Expatriates in the Middle East have one foot in each of two countries. That means that it's often more convenient and enriching for them to keep their money in a place that's neither here nor there. Offshore financial centres can offer at least the same safety and choice as an expat's home country and sometimes more than is available in the country of residence. They do this while providing tax advantages in many cases and easier access to the banking and investment products and services that expats need.
Several factors go into determining where to park your wealth and how to structure your financial affairs once you hit the road. The key is to make the most of the favourable tax treatment while staying within the law - at home, abroad and in between - without neglecting the principles and practices of sound investing that should serve as a guide anywhere and under any tax regimen. First, a geography lesson: What does offshore mean?
Mention an offshore financial centre and the first image might be of a tiny island with banks, lawyers and accountants ensconced among palm trees and sandy beaches, with perhaps a golf course or casino nearby. There are plenty of those, including the Bahamas, the Caymans, Bermuda and Vanuatu in the Pacific. But many of the leading jurisdictions, the ones with the most financial institutions and foreign assets under management, are the so-called European onshore offshore centres like Luxembourg, Switzerland and the International Financial Centre ring-fenced in Dublin.
Like the patches of land jutting up out of the sea, these places will not tax the bank or investment accounts of non-residents. Many countries, including in the Middle East, won't tax investment earnings of foreigners who live there. That leaves only an expat's home country as a potential issuer of a tax bill. Most countries tax citizens only while they continue to be residents, loosening their grip after they move abroad for an extended period. There is one significant exception: The United States taxes citizens and permanent residents on their worldwide income, wherever they may roam and wherever their wealth is situated.
"The US is exceptional, taxing on nationality as well as residence," said Ian Shane, a specialist in international tax matters at the New York law firm Golenbock Eiseman Assor Bell & Peskoe. "In the UK, a lot of the work I did was for people who wanted to get out of the UK tax net. They left for a year and they were out. "A US person can't do that," he explained. "A citizen or green card holder is still subject to US tax. That stops Americans from going off to tax havens, while the rest of the world can get up and leave and not be taxed in their home country."
He then clarified his remark, noting that there are reasons, for Americans and others, to make use of offshore territories that are not directly related to tax. The confidentiality that they furnish can be useful when it comes to hiding your financial affairs from potential creditors or from clients or competitors of a business. Offshore centres are also valuable when it comes to navigating aspects of financial life that are somewhat exotic for ordinary individuals but commonplace for expatriates. Offshore institutions have the proper expertise in order to meet client demand.
"They do tend to know the needs of expats," said Christopher Shaw, group head of wealth planning at SG Hambros, a British private bank. "That's their client base. There are often things that people overlook - small niceties that they need to be aware of," relating to various accounting and legal codes. Some niceties aren't so small, something to consider when choosing an offshore centre, said Bill Blevins, managing director of Blevins Franks International, a large London firm of financial advisers.
"The financial planning needs of expatriates are diverse, ranging from basic banking to foreign exchange, wealth management, tax planning, trusts provision and management, life assurance etc," he said. "It is vital as an expatriate potential investor or banking client that plenty of research is committed to the selection of the most appropriate offshore centre to ensure that it is capable of providing expertise and protection over the services and facilities the individual requires."
Certain locales, notably the Isle of Man and the Channel Islands, are deemed the "Premiership" of offshore centres, he said, for the range and quality of the services they offer and the strength of their regulatory oversight. A cut above them, in his view, is Luxembourg, which he considers to be "in a league of its own when it comes to wealth management and regulatory protection." Offshore jurisdictions offer something else vital to investors: choice. When it comes to funds, Luxembourg alone dwarfs the number and variety available in Britain, said Ed Moisson, head of fiduciary operations for the Lipper division of the research firm Thomson Reuters.
About 9,000 funds are domiciled in Luxembourg, covering about 160 sectors, compared with 2,000 UK-domiciled funds in 70 sectors, he said. Dublin also has a wide array of funds, he noted, while other centres, such as the Cayman Islands, offer many funds, but they are concentrated in hedge funds and other exotica reserved for the wealthy. Mr Moisson added that the choice available offshore is especially helpful for foreign residents in the Middle East because the fund universe there is limited.
Financial planners point to other potential shortcomings in the provision of banking and other services in some parts of the region that might persuade expats to keep their money in traditional offshore centres. "Someone based in the Middle East may not feel comfortable with the local banking industry and may want more reputational comfort, so he will use an established bank in a jurisdiction with less tax," Mr Shaw said.
Ahmad Chahidi, a wealth adviser for the Middle East and North Africa at JP Morgan Private Bank, also noted this lack of trust in banks in the region, especially in Saudi Arabia. The lack of trust results in part from concerns about political stability and the generally volatile nature of the Middle East, compared to places like Western Europe. The considerable economic and financial volatility of the last few years has amplified the reticence to rely on local financial institutions.
"Because of the crisis, as the value of shares started dropping, people sold and wanted to stay liquid," Mr Chahidi recalled. Some individuals "didn't want to repatriate the money into banks in the region." He highlighted another reason - a morbid one - for foreign residents in the UAE to put some distance between their money and their new home. If you die while residing in the country, "all of your UAE assets will be frozen," he warned, "and your family won't be able to access your accounts."
Offshore financial centres are generally safe, convenient and tax efficient, but they don't provide something for nothing. There is a tendency for institutions, eager to share your tax savings with you, to charge more than onshore institutions for equivalent products and services. Charges related to fund ownership can be especially high because the third-party distribution outlets - fund supermarkets - that are fairly common in places like the United States and Britain are thin on the ground offshore, said Peter McGahan, the managing director of Worldwide Financial Planning in Wadebridge, in southern England.
"In the offshore world, there is often little value added and lots of costs, and with little competition they can get away with it," Mr McGahan said. "Offshore investors are being hammered ... and it's really unacceptable." That makes it all the more important for users of offshore centres to organise their affairs to take maximum advantage of what they have to offer. That means realising that tax breaks do not make a bad investment good and that sloppy planning can make a good investment less good by keeping potential tax breaks out of reach.
That opportunity cost pales in comparison to the cost in money and freedom that can result when offshore territories are used to escape tax illegally. Specialists in offshore finance point out that the secrecy for which such places used to be known has diminished greatly as co-operation among governments has increased and as the technology needed to gather information has improved. "Offshore centres should not be used for tax evasion, assuming that the banks will provide secrecy over the expat's affairs," Mr Blevins said. "Banking secrecy as we have known it is at least dying, if not dead, and exchange of information ... is commonplace."
The line between legitimate tax planning and tax evasion may be a fine one, but it's essential to stay on the right side of it. To do otherwise is not worth the financial and legal risk. Besides, for many expatriates, tax benefits are easy enough to achieve honestly. "Using offshore jurisdictions can have significant advantages while living as a foreigner in a new country," he said, "and they can also often provide significant tax and investment advantages if and when the expat returns home."
Conrad de Aenlle writes from Los Angeles about investment and personal finance issues. His blog on investing for MoneyWatch.com, "Against the Grain," can be found at http://bit.ly/NjaBa