It is dangerous to be right when the government is wrong. -- Voltaire
The benefits of offshore investing together with the comfort and simplicity of a mutual fund.
Every move by taxpayers to reduce the bite of the tax man provokes a response from those same tax authorities. When taxpayers began using overseas entities to accumulate income free of tax the government slapped on withholding taxes, reporting requirements and tax rules that attributed the income of closely held foreign corporations to the owners as ordinary income. This led to the growth in popularity of overseas funds.
An overseas fund is like a domestic mutual fund. It's usually located in a tax haven jurisdiction and offers a high rate of return both for the fund purchasers and the fund managers.
Those who set up overseas funds benefit because there are no limits, other than natural competition, set on the fees that management companies charge to manage the fund. Also, since the management is physically located in the tax haven jurisdiction it may be able to postpone or eliminate taxes on its management profits.
Those who invest in overseas funds benefit from not having to pay capital gains taxes on investment switches by the fund. They also benefit from the traditional secrecy of tax haven jurisdictions. Because the fund is set up in a tax haven with a more liberal regulatory climate, the rates of return on investments tend to be higher than they are in the United States. This reflects the lower operating costs due to avoiding the regulatory paperwork required of domestic investment companies, as well as the hotly competitive nature of the offshore financial community.
Since the fund is jointly owned by many different investors from different countries, it will be impossible for tax authorities to claim that the fund is merely a paper holding company and that, therefore, the funds' income should be treated as the income of the individual investor. Overseas funds have an obvious independent business existence. This protects investments in these funds from some of the heavy-handed tactics that fiscal authorities apply to corporations or trusts set up by individuals.
Overseas funds put money into many kinds of investments. The funds invest extensively in the United States and Europe. They are a way for individuals to play the international money game with a small stake. Most of the funds have an initial investment requirement of around L2,500 (the British flavor). They invest like any mutual fund and performance varies. For someone who is just getting started in investing, they provide the benefits of offshore investing - higher fates of return, privacy, and security - together with the comfort and simplicity of a mutual fund. He can find overseas funds that invest in American companies if he wants his money working there.
Overseas funds are advertised in internationally distributed publications like the Economist, Financial Times, and International Herald Tribune. Advertisements in these publications are not subject to the regulations of the SEC. The publications also are not bound by restrictions on their freedom of publication because they are international. The reader who becomes an international trader will be able to use this freedom of the press to advertise his own services.
An overseas fund might be a service that a tax haven financial services company could offer. With advances in communications, the costs of organizing and operating such funds can only go down. People are already shopping their country for the best savings rates; it won't be long before they will be doing the same on a worldwide scale.
Tax haven based funds will be in the best competitive position to take advantage of the aggressive money flows that are sure to result from the growth of personal electronic fund transfers. Within the nest decade, a large chunk of the investment market will be like the federal funds trading room of a large commercial bank. Once consumers can routinely buy investments directly from their computers it'll be a whole new ball game.
Overseas funds have been a fairly conservative industry in spite of their exotic locations. The cost popular funds - Fidelity, Save & Prosper and Bank of America - are managed by large established companies. They have tended to locate in the more traditional - or better thought of - jurisdictions like Bermuda, the Isle of Man, and the Cayman Islands.
This document was excerpted, modified & otherwise prepared by the 'Lectric Law Library ('LLL) from materials supplied by Baltic Banking Group - www.BalticBankingGroup.com Copyright 1998 - 2002 'LLL & BBG, all rights reserved.