The Laws and Regulations of Investing Offshore as an American
Investing offshore can provide a range of benefits, including access to new markets, diversification, and potentially higher returns. However, it's important to understand the legal and regulatory environment surrounding investing abroad as an American, including the reporting requirements and potential benefits.
If you have found your way to this article, you are familiar with offshore investing or at least interested in learning more about the potential it offers Americans. One question that continues to plague the topic of offshore investing and banking is: "Is it even legal?".
The clear answer to this is that Americans can legally use offshore banking and investing to access investments outside of the U.S. market, USD, and gain access to opportunities that simply do not exist in the United States. All that said, there are still laws and regulations that Americans need to be aware of when moving or holding assets outside of the U.S. In this blog, we will cover the laws and regulations Americans need to know about when moving assets outside of the U.S. and the reason why moving assets offshore could be a good option for Americans.
Americans and Others
Americans are not the only individuals who may need to understand the laws and regulations of offshore investing. U.S. green card holders also need to perk up their ears and learn what they need to do to remain compliant with investments and bank accounts outside the United States. Further, Americans and tax residents of the U.S. are required to report their global earnings to the IRS and file their taxes whether they are living in the U.S. or abroad.1
Reporting Requirements for U.S. Persons
Foreign Account Tax Compliance Act (FATCA)
In 2010, the Obama administration passed the HIRE Act, and a part of this act was FATCA. This is a federal law that requires American citizens and tax residents to report their foreign financial accounts and assets to the Internal Revenue Service (IRS). The purpose of this law is to prevent tax evasion and ensure that American taxpayers are properly reporting their foreign income. In a nutshell, FATCA makes it obligatory for U.S. citizens living in the U.S. or abroad to file annual reports on any foreign account holdings they have outside of the U.S.
- Form 8938: This is the Foreign Account Tax Compliance Act Form for Individuals. It is to report "Specified Foreign Financial Assets." It is filed along with your Tax Return if you meet the threshold requirements.
- Form 5471: This form is required for American citizens and residents who have a foreign corporation. The form must be filed annually with the IRS.
FBAR (FinCEN 114)
The Report of Foreign Bank and Financial Account Form is required for U.S. persons with more than $10,000 in annual aggregate total in foreign accounts on any given day of the year. Meaning if you have any number of accounts outside of the U.S. and their combined value is more than $10,000, all the accounts outside of the U.S. will need to be reported. It is important to note that the form is filed separately from your Tax Return. Filing your FBAR can be done directly on the BSA website.
Passive Foreign Investment Company (PFIC)
A PFIC is a big tax reporting hassle. Depending on whether you made the proper elections and/or have an excess distribution – your offshore investment tax may turn into a penalty (with net-effective tax rates reaching +75%).4 Often, PFIC managers are unaware of the tax consequences to their American clients. Furthermore, Americans who have been invested in PFICs were unaware of the differential treatment. Because of this, they reported and paid taxes on their foreign investments as they did with their U.S. domestic fund.2 Since this is not the correct way to handle PFICs for U.S. tax purposes, they will wind up facing significant penalties, back taxes, and interest when they try to correct the situation after the fact.
Reasons For Moving Offshore
Now that we covered some of the documentation requirements of moving assets offshore let’s also briefly rewind three of the main reasons why Americans choose to move money offshore.
The U.S. makes up only 4.4% of the world's population. However, 80% of the world's lawyers operate in the United States. They deal with the highest number of civil cases in the western world.3 An eye-brow-raising figure to observe. This helps to show the reason for banking offshore in terms of asset protection purposes.
If you are a high net worth individual ($2-$15 million in total wealth), the risk from frivolous lawsuits is higher than the average person. Holding money in an offshore bank account can make certain assets quite burdensome to access.
Further along these lines, U.S. federal agencies such as the Department of Justice, Federal Trade Commission, and Securities and Exchange Commission have the power to freeze assets in an individual's domestic account as part of an ongoing investigation. This leaves individuals with the unenviable position of hiring an attorney without any funds. Having money offshore reduces this concern, as federal agencies may only freeze assets within the home country.3 While having an offshore bank account alone might not be enough to offer a high level of asset protection, a Swiss bank account in combination with an offshore trust is one of the highest levels of protection you can get.
American investors have access to many investment opportunities, but purchasing foreign equities in their issuing currency is not one of them. However, by moving funds into an offshore investment account, you can invest directly into securities in their issuing currency and benefit from the growth while also taking advantage of fluctuating foreign currency markets. This can be referred to as true diversification and can add considerable stability to Americans' investment portfolios.
Many countries that provide offshore banking services will have laws enforcing banking confidentiality and privacy. One such financial jurisdiction is Switzerland, with the Bank Secrecy Act. Information remains confidential only so long as these offshore bank accounts are not involved in illegal activities, such as tax evasion, trafficking, or money laundering. While reporting to the tax authorities is required, the laws in Switzerland make sure no one outside of who you inform about your funds being held in the country will know about the assets. This helps to fend off pesky neighbors and greedy individuals from learning about your sensitive data and private information.
In conclusion, investing offshore can be a valuable part of a diversified investment strategy. However, it's important to understand the legal and regulatory environment surrounding offshore investing, including the reporting requirements and potential benefits. It's also important to consult with a financial advisor or tax professional to ensure that you're in compliance with all applicable laws and regulations.
If you want to learn more or have more questions about how moving offshore can benefit you and your situation, please get in touch with us using the form below. We will be happy to answer your questions about finding the right partner to help you invest outside of the U.S.