3 Common Offshore Mistakes and How to Avoid Them

It’s true that offshore accounts and businesses can present a number of advantages, helping you minimize your tax liability, better protect your assets, and enhance financial privacy. Although there is nothing necessarily illegal about offshore assets, it is important to make sure everything is done in order to ensure that you maximize the value that an offshore structure can provide and avoid any potential legal issues. Check out these three common offshore mistakes and how to avoid them.

You don’t do your research before opening an offshore account or business. While it’s true that most offshore jurisdictions can be characterized by favorable tax regimes for noncitizens, not all offshore jurisdictions are the same. For example, when it comes to establishing a company offshore, different jurisdictions have different corporate requirements, exchange controls, public filing and annual requirements, government costs, and corporate administration rules. In order to maximize the value that an offshore structure can provide, you need to do your research and figure out which jurisdiction best meets your needs.

You don’t report beneficial ownership. When it comes to offshore accounts and overseas businesses, you will likely need to report all of your assets when filing taxes in your home country. Many people don’t realize that they also need to report beneficial ownership. For example, a U.S. citizen is required to file a Report of Foreign Bank and Financial Accounts (FBAR) for any foreign financial account in which he or she has a financial interest. The term “financial interest” is a broad one, but it typically refers to a U.S. person who is a beneficial owner of the assets in the account even if he or she isn’t the legal account holder. So, let’s say your brother has an offshore account in the Cayman Islands and you decide to keep $20,000 of your money in that account. Even though you aren’t formally attached to the account in any way and you may not be able to even communicate with the financial institution about the account directly, you still have a financial interest in it because it holds some of your money. The bottom line? Even if you aren’t a signatory on the account or the legal account holder, you may very well have to file an FBAR.

You don’t report nontraditional financial accounts. When it comes to reporting offshore accounts and assets, most people realize they need to report all overseas checking and savings accounts. What people often fail to realize is that they also need to report nontraditional accounts — like life insurance policies and overseas retirement funds. For example, a U.S. citizen needs to file an FBAR if he or she is either the beneficiary or owner of foreign retirement assets, annuities with cash value, or a life insurance policy. When in doubt about reporting requirements, it’s best to consult with a professional.

Trying to set up an overseas account or business and then navigate the subsequent reporting requirements can be a challenge. That’s why it is a good idea to hire a professional. Remember, small mistakes can sometimes have costly consequences, so it is better to be safe than sorry.