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Offshore investment refers to the keeping of money in a jurisdiction other than one’s country of residence. Offshore jurisdictions are a commonly accepted solution to reducing excessive tax burdens levied in most countries to both large and small-scale investors alike by taking advantage of higher rates of return or lower rates of tax on that return offered by operating via such domiciles. The advantage to this is that such operations are both legal and less costly than the solutions offered in the investor’s country - or “onshore”. Locations favoured by investors for low rates of tax are known as offshore financial centres.
The main factors surrounding the decision to go offshore include:
Tax is the driving force behind offshore activity. Due to offshore solutions investors are able to conduct investment activities in a profitable fashion. Often, taxes levied by an investor’s home country are critical to the profitability of any given investment. Using offshore domiciled special purpose vehicles, an investor may reduce this burden allowing the investor to achieve greater profitability overall. It does not mean that the investor does not pay tax back home, or is evading his moral duty to his country of residence.
Other pertinent factors relate to the avoidance of forced heirship, which limit the discretion of the testator to distribute assets under a will or codicil on death. This is common in civil law and Islamic countries, particularly France, Saudi Arabia, Japan and the USA. Equally, higher levels of banking privacy in offshore centres offer clients peace of mind in the event of death or unforeseen circumstance.
Another reason to consider offshore investment is lower levels of regulation compared to onshore investment. This appeals to seasoned investors, who are well placed to assess risk and may feel limited by the restrictions placed on onshore trading. Hedge funds have illustrated the benefits of investment freedom very clearly: they initially almost all chose offshore bases, mostly for regulatory reasons.