When most people hear the term offshore account, they immediately think of tax fraud, shell companies and other not-quite-legal businesses. But this is a big mistake! An offshore account has nothing at all to do with fraud and crooked business. At the end of the day, an offshore account is just an account in a foreign country to begin with. What does offshore banking mean? What forms of offshore accounts are there? Under what circumstances is it worth opening such an account abroad? You will learn all this and more in this article.
Definition
If you have an account in a country where you are not resident, you have an offshore account. Offshore means “far from the coast”. The name originated during the time of the many British colonies. These were largely located on islands far from the coasts of countries with inland connections. Offshore accounts are basically 100 percent legal, and you can open offshore accounts in any country. If you have an account in the USA, among others, this is an offshore account. However, a citizen of the USA can just as easily have an account in Germany.
What is Offshore Banking?
Offshore accounts make money transactions and transfers easier for those who deal a lot with other currencies. These can be international companies. But digital nomads also like to rely on an offshore account.
Typical situations for an offshore account are:
- Living and working abroad
- Retirement abroad
- frequent commuting due to work or travel between different countries
- Company ownership abroad
- Freelancer abroad
- International company with many cross-country payments in different currencies
Offshore banking opens up all the possibilities that one also has with a normal account in one’s own country. All financial activities from remittance to investment are possible. An offshore bank is a financial center far from the coast where you have opened your foreign account.
Offshore banking is when banking transactions are conducted in a currency other than that of the offshore bank’s domicile. An example: you have an account and perhaps a company headquarters in the USA. Your customers are mostly located in Europe and pay with Euros. This is already offshore banking.
But now there are financial centers that are particularly attractive for an offshore account. These are characterized by additional advantages over the simple processing of cross-currency banking transactions. These may include lower or no wealth taxes or a particularly high level of confidentiality and protection of personal data. Countries offering such financial centers include Dubai, the Seychelles, Singapore or Hong Kong.
What are the types of offshore accounts?
Basically, the types of offshore accounts differ into accounts for individuals and corporate accounts.
Private account
A private offshore account is in the name of a private individual. It can be set up as an individual account or as a joint account. Joint accounts are also called joint accounts. Private accounts as offshore accounts can serve as savings accounts, but also as investment accounts.
Corporate account
Offshore companies need a business account. It is in the name of the company. As a rule, such accounts are pure transaction accounts.
Offshore accounts are particularly common as IBC accounts. This means that they are opened in the name of an internationally active offshore company (International Business Company). From an economic point of view, they are also private accounts. However, in most cases they serve as investment accounts. It is such IBC accounts that make it possible to open an anonymous offshore account. Private individuals can hide behind such IBC accounts and conduct business. This is where the gray area of offshore accounts begins. For it is precisely this type that has fallen into disrepute because of money laundering, tax evasion and fraud.
However, misusing an offshore account as an anonymous account is hardly possible today. Thanks to the automatic exchange of information (AEOI) and the Common Reporting Standard CRS, funds can no longer be hidden so easily.
What is the operation of offshore accounts?
So, by definition, an offshore account is an account in a foreign country. Opening an offshore account can be done locally. To do this, you will need to meet different requirements in different countries and prove your identity. The opening of the bank account is then reported to the tax offices of your place of residence. Only in a few countries like Georgia it is still possible to open an account as a non-resident.
The second way is through a European neobank. These offer account opening abroad as a service. For transaction accounts, this is the simplest and safest option. However, this does not provide any special protection of the assets from government access or bank failures. These accounts are not true offshore accounts, but multi-currency accounts.
Once the bank account is opened in the foreign country, it is usually managed online from home. The offshore account usually comes with a debit card. Withdrawing money from the offshore account is therefore not a problem in most cases. However, high fees may apply. If you intend to withdraw money from your offshore account frequently, find out about the costs in advance.
Foreign transfers are also no problem with an offshore account. The ease of processing across different currencies is often one of the main reasons for opening an offshore account, but here too you should look closely at the fees. An easy way is not always the cheapest way.
