose one that also provides its clients with information on how to remain legal with regard to tax and other reporting requirements or obligations vis-à-vis their home country.  Some providers even provide links to the appropriate tax forms their clients need to fill out and file to their local tax authorities.

On the technical side, you definitely want to choose a provider with whom you can communicate in privacy via encrypted e-mail or through a secure online form on their website.   In the last section of this chapter I will give you some tips on this subject.

Finally, you want a provider who will provide clear and timely responses to all your questions and concerns.  Don’t be afraid to e-mail them often, as you will undoubtedly have many questions.  Usually, the better the response and level of customer service you get, the better the competence and reliability of the firm.  So be sure to shop around and ask the same questions to different providers to see which best meets your needs.

Tax Implications and Obligations

Both Canadian and American citizens and residents have a legal obligation to report their “worldwide” income to their tax authorities.  Worldwide income generally includes onshore income as well as income or investment gains earned offshore.  This also includes income generated by the rental or sale of foreign property.  In addition, you may be required to report the formation or funding of an offshore company or trust.  If your offshore corporation uses a transfer pricing strategy (as described earlier in this chapter) you may also need to report which specific method was used, as well as provide information on cross-border transactions.  Don’t worry about this too much, as it is more for “big business”.  If your offshore endeavors are quite simple, you may be able to declare all you need in your income tax statement and appropriate forms.  I have provided you with links to both Canadian and American tax forms and relevant information in the link box below.  If your personal situation is more complicated then you should obtain the services of an experienced and knowledgeable tax attorney or accountant.  Most major accounting firms in North America have tax lawyers and accountants who specialize in offshore and international tax issues.  Staying legal is the best way to avoid any problems.

Tips for Going Offshore

Since the main rationale for going offshore is to better protect your financial privacy, you will need to take certain precautions in order to maintain that very privacy at all times.  We live in a society where big brother is watching our every move.  In this section, I will provide you with some very useful and practical tips on how to stay safe and secure during the process of going offshore.  I have grouped these tips into the following areas:

1. Due Diligence
2. Computer Tips
3. Communications
4. Online Banking and Trading
5. Moving Money
6. General Tips

1. Due Diligence

Due diligence simply means doing your homework.  Just as you would do your homework with regard to choosing a particular investment, you should do the same when deciding to invest or move assets offshore.  This process begins with finding a competent and reputable offshore service provider.  I have already provided you with insight on this topic in an earlier section.  Here, I want to focus on the measures the offshore service provider takes to ensure the confidentiality and privacy of its clients.  But first you want to be sure that you are dealing with a legitimate and reputable firm that is legally registered and physically located in an offshore country.  As mentioned previously in the Choosing an Offshore Service Provider section, you want to do business with a firm that has competent, English-speaking employees with good credentials and lots of experience.  This information should appear somewhere on their website.  It’s always a good idea to google the company on the Internet to see if any bad press has been associated with them.  You have to be extra vigilant because there are many offshore scams and fraudsters out there.  You can also check online bulletin boards, blogs, newsgroups, as well as scam and fraud alert websites.  Make sure that the provider’s website has a physical address listed, as well as phone numbers and e-mail addresses.  Safe offshore providers also maintain websites on computers or servers located in different offshore countries.  They also store their clients’ records in encrypted format.  The best offshore providers make it their duty to communicate with clients (or potential clients) in a highly secure and encrypted fashion (see next two tips sections).  Finally, you want to take time to read carefully the providers’ Privacy Policy and Terms of Service Agreement.  There should be no statement that indicates that they will share your personal or financial information with other parties. 

