An offshore fund is a collective investment fund domiciled in an Offshore Financial Center. These funds have been in existence since the 1960’s, and so named because they were established originally in the island tax havens of the Caribbean and the English Channel. The term ‘Offshore’ has since come to mean any jurisdiction, wherever geographically located, which is advantageously different from one’s own domestic financial environment.
Benefits
The advantages take a number of forms: a tax free, or ‘tax-lite’ regime, which reduces the costs on the fund making increased performance achievable, and a less restrictive regulatory environment. Assets can be held in confidence, and the timing of tax payments, and mitigation of the rate at which they are levied can be managed by investing offshore.
Offshore funds offer eligible investors significant tax benefits compared to many high tax jurisdictions such as the United States and the European Union. However, where funds are repatriated to high tax jurisdictions, they are usually taxed at normal rates as foreign arising income.
Many of these tax-haven locations are considered investor friendly and are internationally regarded as financially secure.
1. Confidentiality
While conceding the need for greater degrees of co-operation with onshore authorities, the offshore centers’ tradition of protecting investors’ privacy still persists. If they are implementing measures necessary to maintain a reputation for profit, on money laundering for example, and if they are co-operative when there is evidence of criminal activity, they will nevertheless actively resist any attempts at ‘fishing expeditions’ on the part of onshore tax authorities.
2. Returns and Volatility
In addition to operating in a benign tax environment, offshore funds have the opportunity to further increase their returns through exposure to a wider range of asset classes. It is an accepted principle that diversity can better balance an investor’s portfolio and reduces its volatility. By spreading investment around different financial centers, not only are diversity increased, but exposure to different market conditions and investment styles are brought into the mix as well.
Although most offshore jurisdictions permit funds to obtain licenses to operate as public funds, the onerous regulatory requirements associated with such licenses usually means that only a small minority of offshore funds is available for subscription by the general public. These funds are subject to formal constitutions, and operated and monitored in compliance with the rules of the local regulatory regime.
While shares in many offshore funds are available by direct application to the managers, the decision to invest in them is likely to be made within the context of broader financial planning. This, plus the desirability of expert guidance, makes an approach through an appropriate financial advisor highly to be recommended.
About the Author
Mark Plummer is an Asia based independent Offshore Investment advisor. Has been involved in the financial services and financial planning business since leaving full time education in 1977. It was his intention to provide an insight in to both the mainstream products offered by the general population of financial advisors out there and also the alternative investment areas that are often overlooked or ignored.
Related articles
- Offshore Accounts: Turn the tax tide (thejc.com)
- Financial Planning: Offshore Bonds or Pensions 2011? [Marcin Zientek] (ecademy.com)
- New Tax Law Strokes Hedge Fund Managers (blogs.forbes.com)
Photo credit: Bill Selak via Visualhunt.com / CC BY-ND
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