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Offshore Can Be Naughty and Nice

Anna Smolchenko, Special to The Moscow Times

The word “offshore” has a certain mystique to those who have never been part of it. People often suppose that investing offshore is not only a bit naughty, but must necessarily be expensive. It can be both, but doesn’t have to be.

For most expats, offshore banking and investment offers opportunities for greater tax efficiency, confidentiality and the ability to take advantage of international investing, free of the restrictions that often apply in high-tax countries.

These freedoms depend on your residential status and the tax rules in your home country. For most expats a period of nonresidence will do wonders for their bank accounts but for some nationalities—U.S. citizens, for instance—being an expat is not enough to escape home taxes.

The reasons people may opt for offshore banking services are diverse, but there are three main incentives.

First is the security of the banking system and low currency risks. In Russia, it is “difficultto forget and forgive a [banking] system that failed so many people in the late ’90s,” said Nigel Whiting, principal of Provision Financial International, who divides his time between Britain and Moscow.

The convenience factor of being able to receive and deposit funds remitted from your home country, or income earned from working in Russia, in any one of a number of hard currencies is extremely attractive.

“Anyone who has tried to open a U.S.-dollar account in the U.K., for example, or vice versa will already be able to testify,” said Alan McGregor, a Moscow-based financial adviser with AVC Advisory.

Secondly, interest earned on bank deposits or capital gains is low-tax or free of tax for nonresidents.

A third reason for banking offshore is the financial diversification it offers.

“Investors can access assets, instruments and products which are more than likely not accessible from one’s home country,” McGregor explained.

Many offshore banks offer a range of services and options, including: instant access accounts with credit card facilities; fixed-term deposit accounts, with the interest rates tiered according to the length of the term and the size of the deposit; and conventional variable-interest deposit accounts, which may offer higher rates than fixed-term accounts.

Offshore bank credit cards can be used much in the same way as onshore credit cards. However, according to Lowtax.net, one of the largest Internet resources on tax and offshore materials, offshore credit cards are secured, which means the client has to provide a deposit that ranges between 125 percent and 200 percent of the credit limit requested.

There is generally a minimum amount required for opening an offshore deposit account, and due to recent legislation designed to prevent money laundering, identification is usually required, despite the claims of some shady service providers to offer “fully anonymous” offshore banking.

The extra costs of taking advice, opening new bank accounts and phone communication at a distance mean that offshore investment is unlikely to be worthwhile for less than, say, $25,000, according to Lowtax.net. Still, costs are coming down all the time because of the Internet. Offshore banks will take deposits down to $1,000, but for a personalized private banking service, you will need to deposit $100,000 or more.

According to Whiting, an adviser will generally charge around $150–$200 per hour.

Vadim Smirnov, a $300-per-hour consultant with Offshore Consulting, said it takes between 15 minutes and a week to open an offshore account.

The rate on deposit accounts is typically between 3.5 percent and 6.5 percent, which is not high compared with the 9 percent offered by many Russian banks, but offshore assures greater security, and the interest is not taxed.

However, offshore tax planning is complex and makes sense mostly for high net worth individuals, experts said.

“In terms of tax planning for the majority of individuals living in Russia, given Russia’s low resident tax rate of 13 percent on most types of income, it doesn’t usually make economic sense to undertake complex offshore tax planning,” said Nancy MacEntee, senior manager with Deloitte & Touche CIS.

Depending on your situation, financial status and degree of openness to risk, in addition to banking there are a variety of offshore investment options open to you as well. These range in risk from low-yielding bond funds to highly-geared hedge funds, so there is something for everyone.

The offshore jurisdiction you choose for banking or investments will depend on a number of personal and business circumstances such as your country of residence, wealth, tax-planning structures, and others. You should also consider the jurisdiction’s political and economic stability, legislature, professional infrastructure, communications network and geographical location.

A lawyer with Amond & Smith’s Ltd Moscow office, said that Swiss banks steadily attract Russians, with the Baltic states becoming popular due to their proximity. As for U.S., British and French nationals, according to Whiting, they tend to choose from the Channel Islands, Isle of Man, Bermuda, British Virgin Islands, Cayman Islands and Luxembourg.