When we pause for a moment to take a step back, mull over our finances, and come to realize just how much money we contribute to society every year, the figure may be alarming for some.
Building wealth is no easy feat, and maintaining it can be even harder. So, steps like opening an offshore bank account are on the rise.
Many expats and entrepreneurs spend a considerable number of years building wealth and accumulating enough assets in order to enjoy a deservedly good standard of living. To have wealth skimmed away like crema off a cappuccino is common in modern-day society and can be a tough pill to swallow.
When we combine rising interest rates that affect everything from mortgages to business loans, and ever-increasing income and corporate taxes, in addition to titanic inflation levels for everything under the sun, it’s easy to conclude that this affects not only individuals of all incomes.
Consequently, it’s common to see businesses, expats, and entrepreneurs take asset protection measures such as offshore banking to escape the traps of banking in their home country.
But what exactly are offshore bank accounts? And how can you open one? In this article, we’ll take a deep dive into the world of offshore bank accounts and finance. From understanding what they are to offshore banking advantages and disadvantages, as well as explaining the step-by-step process of opening your own offshore account.
What is an offshore bank account?
History
To understand what an offshore bank account is, we first need to understand how offshore banking originated. The financial division of offshore banking can be traced back over 200 years to western Europe.
During a period of unrelenting economic turmoil and political disarray, the first offshore banking system was established in – what many historians claim to be – Switzerland, which, at that time, had declared itself politically neutral. This was when the world-renowned Swiss banking system was born.
Switzerland became a popular tax haven for wealthy citizens from countries like Germany, Russia, and South American countries such as Brazil and Argentina who wanted to escape oppressive regimes.
The early 1900s saw overseas territories with political and financial autonomy, such as Jersey, establish offshore banking systems to protect the assets of wealthy British citizens and Europe’s elite.
A few decades later, offshore banking began to spread to the rest of the world to southeast Asian countries like Singapore and Central American countries like Panama.
Businesses also began utilizing offshore banking to avoid crippling taxes from the rise of globalization and the heavy taxes countries levied on international trade.
You will now find all types of offshore banking services in countries around the world that cater to varied clientele from the ultra-wealthy to small business owners.
Definition
An offshore bank account is a bank account located in a country other than the account holder’s tax jurisdiction. Offshore banking can be used for various purposes, including diversifying one’s assets, privacy, tax optimization, and overseas investments.
An offshore bank is a bank regulated under an international banking license. Therefore, it typically prohibits the bank from disclosing its business activities to authorities in the jurisdiction where it’s located.
Benefits
There are many benefits to having an offshore bank account. One of the primary advantages is asset protection through asset diversification. By holding funds in an offshore bank account, you can protect your assets from risks associated with your home country, such as political instability or economic crisis.
Another benefit of offshore banking in a foreign country is privacy. In some countries, banks are obligated to report information about their customers to the government. However, this is not the case in every offshore banking jurisdiction, and a lot of offshore banks offer greater confidentiality and privacy protection for their clients.
Holding funds in an offshore foreign bank account also reduces your tax burden. In many cases, you can minimize your tax liability by taking advantage of lower tax rates – or even their absence – in the country of an offshore bank.
Eleven Reasons Why You Should Open an Offshore Bank Account
The best offshore accounts offer several benefits for expats and investors who want to protect their wealth:
- They’re excellent for asset protection by being outside your home jurisdiction.
- They’re suitable for diversification as you add an additional layer to where your wealth is stored.
- They generally offer higher interest rates for savings, which means you can earn more money on deposited funds in an offshore bank account than you would by keeping them in your home bank account.
Those reasons may be enough to trigger your decision to open an offshore bank account, but let’s take a deeper look at what else offshore banking can offer you financially.
Offshore banking offers political risk diversification
Although not a common occurrence in western countries in this day and age, many people of the boomer generation will remember a time when their financial liberty was wrecked by war and failing states due to irresponsible political decisions and incompetence.
There are examples of this today in countries like Lebanon, where devastating events and prolonged political crisis has led to cash-strapped banks placing capital controls such as withdrawal limits on their account holders.
Any assets you hold in an offshore bank account won’t be at risk from threats of political chaos in your home country.
There are examples of this today in countries like Lebanon, where devastating events and prolonged political crisis has led to cash-strapped banks placing capital controls such as withdrawal limits on their account holders.
Any assets you hold in an offshore bank account won’t be at risk from threats of political chaos in your home country.
Offshore bank accounts are a type of financial account held in offshore financial institutions. This indicates that not only are offshore funds protected from political and economic risks in home countries, but they can also eliminate tax obligations such as wealth tax.
When you transfer money to a bank situated outside your home country, it becomes much more difficult for creditors or other entities in your home jurisdiction to seize your assets.
