Introduction on Offshore Investments

Tax is the driving force behind 'offshore', but for the great majority of well-off individuals considering offshore investment, tax is not directly an issue. They reside in high-tax areas such as the EU, the US, Canada or Japan, they pay their taxes, and if they make 'offshore' investments, it is in pursuit of higher returns, and without any intention to evade taxes in their home countries.

Some investors are outside the jurisdiction of high-tax areas, either because they live elsewhere, or because they are temporarily non-resident for work reasons. Such investors can often avoid having to pay taxes on their investments, whether on or offshore, but that is due to the investor's circumstances, not the location of the investment.

So why might an 'offshore' investment be superior to an onshore investment?

The first answer is because it is less regulated, and the behavior of the offshore investment provider, whether he be a banker, fund manager, trustee or stock-broker, is freer than it could be in a more regulated environment. Any G7 regulator  will immediately say, oh, of course, if it's unregulated, then it is riskier. Well, they would say that, wouldn't they?

Who can benefit?

An offshore (i.e., non-US) mutual or commodities fund, which intends to trade on the US markets and/or appoint a US investment advisor, should be organized to comply with certain structural and administrative 'rules', in order to avoid its income and trading profits being subject to US federal corporate income tax and US federal branch profits tax.

One fact that is important to establish is that the Principal Office of the offshore fund is outside the United States. The Principal Office is the office where the Fund's general day to day administrative and management activities take place. This does not include trading, which can take place entirely within the United States.

To pass the Foreign Principal Office test, the following guidelines, which are known informally as The Ten Commandments, should be adhered to. However, when this is not practical, as many of the guidelines as possible must be complied with. Where US shareholders are contemplated as investors in the fund, then it may be necessary, even unavoidable, to solicit subscriptions within the United States. In this event, as much as possible of the marketing activity should take place from the Foreign Principal Office, such as sending out the offering memoranda and other information and ensuring that subscriptions are mailed by the subscriber direct to the Foreign Principal Office, without going via any third party within the US.