A 2017 study revealed that the amount of cash in offshore accounts is equivalent to 10 percent of the world GDP. Most people use these accounts as tax havens, so it’s vital to learn more about them before opening one.
Inasmuch as stashing money in foreign accounts is portrayed a shady thing, it isn’t entirely illegal to open a bank account in a foreign country. Using foreign bank accounts can make things easier for people who like traveling or for business owners who want to diversify their assets.
In this post, we’ll cover more about offshore banking to help you navigate this area well. Read on!
1. Offshore Bank Accounts Are Legal
Over the years, countries such as Panama and Switzerland have earned a bad rap as tax havens for the world’s wealthy. You may have heard that, but owning an offshore bank account is perfectly legal.
Each jurisdiction has its own rules for offshore banking. As long as you understand and follow their provisions, you won’t get yourself on the wrong side of the law. Be sure to involve a finance professional when opening the account.
Also, if you need to find financial records, foreign corporate structures or other information, this website makes it easier for you.
2. Don’t Use the Accounts for Tax Evasion
As noted before, some people find offshore accounts as the best tax shelter. In this case, they could invest the money in revenue-generating activities, and the Internal Revenue Service (IRS) will never know anything about it.
Countries like Monaco, where there’s no personal income tax, have been used for such activities. This is illegal in the US, and every citizen is required to pay tax. This means every interest and gains earned on your foreign investments must be included in your tax returns.
3. Have Legimitate Reasons for Using the Accounts
Not everyone uses foreign bank accounts to hide their money or evade taxes. As such, there are many legitimate and legal reasons why many people want to have offshore accounts.
For example, some people open accounts in countries they visit frequently. This makes financial transactions easier for them when in those countries. Plus, it doesn’t make sense carrying a lot of cash while traveling when an offshore bank account can help.
You can also inherit a foreign account, which you might want to keep. If you’re going to buy a property in another country, it may be reasonable to have a local account.
For investors, owning foreign accounts make diversification a lot easier. In this case, it helps to reduce the risk of losing the value of your assets when the dollar weakens.
4. Understand the IRS Requirements
The IRS has measures in place to prevent people from using foreign accounts as tax havens. So, before opening an offshore account, be sure to understand the IRS requirements for such accounts.
Under the Foreign Account Tax Compliance Act (FATCA), the IRS is allowed to access information regarding your foreign accounts. The act enables agreements between the US and partner jurisdictions to facilitate third-party account reporting.
You must declare that you hold accounts in foreign countries. Failure to do so can lead to a penalty equal to the half of the amount in your account. Also, if you have more than $10,000 across all foreign accounts, you must submit a yearly Report of Foreign Bank and Financial Accounts form.
5. Offshore Banking Has Risks
Just because it’s legal to keep money in foreign accounts doesn’t mean it’s risk-free. For example, a country could experience a recession, and its currency is likely to be devalued. When this happens, your assets in that country will lose value.
Also, political instabilities in other countries could make it hard for you to access your money when you need it. Even though it’s rare, some regimes can decide to nationalize banks and take foreign assets.
Sanctions have also become more common today in countries like Russia, Iran, Cuba, Zimbabwe, Ivory Coast, and Iraq. Such embargos could limit your ability to transact easily in such countries.
Other risks that might affect you include identity theft, cyber crimes, and other fraudulent actions. Other countries may lack the same level of security and consumer protection as the US.
6. There Are Cons
Well, this is a bummer, but the harsh truth is that the more offshore accounts you have, the more you’re on the IRS’ tax radar. Also, if you have lots of money, say $100,000, you can be a target by governments during political turmoils.
The global transparency policy makes it easy for governments to share or access information regarding their citizens’ foreign assets. So, if you strive for a somewhat private financial life, then opening foreign bank accounts doesn’t guarantee that.
Keep in mind that the taxman may think you’re hiding something. So, be ready to prove them wrong should they contact you about your accounts.
7. Consider the Costs
For less than $2,000, you can open your offshore bank account and start using right away. Keep in mind that amount includes the setup fee, which can range from $300 to $1,300 depending on the bank you choose and its jurisdiction.
If you choose a full-reserve bank, this means that they won’t lend your money to borrowers. In this case, they will charge you maintenance and transactional fees, which vary widely depending on the bank you use and other factors.
They might also charge fees for other services like online trading, managed service, and investing. Be sure to review their fees to ensure they make sense and are reasonable.
Offshore Accounts – Final Thoughts
The Panama Papers data leak made owning offshore accounts seem somewhat illegal and shady. On the contrary, they’re pretty legal as long as you follow the taxman rules and other set regulations.
If you have two homes in different countries or you travel a lot to a particular country, an offshore bank account can really come in handy. However, before you open one, be sure to weigh the risks against the benefits to determine if the account will work for you.
For more information, here are features of a good checking account you should consider when opening one.