Many countries provide excellent asset protection and tax advantages for expats who want to protect their wealth overseas. The Portugal NHR Tax Regime (non-habitual resident) offers a way for expats to open a foreign bank account and access many benefits not available to habitual residents, such as:
- Special tax treatment for ten years
- No wealth tax
- Free remittance on funds sent to Portugal
- Tax exemption on all foreign income
Earns higher interest rates
The argument about interest rates is never-ending. One year it’s high, and another year it’s low. In the US, the interest rate typically hovers around three to four percent APY for funds held in savings accounts.
Most offshore banks generally offer higher interest rates than those available in domestic banks. The best offshore banks can afford to pay higher rates due to the lower costs of operating in foreign countries and territories that are often considered tax havens or impose low corporate taxes.
Many foreign banks will also collaborate with their government to create a compensation scheme to attract foreign investment by providing incentives to invest money in their currency for a minimum time period. In these cases, you’ll see more competitive interest rates, as high as nine or ten percent.
Although foreign accounts like this can come with some risk due to currency devaluation and politics, it can be more than worth it in the long run, especially for high-net-worth individuals.
Provides asset diversification
Every investor should go through the process of diversification to protect their assets. The higher the assets, the greater the risk. As individuals accumulate more wealth, they will inevitably have more to lose.
Diversification is the act of spreading your money across different investments and holdings in order to mitigate financial risk.
When it comes to investing, you can diversify your investment portfolio in many different ways. One way to diversify is by investing in other asset classes. This could mean investing in stocks, bonds, and cash equivalents like money market accounts or real estate.
Another way to diversify is by investing in different geographical regions. For example, you could invest in US-based companies, as well as companies based in Europe or Asia. Or you could buy real estate in another country like Malta and receive citizenship by investment in the process.
Investors often diversify their portfolios by transferring funds to offshore bank accounts. There are several reasons this works. One reason is that offshore bank accounts mitigate risk by adding another layer to the location of assets.
By having money in a financial institution situated outside your home jurisdiction, your risk is diversified through decreasing your exposure to events that can put you at risk financially, such as a recession or political crisis.
Enables currency risk diversification
Currency diversification has become a common way for investors and expats to mitigate risks related to currency devaluation.
You don’t need to go offshore to diversify your currency, as many national bank accounts are now able to hold multiple currencies. But there remains a level of risk in going down this route.
Should your country experience a sharp currency devaluation, this would also put the other currencies you have saved in bank accounts at risk.
A prime example of this is Venezuela. After years of political corruption, deterioration of productivity, and gross economic mismanagement, the entire economy experienced a decline so fast that it left Venezuelan citizens with little to no time to salvage what assets they had in Venezuelan banks.
From 2014, Venezuela went through several episodes of hyperinflation that saw inflation rise an unimaginable 10 million percent by 2020. As a result, the value of the Venezuelan Bolivar declined by 99.9 percent in just six years. These events caused an abrupt and total banking system failure.
The lesson from this is that in the event of a banking system failure caused by economic collapse, regardless of which currency you have in the bank, all the money you have in it is lost forever.
Offshore bank accounts provide a safe haven to hold money in foreign currencies, eliminating risks related to hyperinflation and currency devaluation in an individual’s home jurisdiction.
The ideal way to optimize taxes
Not only are offshore bank accounts a way to protect your assets from governmental entities, but they also provide a way to reduce the taxes you pay. Many people confuse tax avoidance with tax evasion, but you can easily avoid taxes legally without committing the crime of tax evasion.
The best offshore bank accounts and financial centers are particularly beneficial to high-net-worth individuals who live in countries that charge taxes on wealth, also known as wealth tax.
There are two types of wealth tax:
- Net wealth tax
- Selected assets wealth tax
Net wealth tax is levied on all the assets an individual owns worldwide. Selected assets wealth tax is a tax that is levied on selected assets that an individual owns. This could be specific types of investments or assets held in the country that imposes the tax.
In addition to the benefit of offshore accounts for tax avoidance on wealth, they can provide eligibility for reduced taxes on business conducted within the country they’re held in, as well as reduced taxes for non-domiciled retirees.
A great example of this is the Cyprus Golden Visa. This visa program allows qualifying non-domiciled individuals access to potential tax benefits such as:
- A 50 percent tax exemption on income generated from business in Cyprus, provided that it exceeds €100,000 ($107,000) per annum.
- No income taxes on business services conducted outside Cyprus for more than 90 days in a tax year.
- Only 5 percent tax on overseas pension incomes exceeding €3420 ($3657).
A more stable banking system
The fact of the matter is that western banks are fundamentally unstable. On the surface, they appear well-run, but how they actually operate leaves much to be desired.
