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Offshore Bank Account
What is Offshore bank?
An offshore bank is a bank located outside the country of residence of the
depositor, typically in a low tax jurisdiction that provides financial and
legal advantages. These advantages typically include some or all of
- strong privacy (see also anonymous banking)
- less restrictive legal regulation
- low or no taxation
- easy access to deposits (at least in terms of regulation)
- protection against local political or financial instability
While the term originates from the Channel Islands "offshore" from Britain,
and most offshore banks are located in island nations to this day, the term
is used figuratively to refer to such banks regardless of location
(Switzerland and Andorra in particular are landlocked).
One common misperception is that offshore banking can legally prevent assets
from being subject to personal income tax on interest. Except for certain
persons who meet fairly complex requirements, this is incorrect as the
personal income tax of most countries makes no distinction between interest
earned in local banks and those earned abroad. Persons subject to US income
tax, for example, are required to declare on penalty of perjury, any
offshore bank accounts they may have. Although offshore banks sometimes do
not report income to other tax authorities this does not make the
non-declaration of the income or the evasion of the tax on that income legal
in most jurisdictions.
Advantages of Offshore Banking
- Offshore banks provide access to politically and economically stable
jurisdictions. This may be an advantage for those resident in areas where
there is a risk of expropriation or where there is corruption within the
banking system, or bank officers may become liable to the influence of or
pressure from criminal gangs.
- Some offshore banks may operate with a lower cost base and can provide
higher interest rates than the home country.
- Offshore finance is one of the few industries that geographically remote
island nations can competitively engage in.
- Interest is generally paid by offshore banks without the deduction of tax.
This is an advantage to individuals who do not pay tax on worldwide income,
or who do not pay tax until the tax return is agreed.
- Some offshore banks offer banking services that may not be avalable in
one's country of residence. One such example is paperless bank statements.
- Offshore banks in some countries (by law) partisipate in mandated bank
account deposit protection insurance systems. A US person using a bank in
Australia, NZ, Canada (or any EU country) would get similar deposit
protection as using a US bank.
Disadvantages of Offshore Banking
- Few offshore jurisdictions have depositor compensation schemes, to bail
out depositors in the event that a bank becomes insolvent.
- Offshore banking has been associated with money laundering and organized
crime. There is a risk of reputation being tarnished by association.
- In addition, the advantages of offshore banking may come at a high cost as
the returns on some offshore banking accounts may be substantially below
those of normal bank accounts.
- The fees and minimum deposits required to open and operate accounts at
some offshore banks can make them inaccessible to the general public.
- Offshore jurisdictions are often remote so physical access and access to
information can be difficult.