2. Computer Tips

Today, most people who do business offshore do it online via a computer that is connected to the Internet.  What a lot of people don’t realize is that their every move online leaves a permanent trace.  Moreover, different parties can, legally or illegally, find out which websites you have visited, whom you have corresponded with, what the correspondence was about, what purchases or online transactions you have made, etc.  As mentioned earlier in this chapter, identity theft has soared in recent years.  Therefore, it is your duty and responsibility to take some basic precautions concerning how to use your computer to go online.  This begins by having a computer with good anti-virus, anti-spyware, and firewall programs installed on it that are updated frequently.  You should never keep any of your passwords on your computer unless they are stored in an encrypted file.  In addition, you should disable what we call “cookies” in your web browser software as they may store your passwords, personal information, and credit card information on your computer’s hard drive.  You should also consider encrypting personal files stored on your computer; you can purchase software that does this.  Otherwise, should your computer be stolen or seized, you will become extremely vulnerable.  The remaining tips regarding computer use relate to online communications.  Therefore I will list them in the following tip section.

3. Communications

There are several methods that you can use to communicate with your offshore service provider, your offshore bank or broker, offshore businesses or partners, as well as other parties.  Some methods are safer than others.  Regardless of which method you use, you will have to take precautions in order to maintain confidentiality and privacy.  The first party with whom you will most likely communicate with is the offshore service provider.  There are usually several methods you can employ to contact the provider including:

Try to keep your snail mail correspondence to a minimum.  Initially you may only need to send a photocopy of your passport or driver’s license and a few other documents in order to open a bank or brokerage account.  In this case, use a courier service such as UPS or FedEx instead of the regular mail service.  If you open an offshore company you will also receive documents by mail.  Avoid contacting an offshore provider or financial institution via regular phone because calls can easily be monitored and recorded.  A good alternative to using the phone is to use VoIP (Voice over Internet Protocol).  VoIP means making calls over the Internet.  Some providers use programs such as Skype to communicate with their clients.  The good news is that you can send encrypted messages with Skype.  The preferred method is via e-mail because it is so convenient.  When communicating via e-mail, make sure that all your incoming and outgoing messages are encrypted.  Regular (unencrypted) e-mail messages that travel over the Internet can most easily be intercepted and read by anyone who has the means to do so.  There are two popular ways to encrypt your e-mail messages.  You can use a program called PGP (which stands for Pretty Good Privacy), or you can simply open an e-mail account at hushmail.com.  If both parties have a hushmail account, all messages sent between them are automatically encrypted.  Similarly, you can contact some providers via encrypted text messaging services.  HushMessenger lets you do just that.  Finally, you can communicate with the provider via Live Chat or through online forms on their website.  Just be sure to check whether they use a secure or encrypted form.  You can easily determine if this is the case by looking in your web browser window.  If the web page address starts with https:// (notice the “s”), or you see the small padlock icon that is in the “locked” position, then you are completely safe.  This is the same safety encryption measure that is used for making secure online purchases.

If the offshore provider or party doesn’t seem to have a secure method to communicate with them, then use regular e-mail to ask them how you can communicate with them securely before making official inquiries.  If they can’t provide a secure method of communication, then move on to another provider.

4. Online Banking and Trading

I will begin by repeating a few tips that were mentioned earlier in this chapter with regard to offshore bank and brokerage accounts.  First, it is preferable not to open a personal bank account since your name appears directly on the account and any associated credit card.  This can compromise your confidentiality and privacy during financial transactions such as wire transfers, purchases, and withdrawals.  For the most part, it is preferable to open an offshore company first and then open an associated corporate bank and brokerage account.  When you open an offshore bank account, get a debit card but don’t bother with getting a credit card.  As mentioned earlier, any transaction (including cash withdrawals) you make with the credit card will be on file with the credit card company who may be forced to disclose this sensitive information to government and tax authorities.  In addition, the offshore banks will also charge you few hundred dollars to get the credit card in the first place, whereas the debit card is usually free or very inexpensive.  Moreover, the debit card can be used for withdrawals at virtually any ATM machine in the world and only the account number appears on the card and not your name (or the name of your offshore company).  This information is only known to the offshore bank whose duty and legal obligation are to protect this confidential information. 