Many banks in the US are severely overleveraged, in addition to holding very little cash reserves. Therefore, in the event of an economic crisis, their financial vulnerability could lead to the need for emergency assistance from the government.
We witnessed this during the 2008 financial crisis, in which several large banks – Wells Fargo, JP Morgan Chase and Co., and Bank of America, to name a few – required significant government bailouts to prevent total collapse.
Offshore banks in non-political and economically stable jurisdictions, like Swiss banks, have strict financial regulations which limit the amount of activity they can carry out with the funds they hold.
They see themselves, first and foremost, as a place for wealth to be protected rather than a place for it to be gambled on risky investments.
Simplifies international transfers
International money transfers can be the bane of life for many investors and expats. Governments place heavy regulations on international transfers for sending and receiving money.
Sometimes this causes long delays for an electronic transaction that, instead of being instant, can take days or even more than a week to be received on the recipient’s end.
In the era of time is money, it’s essential to find ways to save us time and make our lives easier.
The best offshore bank accounts for expats can save you a lot of hassle when it comes to international transfers, as you often don’t have to pass through the same painstaking procedures to transfer large sums of money.
Cheaper international transfers
In addition to easier international transfers, due to the heavy fees imposed on taking large sums of money out of the economy, an offshore bank account can also provide a cheaper way to make international transfers.
European countries like Malta are great places to open an offshore bank account and do business, which you can accomplish through the Malta Golden Visa Program. With this visa, you’ll have direct access to the world’s largest trading bloc and can make feeless international transactions throughout Europe.
An additional way to get paid
If you’re an American expat who works as a freelancer or is self-employed, you’ll often be doing business with people outside your home jurisdiction. This can create a sticky situation as many individuals outside the US don’t have access to national payment systems like Venmo or international payment systems like Paypal.
Should your customers have access to an international payment system like Paypal, the disadvantage of using them can far outweigh their benefits. Paypal charges high fees for transfers, in addition to exorbitant fees for currency conversion.
If a US freelancer were to be paid €10,000 today, at the current market rate, they would receive $10,695. If the transaction was paid for through Paypal, they would receive $10,390, creating a loss of $305 due to Paypal’s high currency conversion fees.
An offshore bank account is priceless for those who trade with foreign businesses as you have an alternative payment method, which may also be easier for the person you’re doing business with, in addition to saving money on fees.
You won’t need to spend time figuring out how to withdraw money from an offshore account either, as this can be done with a click of a button on your laptop or with your account set to withdraw funds automatically.
Provides a path to citizenship
For entrepreneurs who want a second citizenship from a different country, the process of acquiring one is easier than you think. Some countries will offer citizenship on the basis that you invest a certain amount of money in their economy.
Portugal is one of those countries. The Portugal Golden Visa is ideal for expats who want to open an offshore bank account and obtain citizenship by investment. Although not a direct route to citizenship, after five years of holding your investment and holding legal residence in the country, you can apply for Portuguese citizenship, provided you fulfill all the requirements under Portuguese nationality law.
This can be attained with a capital transfer of €1.5 million ($1.61 million), an investment of €500,000 to an investment fund, or a €500,000 real estate investment through Portugal’s Golden Visa program.
There are an array of investment options open to investors, with a minimum investment of €200,000 (cultural production pathway, if located in a low-density area).
If the investment is held for five years and you meet the necessary residency requirement, you’ll be eligible to apply for Portuguese citizenship.
Take a Look at Your Golden Visa Investment Options in our Complete Guide
Reasons to Open an Offshore Bank Account for Businesses
Corporate offshore banks have been a growing practice for the last few decades. There are numerous advantages to opening an offshore bank account for a business.
Many offshore account examples that individuals benefit from, such as asset protection, currency diversification, cheaper international transfers, and alternative payment options, can also help businesses. But, some of these advantages are more beneficial to companies than others.
Here is an in-depth look at the types of benefits that an offshore bank account can offer a business.
Tax Optimization
It’s no surprise that many of the world’s largest international corporations and businesses run their finances through foreign financial accounts located in a tax haven and country with low or no taxes on corporations.
Take Ireland, for example. Although a small country located on the most westerly side of Europe, it is the European offshore banking hub for several of the world’s largest technology companies, such as Apple, Google, Paypal, and Airbnb.
Ireland’s banking system is highly advantageous to businesses as it levies low corporate taxes on companies that conduct business in the country and Europe. An ideal offshore banking example to demonstrate the legal way to avoid paying taxes.
Cheaper international trade
Besides tax optimization, offshore banking is also a path toward cheaper international trade.
Entrepreneurs can accomplish this by starting a new business or subsidiary offshore company in the country of the offshore account.
