Offshore Investing

Tax Free or Tax Efficient?
The term “offshore investment” is a much misunderstood term. It seems to evoke images of sun soaked islands and lax tax regimes more than of the solid financial institutions who are mostly located in such areas.

An offshore investment is simply an asset located in a country or place where the investment itself is not automatically taxed. NOTE: This does not mean it is exempt from tax worldwide – you are probably liable to pay tax on the investment in your country of residence. This is certainly the case in the UK and in Switzerland.

You may find the concept strange, but as far as anyone who lives outside of Switzerland is concerned Switzerland itself is classed as an offshore centre because no witholding tax is levied on the assets of non-residents when held in Switzerland.

Other surprising “Offshore Centres” include Luxembourg, Dublin, and the more usual examples of the British Channel Islands and the Isle of Man. Malta and Gibraltar are meanwhile building up their regulatory environments to cater for a more international market. There are also many locations in the caribbean that qualify on low local taxes but not necessarily so highly on investor protection rules: many hedge funds are located here.

Offshore centres do not tax the investments placed there, or if they do it is a minute sum. Not declaring your ownership of assets held in offshore centres on your tax return is usually a criminal offence with a maximum penalty that can include a prison sentence.

Tax evasion is illegal because it is simply trying to hide taxable income from the taxman. Tax avoidance is legal because it allows an individual to use the tax rules to his or her own advantage. A good independent financial adviser can help you to save tax without breaking the law.

You should always declare offshore investments on your Swiss tax return as an asset. If you arrange your finances in the right way you can get good returns, good tax efficiency, and sleep at night. Contact Grether MacGeorge to find out how.

Offshore Bank Accounts
Offshore bank accounts only produce income and give no capital growth. This is not tax efficient if you live in Switzerland, or in many other places. Unless you have entered into a special arrangement with the tax authorities, the income produced in offshore bank accounts as interest is taxable in Switzerland.

Just because the account may be located in the Channel Islands or the Isle of Man for instance, or are called “tax free” this only means the place where they are located does not charge tax on them: Swiss tax is levied on your worldwide income, wherever it comes from.

Offshore bank accounts also give you a far smaller return on your money than you could get from investing into offshore funds. Don’t be misled into only comparing the gross interest rates between Swiss banks and offshore accounts either.

Getting say 4% or more in a Sterling account against 1.75% in a Swiss bank isn’t the end of the story. Deduct the tax liability – use an arbitrary 20% for the purposes of argument – and the net interest becomes 3.2% against the Swiss 1.4%. Then deduct inflation – say 3% for Sterling, 1% for Swiss Francs as average figures. This brings the real interest rates down to 0.2% in the Sterling GBP offshore account and 0.4% in a Swiss bank – you actually make twice as much money by being in the Swiss bank.

But what about currency fluctuations for money you have in a Sterling account? A change in value of the CHF/GBP currency exchange rate of just 5% a year has a serious effect on your money. Since this works in both directions from time to time, a 0.2% real return can change to a new range of possible returns on your money of -3.8% to +5.2%.

So, after the effects of inflation and currency fluctuations are taken into account it is quite possible to lose money in an offshore bank account, then have a large tax bill to pay plus interest plus penalties to the Swiss authorities when they find out (they can investigate your affairs for the last ten years if they wish and banking secrecy laws are set aside if fraud is suspected).

Remember, tax authorities will only be concerned with the interest earned in each tax year, converted into Swiss Francs in the tax year the interest was earned in the account. They make no allowances for inflation or future changes in the currency. And there are no income tax rebates for years when your cash reduced in value – you just don’t pay any income tax on the money for the year the money reduced in value.

Reinvesting the income is no defence either. It was produced, so it is taxable. Just because you decided to invest it rather than spend it makes no difference: after all, you don’t pay less income tax just because you spend less of your salary.

Offshore Investment Funds
On the other hand, you can have money invested in offshore centres and receive tax advantages as well. You just have to plan carefully and invest in suitable offshore investment funds, which are just normal investment funds but located in a low tax centre so as to give you some tax advantages.

Offshore investment funds are usually constructed in such a way as to grow almost entirely from increases in their capital value, and not from the production of interest which would normally be taxed as income.

In Switzerland there is no capital gains tax for private individuals so the capital gains in these investments will not be taxed anyway, although a small amount of wealth tax may be due each year, depending on the surrender value of the policy. Since the funds are designed to produce very little income any income tax on them will also be very small.