The advantages and disadvantages of an offshore account
An offshore account offers many advantages. However, there are also disadvantages and risks associated with opening and using such an account. The table gives a rough overview of the most important points.
| Advantages | Disadvantages |
|---|---|
| Asset protection | Partly high account management fees |
| Investment Opportunities | Often high fees for transactions |
| Inflation protection | Language barriers in the use of services |
| Better interest rate | Often high capital requirements at opening |
| Distribution of risks | Difficult communication due to geographical distance |
| Litigation | |
| Privacy protection |
Advantages of an offshore account in detail
The advantages of an offshore account outweigh the disadvantages. This can already be seen in the short tabular overview. At the same time, the advantages of an offshore account are also the most common reasons for setting one up. At this point, the individual advantages will be discussed in more detail.
1. financial privacy
Offshore accounts offer privacy and a certain degree of anonymity. Thus, among other things, a partner, especially the ex, does not know about the accounts. Completely anonymous accounts are only possible in a few countries.
2. lower account maintenance costs
Depending on the case, an offshore account can offer more favorable conditions than a current account at the domestic bank. Lower account maintenance fees and lower costs for transfers can be mentioned as advantages.
3. diversification of risks
With an offshore account, you can spread risks geographically. Political risks are thus spread across countries with different jurisdictions. Risks associated with devaluation of money or collapse of the banking system due to natural disasters can also be mitigated with an offshore account.
4. easy access to international financial markets
With an offshore account, you can lower hurdles in accessing individual markets. This is especially true for countries with currencies other than the Euro. If you want to establish business relations in a foreign country, it can help to have an account in that country. In this way, you make it easier for customers to make payments and build trust.
5. higher interest rates
Interest rates on savings or investments are lower than ever before. In some cases, they are even approaching zero. Some people can also tell you a thing or two about negative interest rates. In other countries, the interest rate situation looks quite different. Offshore accounts usually offer an interest yield of 4 to 8 percent. In some countries, interest rates of 10 percent and more are also possible. So, getting higher interest rates than in your home country is one of the important advantages with an offshore account.
6. lower taxes
Tax evasion is not possible with an offshore account. However, taxes can be saved. With an account in a country with 0 percent corporate tax, for example, it pays off.
7. protection against inflation
An offshore account protects against loss of value due to inflation. Normally, especially in Europe, we are protected from too high inflation by the interventions of the European Central Bank. But just the last time has shown that even in this country inflation above the normal level is possible. If your money is stored in another currency abroad, you prevent the loss of value.
8. protection against capital controls
You may know that capital controls can theoretically exist. What these mean in practice is what the Greeks in Europe experienced and are experiencing. With capital controls, a state wants to prevent money from being moved abroad to safety. Measures include restrictions on international payments, but also caps on withdrawing money from accounts. The reason is to try to keep banks and their solvency stable.
But these restrictions have a devastating impact on people and businesses. Exports and imports are partially crippled. It is almost impossible for companies to invest. Private individuals are restricted in buying consumer goods. Orders from suppliers with international payment options are no longer possible. With an offshore account you have free access to your money even in such times.
9. protection against state access
Even if it is rare, the state can get to your money if it wants to. The expropriations in Cyprus and Iceland have shown that. You cannot work with frozen money in your account. Money that you get paid out as shares is of no use to you either. In the offshore account, the money is safe from the access of the state.
Disadvantages of an offshore account in detail
In addition to the many advantages of an offshore account, we would also like to take a closer look at the disadvantages and risks. Additional costs for services and relatively high account maintenance fees can reduce the hoped-for savings.
There are also legal risks that should be considered. How safe the money in the offshore account is depends not least on the political stability of the country. Political unrest or even wars will also put your money at risk. Furthermore, the jurisdiction of the country is crucial. How and by what means is control over financial transactions exercised? Which jurisdictions and laws come into force in the event of a crisis?
Also, the economic condition of the bank where you open an offshore account is essential to the safety of your money.
The exchange rate risk should not be concealed either. Shifting the exchange rate against the individual can decrease the value of the capital deposit.
Conclusion
Opening an offshore account in a foreign country is something completely legitimate. There are many advantages to having an offshore account. Less taxes, more interest, protection against inflation and more innovative ways to invest money are reasons to have an offshore account. Especially digital nomads, people who travel a lot or internationally active companies benefit from an offshore account. However, with all the benefits, there are also risks. The offshore bank and the country should be chosen well. Political and economic stability are important. You should also pay attention to fees and additional costs. If you have any questions about the topic and need advice, we are happy to help.
