- What is an offshore account?
- Is it illegal to have an offshore bank account?
- Why do people have offshore accounts? How do offshore bank accounts work?
- Are offshore accounts illegal? Myth 1 – about offshore accounts tax avoidance
- Are offshore accounts illegal? Myth 2 – about offshore accounts available only on offshore islands
- Are offshore accounts illegal? Myth 3 – about enormous sums needed for moving money offshore
- Are offshore accounts illegal? Myth 4 – about in-person visits required for offshore accounts opening
- How can you open offshore accounts legally?
Are offshore bank accounts illegal? Are offshore bank accounts legal? How can we measure their legitimacy in terms of asset protection, diversification, and safety? Let’s discuss the most common misconceptions about the illegal nature of offshore accounts. This article debunks them and explains how you can use an offshore account legally.
What is an offshore account?
An offshore account is any account set up with a financial institution abroad, i.e. outside your home country. If you reside in the EU, your account in the U.S. can be considered offshore, and vice versa. There is nothing illegal about holding offshore accounts.
On the other hand, the term ‘an offshore account’ is often used to refer to accounts opened in offshore jurisdictions, i.e. any country or territory that offers various incentives to inbound foreign investors. Such benefits may include, for example, a low-rate or zero income tax or no capital gains tax. However, some people consider offshore accounts illegal.
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Is it illegal to have an offshore bank account?
The answer is very simple.
Nobody can call your offshore accounts illegal unless you violate the laws on offshore banking.
The breach of the law means:
- tax evasion and tax fraud
- money laundering
- terrorism financing
- sanctions avoidance and help with sanctions circumvention.
If you open an account for personal or business purposes, you are supposed to do the following:
- prove the legitimacy of the origin of your funds
- explain the purpose of your new account
- meet the bank’s requirements
- respect the laws in the country of the account setup.
Compliance with the above-listed reasonable prerequisite is a guarantee that no claims can be made against your legal offshore banking.
Is it illegal to have offshore bank accounts for tax avoidance? Yes, it is.
Why do people have offshore accounts? How do offshore bank accounts work?
An offshore account can serve several decent purposes:
- to receive international income
- to pay bills abroad
- to ensure the safety of funds (for example, if the financial situation and banks in your country of residence are unstable)
- to diversify risks
- to invest abroad.
A legal offshore account works similarly to a regular account in your home country:
- money is deposited or transferred to it
- you can use the funds in your account at your discretion.
However, offshore accounts may differ from accounts in your home country:
- by the fees, especially for withdrawals (they are usually higher than those charged by onshore banks)
- by the banking secrecy and data protection regulations in force in the country of the banks’ incorporation
- by the bank deposit guarantees maintained in the bank’s country of incorporation.
You can access your offshore account:
- in an app
- over the phone
- or at the bank during an in-person visit.
Are offshore accounts illegal? Myth 1 – about offshore accounts tax avoidance
The most common myth about illegal offshore accounts is the topic of tax evasion. The media have painted a gloomy picture of offshore accounts used only by criminals wishing to hide their illegally obtained income.
Of course, there is some truth in it. According to some sources, up to 2% of the global GDP goes illegally to wrongdoers’ pockets. However, 98% of the funds are absolutely legally stored and used for different legitimate purposes.
It is worth saying that offshore jurisdictions do not mean to help tax evasion or fraud. For example, many developed countries collect income taxes on the income generated locally. Only after paying your share of taxes, you can transfer the money wherever you want.
On the other hand, properly structured offshore legal entities and personal/private offshore accounts do help to reduce taxes legitimately.
For example, if you render consulting services through your company registered in Panama to clients located outside Panama, your income can be qualified as foreign/worldwide income. Therefore, by the Panama laws, you have the right not to pay the relevant tax in Panama.
