Photo by Etienne Martin on Unsplash

Registering an offshore company is usually considered a wise move because it can serve as a powerful business instrument. Some people believe that offshore company ownership can be totally confidential, that its maintenance costs almost nothing, that offshore jurisdictions have flexible corporate legislations, and that they charge zero taxes. This is not exactly correct.

The same holds for offshore bank accounts. Opening a bank account in an offshore jurisdiction is a good idea if you would like to expand your business operations geographically or you want to keep part of your assets at a safe place. You are wrong, however, if you believe that an offshore bank account can help you conceal your capital from the tax authorities of your home country. You are also mistaken if you think that using an offshore bank account is as easy as using any bank account at all. Below we discuss some difficulties that you may face when managing your offshore bank account.

Why do you need a foreign bank account?

People who open offshore bank accounts or bank accounts in foreign onshore jurisdictions usually pursue one or several of the following goals:

  • To protect their assets from inflation, economic crises, and various financial limitations in their home countries;
  • To expand the list of their investment instruments and gain access to foreign securities markets;
  • To make transactions to their foreign partners, suppliers, and other counteragents;
  • To be able to make payments in a foreign currency (or foreign currencies) while avoiding the currency control regulations in their home countries (if such regulations exist).

At the same time, an offshore bank account has some special characteristics.

What is an offshore bank account?

The word ‘offshore’ has several meanings. Some mass media will refer to any foreign company or a foreign bank account as an offshore company/ offshore bank account. This word usage is not exactly wrong but it’s a bit overgeneralizing. When speaking about offshore jurisdictions below, we have such countries and territories in mind as Cayman Islands, Seychelles, British Virgin Islands (BVI), Panama, Belize, St. Lucia, and so on. Companies registered in these jurisdictions can be tax-exempt.

We have to note that countries such as Malta, Cyprus, Hong Kong, Singapore, and the United Arab Emirates cannot be referred to as offshore jurisdictions in the full sense of the word. They do offer attractive tax incentives to resident companies but some taxes need to be paid there in any case. In addition, the authorities of these countries are serious about the economic substance requirements.

Offshore jurisdictions have favorable tax regimes, lax reporting requirements, and flexible business regulations. They also offer a high level of personal information confidentiality and several other benefits, which makes registering an offshore company an attractive opportunity indeed. But is an offshore bank account as powerful a business instrument as an offshore company?

Pitfalls of offshore bank accounts

It is true that some offshore banks offer their customers low fees but you can find low bank commissions in onshore jurisdictions too if you look outside such countries as Switzerland and Austria, for instance. The due diligence procedures may not be so stern in Panama, Belize, or Seychelles but the compliance requirements in such British overseas territories as the BVI, Gibraltar, Cayman Islands, Bermuda, etc. are not different from the compliance requirements in the UK.

Probably the main problem with an offshore bank account is the poor international reputation of offshore banks. They have correspondent accounts with such large banking institutions as JP Morgan Chase, Lloyds, Citibank, and so on and these institutions can be suspicious about transactions from an offshore bank. They may take a long time to process such transactions or refuse to accept them at all.  

If you are planning to set up an offshore bank account, you should be ready for the fact that transactions may take quite some time to go through. We know a story when a bank transaction from the Caymans did not go through and was returned to the remitter… after 9 months. Some offshore banks try to solve this problem by linking up with Fintech companies (electronic payment service providers) but such companies are certainly not as secure as traditional banks.

An offshore bank account can be a useful instrument for making payments in the region where the bank is located or for accumulating capital. However, if you would like to use your offshore bank accounts for making regular international money transfers, you should think twice before you set one up.

An offshore bank account and an onshore bank account: is the difference significant?

Having a foreign bank account is beneficial for many reasons but should you prefer an offshore bank account to an onshore bank account? If you believe that the level of personal information confidentiality is higher with offshore banks than it is with onshore banks, you are mistaken, we are afraid. Most offshore jurisdictions including Seychelles, British Virgin Islands, Cayman Islands, Belize, and others automatically exchange their residents’ financial information with the tax authorities of their home countries. Yes, offshores now comply with the CRS.

On the other hand, an onshore bank is not going to share your personal financial information with every Tom, Dick, and Harry. In most countries, banks need a court decision or at least an official request from a regulatory or a law-enforcement agency to disclose confidential banking information. Thus, your data are going to be equally safe no matter where you open a bank account – in an offshore or an onshore jurisdiction.

As far as the compliance procedures are concerned, they are also equally strict in onshore and offshore countries. It has become rather difficult to set up a foreign bank account because the bank administration wants to know everything about the prospective customer (you’ve heard about the KYC – Know Your Customer – requirements imposed on the banks, haven’t you?). But this holds for both onshore and offshore banks: it is not as easy to set up an offshore bank account these days as it used to be.  

Speaking about the costs of setting up a foreign bank account, offshore banks are admittedly more affordable than some onshore banks. However, you don’t have to bank in Switzerland. You can find a reputable bank in a reputable jurisdiction that does not require a security deposit (or it requires a negligible security deposit) and that does not charge high fees and commissions.

To conclude, having a foreign bank account (or two) is a very good idea but it does not have to be an offshore bank account. It can, if this suits your purposes but an account with an onshore bank will probably entail fewer problems.

Leave a Reply

Your email address will not be published. Required fields are marked *