An offshore fund is a bank account or fund fiscally domiciled and managed in an entity located in a foreign jurisdiction, generally associated with tax havens or offshore jurisdictions.
A tax haven is a country with very low tax rates for foreign investors, the bank secrecy law is in force, and whose capitals or investments are free from the control that a market surveillance or supervision body may exercise.
Why open an offshore account?
The main reason that leads an investor to opt for offshore accounts or funds is to benefit from tax exemption policies. Which are legally offered by this type of jurisdiction that, generally, seeks to attract foreign investment.
When it comes from countries subject to high levels of fiscal, economic and monetary regulation, the citizen or company can choose to open an offshore account to benefit from another series of advantages:
- Obtain higher returns derived from higher interest rates.
- Make currency exchanges.
- Develop new business strategies and access new markets.
- Search for security, since these entities are usually subject to stricter regulations and high security and privacy standards.
- Access more sophisticated financial products that are only available in those countries.
- Protect assets against inflation or government policies, such as expropriation, especially in countries such as Venezuela or Argentina, among others.
- Take advantage of the absence of capital controls that would prevent the rescue of money from national banks in some situations.
- Take advantage of the absence of limitations on the circulation of cash.
However, each country has its own laws, so it is important to know their implications well before taking the step and opening an account in a foreign country of these characteristics.
Tax evasion or avoidance
Contrary to what many people think, having funds in an offshore account is not necessarily a crime. Tax evasion and tax avoidance are not synonymous terms. Evasion constitutes a crime of tax fraud to the extent that the citizen or company hides income or information to pay less taxes, thus violating the law.
On the other hand, tax evasion is not always related to activities in offshore paradises. Evasion occurs whenever a citizen or company violates the law to avoid paying taxes. For example, when a company issues VAT-free invoices at the customer's request, because in this way one party does not declare that income - knowing that it must - and it is cheaper for the other.
However, tax avoidance is not a crime or breaking laws, but rather acting within its framework to reduce the tax burden. In this sense, any citizen is free to go live in another country for whatever reason, including reducing the payment of taxes. No state can hold you just for wanting to leave. Changing your residence does not imply any crime.
The more corrupt a state is in its political sphere, the more lousy its general economic policy tends to be. If citizens detect that the tax money they pay through their work only serves to finance cronyism and clientelistic networks, it is likely that they will look for options to prosper in other countries and end up leaving. They can also assess that the tax rates represent "robberies" of the State for being excessively high and look for alternatives.
On the other hand, it is totally legal for each State to establish its own rules and laws. This is beneficial for the citizen. It implies greater options for progress insofar as it fosters competition between States to attract foreign capital that will generate employment and wealth. Offering better opportunities for those who are willing to relocate.
Now, the citizen must know the conditions of leaving the tax residence in the country of origin and abide by the laws imposed by it. A frequent rule in the country of origin is usually not to live more than a certain number of days in that territory. Otherwise, it would be understood that the tax residence is based in that country and is in breach of the rule. Failure to comply may imply exposure to financial and / or criminal sanctions.