Are offshore accounts illegal? Myth 2 – about offshore accounts available only on offshore islands
A popular misconception is that offshore is a distant, seagull-infested island somewhere in the middle of nowhere. Indeed, some island jurisdictions offer very well-developed offshore services and are very popular with offshore account holders. However, by definition, one can open an offshore account anywhere outside one’s country of residence. There is nothing illegal about it at all by default.
However, if you mean by ‘an offshore destination’ some place where foreign investors enjoy tax incentives and other perks, even the USA can be seen as a large offshore region. Foreign banks report US account holders’ information to the IRS, whereas the USA does not share with other countries information on nonresident alien holders of accounts opened with the banks in Delaware, Wyoming, and some other low-rate tax states. Moreover, due to such incentives as the zero-rate income tax, no reporting requirements, flexible business structure, and minimal capital/balance for opening an offshore account, Delaware is a popular tax haven. This is one of many compelling examples of offshore bank accounts legal availability even in big developed countries, not only on distant islands.
Are offshore accounts illegal? Myth 3 – about enormous sums needed for moving money offshore
“An account in a reputable offshore like Switzerland is available only to millionaires.” This is a common misconception. It is possible to open an account in Switzerland with a deposit of 5,000 euros, dollars, or francs. In some other countries, the amount may be even smaller.
An offshore account, just like any other account abroad, is quite a legal and popular arrangement for:
- receiving salaries and fees
- invoice settlements
- en route cross-border travel expenses.
You don’t mean that only millionaires travel, do you? Anyone may need an offshore account, it is quite affordable to many. So, offshore banking isn’t a privilege of the rich.
HNWIs prefer offshore accounts with private banks. These can be either banks or their offices. Their requirements are higher, and the list of services and opportunities is wider.
Any amount of offshore money can be deposited. The main task is to make it convenient for you to work with and to keep your funds safe.
Are offshore accounts illegal? Myth 4 – about in-person visits required for offshore accounts opening
Increasingly more banks abroad agree to open offshore accounts remotely. Their standard requirements include due diligence, Know Your Customer, and proof of the legal origin of the funds.
In some cases, the citizenship of the applicant, special rules of the bank, or a specific economic situation in the country/world can make a difference. In some cases, a personal visit to the bank s required. Applicants can delegate this and apply by proxy if some conditions are met.
As for the old-school offshore banks in remote island countries, almost all offshore accounts can be opened remotely. A personal visit is rarely required.
You can find more details about personal offshore accounts in our topical article.
How can you open offshore accounts legally?
“Offshore accounts are illegal” is another misconception. If you are not going to launder illegal funds and evade taxes, any account you can open is legal.
The main thing is to choose a bank that suits your needs and is ready to cooperate with you. If you have pre-approval from the bank you will need to prepare the application documents for compliance check and verification. At this stage, it is important to avoid misprints and other mistakes in the papers. Otherwise, even a minor typo can result in a permanent denial of service. That’s why it pays to use the services of professional experts. Please contact us at firstname.lastname@example.org. You are welcome to rely on our team’s experience in opening offshore accounts all over the world for more than 20 years.
After an account is set up, you need to comply with the reporting requirements in your country of residence. Many countries require to declare foreign accounts, report offshore money movements, and/or pay taxes. You should always consult with lawyers and accountants about such rules.
Do you still think that it is illegal to own an offshore bank account? We hope you know now that people open offshore accounts not to break the law, but for convenience and safety. You should try it too.
Some readers ask us all sorts of questions: Is it illegal to not have a bank account? How does an offshore account work for clients from sanctioned countries? Is it illegal to have offshore bank accounts if you have never traveled to the country of the bank’s incorporation? Is offshore banking illegal when the client works in a high-risk business? Are offshore bank accounts legal if you have several accounts in different countries? Is offshore banking legal when the beneficial owner sells and buys cryptocurrencies? What can make legal offshore accounts illegal? Is it right to call Delaware offshore bank accounts legal? You are welcome to send us your questions and we promise to answer them in our further posts.