Next, you want to be certain that the online bank or broker uses a secure and encrypted server to handle all transactions.  You want to check your monthly statements online.  Don’t ask to receive them by mail, as this leaves a paper trail that may be viewed or intercepted by other parties.  If you want a paper copy, you can always print your statements at home from your computer (assuming you have a printer of course).  Alternately, you can download (often in PDF format) the statements onto your computer, view them, and then encrypt and store them for safe-keeping.  Make it a habit to do the same with all your financial and other sensitive documents.  You can never be too safe. 

5. Moving Money

Moving money in and out of offshore banks and brokerage accounts can be tricky.  For the most part, withdrawing cash can be a simple as using the debit card associated with the offshore account at your local ATM machine.  You can also make purchases from merchants using the offshore debit card.  An offshore personal credit card can also be used but is less private for the reasons stated earlier in this chapter.  A corporate credit card can be safer to use in order to withdraw funds, since the name of the account holder doesn’t appear on the card.  However, the credit card company could be forced to reveal the name of the owner associated with the number on the card should a court order mandate it to do so.  This is less likely to happen with a credit card that is issued in an offshore jurisdiction, but you never know.  Another way to retrieve funds from your offshore account is to wire-transfer them into your regular domestic account.  But in general, I would strongly advise against this for two important reasons.  First, you will be leaving a clear trace from the offshore account to your local bank (who may in turn reveal it to other parties).  This will destroy any confidentiality you had in the first place.  And you also need to keep in mind that funds wired into a domestic bank account will be assessed as offshore income subject to onshore income tax.  In brief, it is a good idea to choose the debit card and use it to buy regular items such as food, gas, clothes, etc.  Be careful not to purchase big ticket items with offshore cards since this will definitely attract the attention of certain financial enemies.  Finally, you can also get cash from your offshore bank in person while on a trip to your tax haven.  Just be sure not to take or bring back more than US$10,000 (in the United States) or C$10,000 (in Canada).  Actually, you can move more money than this, but you will be required to declare it to a border agent.

If you have an offshore company, trust, or foundation, there can be several different options that you can use to retrieve offshore funds.  You can receive dividends from your offshore company, borrow funds from your offshore company or trust, or even receive an annuity.  Several other strategies exist as well.  All these different strategies are subject to different legal ramifications, and different tax implications.  So be sure to get sound advice from your tax specialist, accountant, and/or lawyer.

Funding offshore accounts is where it becomes more challenging.  A wire transfer from your domestic bank account to the offshore bank or brokerage account is a definite no-no, since confidentiality and privacy will be lost.  And forget about using the services of a private wire transfer company such as Western Union because they can also be forced to reveal information about their clients to other parties.  You could open a regular “onshore” bank account (make sure it is not a Canadian or American bank) in an offshore jurisdiction, wire-transfer funds to it, and then wire-transfer those same funds once more to your real offshore account.  This is not 100% safe but it can be a useful strategy.  Just be sure to keep the amounts low (less than $5,000) for each transfer.  Opening an “onshore” bank account in an offshore jurisdiction is quite simple.  You can do it securely online or in person when you are traveling abroad.  Other means to fund offshore accounts include buying and sending money orders issued by the post office.  But keep in mind that, at least in the United States through FinCEN, the U.S. Post Office may report such incidents as “suspicious activities” to the authorities. 

Online payment systems such as PayPal and NetTeller can be used to move funds between accounts, but I would strongly advise against this.  PayPal was forced to reveal their clients’ records to U.S. authorities in the past.  And as for NetTeller, based in the United Kingdom, they have recently prohibited their Canadian and American clients from transferring funds from their accounts to online gambling sites.  So don’t be surprised if in the very near future that they (and other online payment system sites located in Yankee-friendly countries) will prohibit the transfer of funds to or from offshore bank accounts.  Count on it happening.  Just like puppets are controlled by the strings of their masters, these online payment giants are slaves to our protectionist governments.  Use alternative payment systems such as e-gold instead.  E-gold is registered in the offshore jurisdiction of Nevis and has a strong privacy policy in place.

