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Offshore holdings: Legitimate uses and reporting requirements

The global media has about exhausted the number of angles they can report on the so-called "Panama Papers." The leak has become synonymous with using offshore accounts and companies to avoid tax obligations.

Offshore accounts have been in and out of the news. The prosecution of Swiss bank giant UBS was a starting point. More recently, implementation of the Foreign Account Tax Compliance Act in the U.S. and progress on a Common Reporting Structure by the OECD have received coverage. Information is flowing more freely between countries making it much more difficult to hide offshore assets.

Legitimate uses of offshore entities

Here is something that is rarely mentioned in reporting: offshore accounts and entities are not in themselves illegal. Often they are essential to running a global business or purchasing property in another country.

A few reasons you might need an offshore entity or account include: 

  • Purchasing property in another country - for example, an American cannot hold real estate in her own name in many countries. If planning to retire to Mexico, you would need to set up a Mexican trust, an offshore entity, to hold your dream retirement property.
  • Asset protection - a corporation or LLC might benefit from the use of an offshore structure after fighting a number of frivolous lawsuits. It doesn't change tax obligations, but does put up a ring fence against plaintiffs looking for a quick buck.
  • Diversifying investments - any second year finance student understands that the best way to protect investments is diversification. For instance, when the BRICs were booming, gains in these countries offset losses in the U.S. recession.

Expats living in the U.S. often keep bank or brokerage accounts in their home countries as well. They may also have relatives living back home who have listed them as signatories on accounts with significant assets.

These are all legitimate uses of offshore bank accounts and offshore holding companies. Learn about the reporting requirements. Even signatory authority can trigger the requirements. They vary based on the type of account or entity and the value of assets. Ensuring the proper reporting is essential.

An error can lead to stiff civil penalties and back taxes. If you have only recently learned of a reporting obligation, programs are available to fix mistakes and limit liabilities.

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