U.S. or Offshore Investing - Issues to Consider:
Investment security and transparency
Choice of investment products and liquidity
Usually you are not taxed at source on investment gains in an account held offshore. It is left up to you to pay any taxes you may owe in your country of residency or citizenship.
If you reside outside the U.S. and are not a American citizen, you will have tax withheld on gains from certain U.S. investments held in a U.S. account. You are, however, exempt from most portfolio capital gains and certain interest income.
At IAM, we put together tax-efficient portfolios for our non-U.S. clients who prefer to hold a part of their investments in a U.S. account.
You may be subject to U.S. estate tax on the U.S. part of your portfolio held in the United States. However, there are ways to legally minimize or eliminate these taxes through trust arrangements or by holding investments that are not considered to be U.S. assets, or simply by transferring your account outside the U.S. before you are subject to the tax.
Certain tax treaties, such as the U.S.-Canada treaty also help mitigate the effect of the estate tax, it is important that you and your financial advisor are aware of such provisions.
It should also be noted that the U.S. estate tax is currently in a state of flux. Changes are being contemplated that may drastically alter or even eliminate this tax within the next few years.
Investment security and transparency
The United States investment community is far more regulated than the offshore community. All U.S. Registered Investment Advisors and brokers are required to be licensed and most investment accounts are protected by SIPC insurance in the case of the failure of the institution holding the account. American markets and investment products are also highly regulated whereas certain offshore investments, such as hedge funds, are not.
Transparency and security are serious issues and need to be considered when making the choice as to where to invest.
The U.S. investment market is highly competitive and therefore usually offers better value to the investor than the offshore market. Offshore investment and insurance companies often charge 5% or more in up-front fees and sometimes have lock-in periods of many years. Transaction fees are also usually higher offshore than through a U.S. discount broker. In addition, there may be considerable surrender charges and hidden fees as high as 7% per year associated with offshore products.
These disadvantages need to be weighed against the fact that offshore mutual funds may be more tax-efficient, and therefore may have lower management fees and higher after-tax yields than their U.S. counterparts.
Choice of investment products and liquidity
The U.S. is the largest portfolio investment arena in the world; as such, it offers the greatest liquidity and choice of products. In an offshore account you may be limited to mutual funds or to only a narrow range of investment options. Due to this choice of products and liquidity, a U.S. account offers the considerable benefit of allowing a financial advisor to easily customize a client's portfolio to their specific investment goals and needs.