Offshore investment is a general term used to describe the practice of holding money in a country or territory outside of the country one has legal residence in. This is primarily done as a way to avoid taxation in one’s home country, although some investment strategies may also choose to make use of offshore investment in jurisdictions that have little or no regulation. Some countries have strong laws or regulations against the use of offshore investment itself, as it circumvents taxation, and therefore deprives the country of citizenship of taxes it may see itself as entitled to.
Strictly speaking, offshore investment is generally legal, so long as it is handled in the correct manner, the necessary fees are paid to the country where the money originates from, and limits of currency exchange are abided by. Many people view offshore investment primarily as a scheme used by criminals to hide their assets, or by crooked businessmen to illegally avoid taxation, but this is only the case in certain rare instances. In fact, offshore investment is used not only by the extremely wealthy, but also by individuals of more modest means in some countries, as a way of continuing to invest without having to pay heavier taxes in high-tax countries.
In the United States, traditionally it was fairly easy to legally take advantage of low- or no-tax enclaves, often referred to as tax havens. In recent years, however, the United States government has realized just how much revenue was being lost to such maneuvering, and so closed many of these tax loopholes. The United States now taxes citizens on their worldwide income, so that in their eyes no matter where their capital gains take place a US citizen still owes the US government money taxes. Failure to pay those taxes, and attempting to use tax havens to avoid them, can result in prosecution for tax evasion.
Even aside from this avoidance of taxation, offshore investment can offer a number of other benefits. For one thing, many other jurisdictions do not have the same disclosure laws as countries like the United States, making offshore investment an excellent way to keep a higher level of confidentiality. This is not only useful to criminals or to people with something to hide; many high-profile investors want to be able to keep their stock maneuverings secret for personal reasons, and wealthy investors may want to hide their plans to make massive stock buys, in order to ensure the stock prices remain relatively low.
An offshore investment account can also allow for a much greater diversification than an account held in a nation with stricter laws, such as the United States. Many of these countries limit international investment, which some people see as restrictive. By using an offshore investment account, these investors are free to invest in whatever countries they wish to, no matter the restrictions their home country may have.
The primary downside to offshore investment is the cost. Setting up an offshore investment account in a reputable haven, with a reputable firm, can be quite expensive. Often minimum investment accounts are in the six or seven figure range, and annual fees can be quite high. Still, for many the benefits far outweigh the cost, and more than half of the investments in the world are held in offshore accounts.