A popular means by which you can fund your offshore account is to travel to the tax haven with your cash (don’t use traveler’s cheques and don’t bring more than $10,000 at a time) and deposit it in a regular “onshore” account there to later wire-transfer it to the offshore account.  You may be asking yourself: “Why not just bring the cash directly to the offshore bank?”  Good question.  The answer is that not all offshore banks will permit cash deposits (because of possible money laundering).  Just be sure to inquire about this with the bank ahead of time.  Each offshore bank is different.  Some may or may not accept cash deposits, and allowable amounts may vary.

In summary, moving money in and out of your offshore bank or brokerage account can be quite simple.  It is best to talk about the issue with the offshore service provider before opening an offshore account or creating an offshore structure.  And discuss it with the bank or brokerage firm in question as well.

6. General Tips

I would like to finish our discussion on tips with some general, common sense advice with regard to moving, using, maintaining, and retrieving your assets offshore.  The first thing you should do is put your investigative cap on and start learning about the state of your personal and financial privacy and confidentiality onshore.  What kind of personal and financial information are your bank, broker, and even your employer sharing about you with others?  Who are they sharing it with?  Are they doing so in a legal and ethical manner?  A good place to start is to carefully read the Terms and Conditions and Privacy Policy associated with your accounts.  In general, most banks will share or even sell your personal information to third parties such as direct or tele-marketers.  You know them because they are the ones that send you all those junk e-mails and regularly interrupt your peaceful dinner with annoying phone calls.  What most people don’t know is that they can simply ask their banks to “opt-out” or limit the sharing of personal information given to third parties.  Please take the time to do so.  When you opt-out, you improve your personal and financial privacy as well as greatly reduce your exposure to identity theft.  Never be afraid to fight for your right to privacy.  As either a U.S. or Canadian citizen, you are supposed to be guaranteed those rights as stated in the U.S. Constitution and the Canadian Charter of Rights and Freedoms.  I am leaving you with a link on the opt-out clause below. 

Next, you want to monitor how you share your personal and financial information online.  Are you taking the necessary precautions when giving personal and financial information such as credit card numbers when you surf or shop online?  Begin by developing good habits onshore first before considering going offshore.  By doing so, you will raise your level of personal and financial privacy while minimizing related risks. 

Once you do decide to move some assets offshore, be sure to do your homework, shop around, and ask a lot of questions.  Always do so in a secure and confidential manner as described throughout this chapter.  Beware of fraud and scams.  If an offer sounds too good or easy to be true, it probably is.  Once you have chosen a legitimate and reputable offshore service provider and bank or broker, be sure to read carefully their terms of service, privacy policies, and fee structures.

Next, you want to keep your mouth shut and not go bragging to friends, certain family members, or business associates that you have a lot of assets offshore.  This is usually the leading cause of most cases brought against owners of offshore bank accounts or companies. 

Finally, you want to sit back, relax, and bask in the satisfaction of knowing that part of your wealth rests safely offshore, away from wrongdoers, while your personal and financial privacy is respected and honored.

I just want to say a few more words to conclude this chapter.  While moving some of your assets offshore may seem complicated or not without hassle, not doing so may actually be worse.  You work so very hard to be able to accumulate a decent amount of wealth for yourself, your family, and your heirs.  Therefore, it is both your right and duty to do everything you can in order to protect and nurture it.  The world is changing.  The personal and financial risks you face are increasing, while your personal, financial, and privacy rights are all decreasing.  These rights are crucial to preserving your wealth, estate, and overall financial well-being.  Keep in mind that your wealth may be a (or the) significant contributor to helping you realize the dreams you set for yourself in Chapter 1.  Don’t ever let anything or anyone destroy your ability to fulfill those dreams.  For these reasons as well as many others stated throughout this chapter, I would strongly advise you to go offshore now, before your government makes it completely illegal, or before it flexes its protectionist arm once more and strips you of any more of your few remaining rights.

© Dan Fournier, 2007-2011