Should You Invest in Offshore Mutual Funds?
Pros and Cons of Investing in Offshore Mutual Funds
Offshore mutual funds are investment securities offered by investment companies headquartered outside of U.S. These funds are typically used by non-U.S. investors, U.S. tax-exempt entities, and hedge funds. Offshore mutual funds may provide certain tax benefits but these funds may not be appropriate for certain investors.
Offshore mutual funds are mutual funds that have established headquarters in a country outside of the country where the investor lives. They may be structured like an open-end investment fund, which is like a conventional mutual fund used by investors in the U.S. The company offering the offshore mutual fund may be formed as an offshore company, a partnership, or unit trust.
For example, a mutual fund headquartered in a small country, such as the Bahamas or the Cayman Islands, may want to attract foreign investment from U.S. investors by offering tax incentives to invest in offshore funds.
Mutual fund companies headquartered in the U.S. may also offer their non-U.S. investors opportunities to invest in offshore funds. In this regard, a mutual fund company may choose a particular country to establish headquarters in order to attract a certain type of investor.
The general purpose of offshore investing is to seek advantages, such as lower regulation, tax-free income, or tax-free distributions to investors through international incorporation.
Advantages of Investing in Offshore Mutual Funds
- Tax Benefits: Foreign countries may offer tax benefits as incentives to attract investors outside of their respective country. For example, a U.S. investor may choose to invest in an offshore mutual fund to reduce or eliminate income taxes or taxes on distributions that would normally occur in the U.S.
- Protection of Assets: Moving assets offshore can prevent financial harm arising from various legal actions, such as foreclosure or seizure of assets from creditors.
- Confidentiality: Many countries hosting offshore mutual funds and other accounts have laws preventing disclosure of the account holder’s identity. Investors wishing to maintain privacy and confidentiality may benefit from investing in offshore mutual funds.
- Diversification: Investing in countries outside of one’s home country can reduce overall market risk by spreading the risk across various investment types, asset types, and countries.
Disadvantages of Investing in Offshore Mutual Funds
- Changes in Tax Laws: Offshore investing has received greater political attention in recent years and the tax laws associated with it have tightened to make tax loopholes more difficult. Therefore, using offshore mutual funds for the sole purpose of evading taxes is illegal.
- Cost and Complexity: Offshore funds can be expensive and difficult to set up. In some cases, individuals must either be a resident or a business owner in the country in which they are investing. Therefore, establishing a residency or business in a foreign country can be expensive and complex, making offshore investing difficult for individuals.
For individuals, the best way to invest in offshore mutual funds is through a brokerage firm that offers offshore investing. Keep in mind that you generally need to be a resident of the country in which you are investing. For example, if you are a non-U.S. citizen living in the Bahamas, and you want to invest in mutual funds that are offered in the U.S., you may be able to access offshore mutual funds headquartered in the Bahamas but offered through a U.S. broker.
The Bottom Line
Investing in offshore mutual funds has become increasingly difficult in recent years, due to the abuse of tax evasion. Furthermore, many investors wanting to diversify overseas can simply buy shares of an international stock fund offered in their respective country. For example, a U.S. citizen can gain access to non-U.S. stocks by purchasing an international stock fund.