There have been many common misconceptions often associated with the offshore and onshore bank accounts and these may have created confusion concerning their use and their differences.
The historical reason for maintaining an offshore bank account in a foreign country was for an individual to avoid taxes on income or investments. This ‘loophole’ in tax evasion was encouraged by the tight secrecy of the Swiss banking system and the lack of extradition treaties with Caribbean island nations that made it possible for those individuals to indulge in a variety of unlawful behaviour which included avoiding taxes on windfall profits to money laundering.
These foreign banks were usually situated in countries where regulations were lax, and this provided money laundering opportunities for criminals. However, the US has recognised this and sought to clamp down on these activities by adopting laws that required individuals to report income in offshore accounts, limiting the benefits that were once the appeal of offshore banking. However, corporations with business operations overseas are exempted from this ruling.
Although such misconceptions are understandable, it has created a stigma on offshore banking and its benefits as many corporate clients have been benefiting from this service. An example of why a corporation may need an offshore banking account – If the company is incorporated in Hong Kong and serves only local clients, then having an offshore bank account would be pointless. But if the company is incorporated in Hong Kong with an international client base, having an offshore bank account in a jurisdiction of your client base may be beneficial. However, that is not the only reason one may need an offshore account. The following will seek to explore the differences between the two account types.
Onshore vs. Offshore: What is the difference?
- Onshore banking:
A bank situated in the home country of the depositor and is subjected to the taxations, legislations and regulations of that country. Onshore banking is generally the regular day to day banking of the banks in which a customer deposit its savings and funds. The activities and exercises of an onshore bank run under the guidelines and rules of governing authorities and institutions of the bank’s location.
- Offshore banking:
The physical remote location of the bank that differs from the depositor’s domicile. The financial concept of either depositing assets which are in the form of hard currency under the safekeeping of a bank account or taking a loan from a bank which is based in an offshore financial centre. The offshore bank is also limited by the license which varies for each jurisdiction) to receive deposits and lend monies to sources out of the jurisdiction where it is physically located, typically in a low tax jurisdiction (or tax haven). Certain banks allow for remote bank account opening.
Requirements and Process
- Onshore account:
A process where the individual visits the bank of their choice and fills up the required forms. After the completion of the forms, they will proceed to submit the documents along with an identification proof as well as the proof of address. Once the account has been established, they will then proceed to deposit the initial amount.
- Offshore account:
The application is mostly made remote due to the difference in the domicile of the applicant and the bank’s location. Due to the increasing international compliance and anti-money laundering requirements and checks, offshore banks would also require additional documentation which includes the identification, proof of address and source of income.
The following table is a brief overview on the differences between offshore and onshore banking:
|Confidentiality of Information||Information cannot be accessed by authorities or government regulators except a few exclusions.||Regulations and policies that require to be strictly adhered to.|
|Constant||The account remains unbiased in the event of economic fluctuations, political amendments or changes in regulations and policies etc.||All predicaments and conditions mentioned have an impact on the maintenance of the accounts.|
|Maintaining Deposit Balance||The depositor needs to retain a large amount in his account at the time of opening.||The account maintenance amount is relatively smaller compared to that of offshore banking.|
|Flexibility||More flexible as it handles the services according to the requirements of the depositor and may comprise of highly personalised actions.||No flexibility in the account and rarely have personalised attributes.|
|Profile of Clients||Clients who are in international business.||Clients typically belong to its inbound territory only.|
|Admissions Criteria for Customer||Only extrinsic and non-resident clients can introduce an account.||The traditional admission criteria are to be followed.|
|Levy Benefits||Offshore banks levy no tax upon their depositors.||Bank may charge a fixed amount of tax and expense on their customers from time to time.|
|Customs and Rules||There are limited rules and customs in offshore banking||Banks are required to adhere to the rules and regulations of their home country.|
Reasons for Offshore Banking
Asset protection can take a few forms. While there are lots of onshore choices, offshore vehicles are usually far more effective for the goal of asset protection, especially in countries where the financial system is not as secured and robust. Hence, many entities seek better alternative banking options away from their jurisdiction, which they feel are inferior.
Establishing an Offshore banking account has become more difficult in recent years. Why?
Although these types of account have its benefits, not all banks are open to this method of operating, and even well-established clients who have this interest might not be able to request for these offshore banking services. It could be because compliance departments are given immeasurable power due to more stringent due diligence checks required on the clients and as such their judgement of applications is not based on commercial factors such as profitability rather than based on the credibility of the applicant.
Besides the applicant’s credibility, the activity and type of business are also taken into consideration. Applications for accounts in ‘sensitive industries’ such as cryptocurrency are usually outright rejected. The banks are also no longer willing to open accounts for every type of company. An example would be the American companies which were once extremely popular but are now shunned by the banks primarily due to the Foreign Account Tax Compliance Act (FATCA) regulations requiring all non-US foreign financial institutions to search their records for customers with a connection to the US, to report the assets and identities of such persons to the US Department of the Treasury.
Although offshore banking is often vilified in the media, it doesn’t mean that all offshore bank accounts are only about evading tax, committing fraud or conducting any illegal businesses. The average person often riles against the offshore banking industry without fully understanding offshore banking entirely. Offshore banking is not only legal, and it also comes with its benefits, as seen in this article.
Your offshore banking needs answered
However, not everyone is eligible to open an offshore bank account. If you have an international presence, regional presence in the region you would like to open an offshore bank account, then you may consider having an offshore bank account. Contact us today to find out now whether you are suitable and eligible to open an offshore bank account.