Offshore bank accounts have, for many years, possessed a certain air of exclusivity about them. It’s as though they were, somehow, reserved for the super-rich only.
For many people, the attraction of holding an offshore bank account over the years has been threefold;
1. Firstly, they were not taxed source on any interest earned. It was all paid gross.
2. Secondly, the gross rate of interest earned, to begin with, was, generally, more likely to have been slightly higher than their equivalent ‘onshore’ accounts.
Thirdly, they were ‘invisible’ to the holder’s own tax jurisdiction. In other words; if they did not voluntarily disclose any interest they had earned on their own personal income tax declarations each year, they were getting away without paying tax on that income.
Unless you are, physically, a tax resident in an offshore location, with few to no personal taxes, then these advantages are all but invisible.
To begin with, we must recognise that interest rates have been so low over the past decade in most major currencies, that the amount of interest being earned on all but the very largest of accounts is relatively small. So, is the differential even worth having? Certainly not - especially if any risk is being taken of any nature.
However; by far the largest consideration against such an account nowadays is the advent of data-sharing by the majority of countries worldwide (100 to date and counting). Essentially, anyone that owns a bank account in another country will have their details provided annually to the tax authorities in their region.
The introduction of FATCA by the USA, and the Common Reporting Standards (CRS) by the OECD, in 2014, has enforced these measures.
The sheer scope of CRS is well-demonstrated on this page on the OECD website. As you can see from this table, a large number of jurisdictions have already signed up to this information sharing agreement.
It is, therefore, extremely inadvisable for anyone to maintain an account in an offshore jurisdiction whilst living in another country - without reporting any interest or other income/gains they receive from their local tax authority. This is unless the country they live in does not require such information on overseas assets and/or does not tax them.
Regulatory Protection & Compensation in the Event of a Bank Failure
If you plan to deposit cash into an offshore bank account, you should first consider how robust that jurisdiction is, and how much protection you are likely to enjoy should they get into trouble.
During the credit crunch of 2008/09, we saw how banks can suddenly become very vulnerable without warning. Today, it is no longer an option to believe that cash in your bank is ever 100% safe. Were it not for the UK Government Nationalising Northern Rock in 2008 (the 4th largest bank in the UK and FTSE 100 constituent at the time), depositors would have lost everything - just as hapless shareholders did.
Following that disaster, the rules were tightened. However; the rules differ from country to country. In the UK, the Financial Services Compensation Scheme (FSCS) says it will protect the first £85,000 in any of your bank accounts should that bank go bust. Obviously, this is a great comfort. However; the FSCS is maintained by an annual levy on firms that operate in the financial services arena. In other words, it has its limitations, and there is no ‘backstop’ from the UK Government. More information on how the FSCS is funded can be found here.
The equivalent protection in the Isle of Man amounts to only £50,000 for accounts held by Individuals, and just £20,000 for companies. See this page for further details. Here is a list of banks in the Isle of Man that are covered by their Depositor’s Compensation Scheme (DCS) scheme. (Link to the word doc attached)
The equivalent Banking Business Depositor’s Compensation regulations in Jersey also pays a maximum of £50,000 to an individual. However; as seen in clause 23 (in this document), they seem to introduce a significant caveat which states the following: “If an eligible depositor in respect of a bank default is entitled to receive compensation under a Bank Depositor’s Compensation Scheme (howsoever called), operating in some other jurisdiction…the eligible depositor is not entitled to receive compensation under these regulations.” This would imply that anyone holding an account elsewhere may not receive the full level of protection from any account they hold in Jersey, which would, obviously, be a major concern.
In short, if you wish to open an offshore bank account and need some guidance, get in touch with us for sound insight as to where (and how) you should open your account.
For those living in regions where this doesn’t apply, such as Dubai, then an offshore account is likely to be highly suitable for you. In fact, it may the only type of account you can obtain!
Banks are highly regulated nowadays and, to avoid potentially punitive fines, they have to be very careful so as not seen to be facilitating any kind of money laundering for any of their account holders. Unfortunately, this has made life extraordinarily difficult for ordinary folk who are legitimately opening an account. For example, numerous US Nationals find it close to impossible to open an account outside the USA, seeing as most banks are petrified of falling foul of the FATCA rules. Also, in many cases, a normal high street retail bank in the UK may refuse accounts to individuals working overseas who are being paid by an overseas entity. The banks simply do not want to take that risk.
In other cases, people operating UK businesses have experienced numerous problems with their bank after years of satisfactory service, merely because they are now doing business with people in another country and have to send/receive money to and/or from their UK bank account.
In these cases, an ‘offshore’ account may actually help - seeing as jurisdictions in areas such as the Isle of Man or the Channel Islands tend to be more used in international situations. However; we still advise that you disclose everything you are doing to them in advance so that they feel more comfortable.
It is also generally easier to operate multi-currency accounts and send/receive regular (and possibly large) amounts to non-UK and possible non-EU-countries when using a bank in these types of countries. This is because they tend to be used for such businesses, instead of only dealing with businesses that work exclusively with other UK accounts.
All of the main high street banks have ‘international’ branches in countries like the Isle of Man. Usually, these are operated differently from their UK branches and will offer services that are more geared toward international businesses that trade cross-border.
If you need assistance in selecting a suitable offshore bank account for yourself or for your business, get in touch with us here.
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