The Ireland Golden Visa Program allows entrepreneurs to open an offshore account and conduct business in Ireland, provided they meet the financial and regulatory requirements.
As Ireland is part of the EU, entrepreneurs who do business there automatically have access to the world’s largest trading block. There are several benefits to being part of a trading bloc, but the main ones are:
- No tariffs on trade
- Access to a larger market
An additional payment option
On the subject of international finance and business, no business is conducted without the transfer of funds. As globalization increases, so does the number of international customers that companies receive.
Choosing the optimal ways for customers to pay you is crucial for a business. And the best offshore account countries provide the best way for you and your customers to connect financially.
Several benefits of banking offshore to receive international payments are:
It’s easier: International payments can sometimes be tedious when the sender needs access to payment systems like Venmo and Paypal, as previously stated. Many national banks also make hard work of sending payments internationally, and they will often decline online card payments to banks in foreign countries.
If you set up an offshore bank account in the customer’s country, this can give access to national point-of-sale systems that provide an instant payment option.
It’s cheaper: When one currency is exchanged for another, there’s a charge that has to be paid by either the sender or the recipient. Either the customer will need to pay a higher price for services, or the business will need to absorb the currency exchange charge.
Transactions made in one currency eliminate this charge, and an offshore account will transfer international funds more quickly due to fewer regulations.
They can attract more business: Making international transactions comes with a level of risk, often preventing trade as the risk may not outweigh the reward for many individuals.
People feel more comfortable making payments to businesses that transact within their country, as national consumer protection laws typically protect these transactions.
How to Open an Offshore Bank Account
To open an offshore bank account in a foreign country today is relatively easy due to online banking. And most will allow you to open an offshore bank account online.
Although foreign bankers and countries have different procedures and regulations, these general steps will put you on the path to set up an offshore bank account:
1. Research which bank and country are right for you
You may feel overwhelmed when you look for offshore banking countries, as many foreign nations and financial institutions provide a way to bank offshore. You will find the right bank and country for you as long as you focus on these main features:
- Taxation
- Stability
- Banking regulations
2. Read the bank’s due diligence form
Not all offshore banks require this, but some will due to regulations in their jurisdiction. High-value initial deposits can also be a requirement for some foreign banks. Make sure to check that you’re eligible or have the means to open the type of account you wish to have before going to the next step.
3. Gather the required documents
Typically your passport, proof of address, and proof of income are required to open an offshore account. If you plan to open an offshore bank account for your business, you may be required to provide additional documents, such as a certificate of incorporation and the share register, to prove ownership.
4. Open an offshore account with the chosen bank
Opening an offshore account can usually be done online and in person at the bank.
5. Fund your offshore account
How much does it cost to open an offshore bank account? This is a question more and more expats and entrepreneurs are beginning to ask.
Not all offshore accounts will have the same requirements, and the funds required to open one can vary enormously.
The initial deposit required to open offshore financial accounts can range from a nominal deposit of $500 to $1,000 to high-value deposits of $500,000 or more.
Withdrawing from offshore banks
For those wondering how to withdraw money from an offshore account, one of the benefits of offshore banking with the best offshore accounts is that they require zero technical know-how to withdraw money.
Offshore banks that provide the best offshore financial services – whether they’re offshore tax havens or any other foreign bank – will provide easy-to-use features to transfer money from offshore accounts to a domestic bank or any other bank around the world.
Frequently Asked Questions about How to Open an Offshore Bank Account
How much money do you need to open an offshore bank account?
You are generally requested to invest between $5,000 and $15,000 to open an offshore bank account. Some banks require an investment of as little as $500, while others require a minimum deposit of $500,000 or more, depending on their services and benefits. You can also expect monthly maintenance fees from some international banks.
Can anyone open an offshore account?
Anyone can open an offshore account, but check the tax law of your country regarding transferring money to an offshore bank account.
Is it legal to have an offshore bank account?
Despite common misconceptions, offshore accounts are perfectly legal to have and transfer money to, provided that you adhere to your country’s tax laws and don’t partake in activities to evade taxes or hide money or crimes such as money laundering.
Which is the best country to open an offshore account?
The best country to open an offshore account is Switzerland due to the global reputation of Swiss banks for creating and maintaining the standards for offshore banking.
Are offshore accounts tax-free?
The answer is yes, and no. Taxes due on assets held in foreign jurisdictions depend on your tax jurisdiction’s tax laws. Some tax authorities facilitate using offshore accounts for tax benefits by allowing money to be held in a foreign jurisdiction tax-free, while others tax agencies levy a tax on worldwide income or all offshore assets an individual owns.
What do offshore accounts do?
Offshore accounts hold money outside an individual’s home country. They protect assets against adverse events such as economic or political crises as well as providing significant tax benefits.
