Advantages and disadvantages of offshore accounts. An offshore bank is a bank regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale, can be referred to as offshore financial centres. OFCs often also levy little or no corporation tax and/or personal income and high direct taxes such as duty, making the cost of living high.
With worldwide increasing measures on CFT (combatting the financing of terrorism) and AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions was subject to changing regulations. Since 2000 the Financial Action Task Force issues the so-called FATF blacklist of “Non-Cooperative Countries or Territories” (NCCTs), which it perceived to be non-cooperative in the global fight against money laundering and terrorist financing.
What is offshore banking?
Offshore banking gets a lot of negative press. For most people, it conjures up images of the super-rich funneling their wealth into secretive banks to avoid paying tax. Add to this the whiff of money laundering and general lack of transparency and you’ve nailed offshore banking’s reputation.
While it’s true that offshore banking has been widely (mis)used by the wealthiest in society (with the richest 0.01% of people channeling around 10% of global wealth offshore), the actual concept is much less controversial.
An offshore account is basically any account held outside the holder’s country of residence. They are offered by many mainstream banks, operate similarly to standard accounts and, contrary to popular opinion, you don’t have to be mega-wealthy (or have nefarious motives) to open an account.
This means that anyone that works abroad, spends a lot of time in more than one country, or frequently transfers money between countries can benefit from having an offshore account.
Many offshore accounts do come with distinct financial and legal advantages such as lower tax rates. However, this is often the case with inland savings accounts. Account types vary but they are more likely to be savings accounts and may require minimum initial deposits.
Most countries offer offshore banking of some description, with countries including banks in Switzerland, Belize, Singapore, and the Cayman Islands among those with the most favorable conditions.
Advantages of offshore accounts
- Flexibility – those who need access to their money or to international financing can do so more quickly and easily with offshore accounts than would be possible with domestic arrangements.
- Financial benefits – offshore accounts typically offer higher interest rates and lower taxes than domestic accounts.
- Diversification – if you’re investing money abroad, offshore banking gives you the potential to diversify your investments in various countries rather than sticking all your eggs in one basket.
- Privacy – offshore banks typically offer higher levels of privacy than domestic banks, with confidentiality agreements that personal information will not be passed onto any third parties. Some banks also offer anonymous accounts. Advantages and disadvantages of offshore accounts
Disadvantages of offshore accounts
- Larger deposits – some offshore bank accounts require high initial deposits. You may also need to agree to keep a minimum amount of money in the account to avoid charges.
- Expensive costs – transaction costs and administration fees are typically higher than with domestic and standard high street banks. You should ask for a full list of charges ahead of opening an offshore account.
- Less protection – although offshore banks can offer security for those living in financial or politically unstable countries, funds are less likely to be protected by guarantee schemes. For example, money in offshore bank accounts is not protected by EU member state deposit guarantee schemes. However, some countries offer separate offshore banking protection schemes.
Reasons for opening an offshore account
People opt for offshore banking for various reasons. If you live in more than one country, or work/do business overseas, offshore accounts can make it easier to manage your finances. Reasons for offshore banking include:
- The ability to operate accounts in multiple currencies. Multi-currency accounts give users the freedom to make and receive payments in different currencies.
- Advantageous additional features such as foreign exchange features that allow you to fix currency prices in advance. This removes the uncertainty that can be a downside of dealing internationally.
- The convenience of concentrating financial transactions that involve multiple countries through one bank. This is ideal for businesses with operations in several countries as it avoids having to deal with separate institutions in a range of countries.
- The security of offshore banking, which can give peace of mind to individuals in countries that are politically/financially unstable. Money held in an offshore account won’t be affected by domestic problems.
- For those looking to relocate to another country at a later point, offshore banking offers an easy way of opening an account ahead of moving to the new country.
Types of offshore accounts
The most common types of offshore accounts are savings accounts, which are normally available as fixed or variable rate accounts.
Variable rate accounts will typically offer easy access to funds while fixed-rate accounts generally stipulate that you must hold the money in the account for a minimum period (typically between 1-5 years) before touching it.
Many high street banks also offer offshore current accounts with debit cards, credit cards, and the ability to carry out day-to-day banking functions. However, the currency will usually be in that used by the country where the account is held unless you have a multi-currency account.
Other features of offshore current accounts can include mobile/internet banking, low-cost international transfers, and additional services such as loans and insurance.
You can also open an offshore business account with most banks. This can be particularly useful if you have set up an offshore company.
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