Make Sure You’re Compliant with Your Offshore Investment Assets
While there is a great deal of discussion taking place about the ethical use of tax havens and offshore investing, the fact is that there are a number of provisions within U.S. tax laws that motivate investors to acquire international holdings and place assets with offshore banks.
The underlying reasons for the activity can range from a desire to use currently legal strategies that help to reduce domestic tax liability to simply wanting to participate in an investment that is not available within the United States. Many of the current policies and procedures that make offshore investments worth considering are based on specific U.S. tax laws and acts that were intended to promote this very activity. Here are a few examples.
Foreign Account Tax Compliance Act (FACTA)
The basics of this particular U.S. law is that individuals and companies with certain types of foreign investments that are worth more than a certain amount must report those assets to the Internal Revenue Service. On the surface, this looks like a workable situation, since it focuses on assets that are worth a great deal of money, and would result in the generation of a significant amount of tax debt.
The key to understanding the provisions of FACTCA and how they will actually support investors in making offshore investments is looking closely at the types of investments involved and the threshold amounts associated with each. Those thresholds actually create a situation in which investors will benefit by diversifying those foreign investments, keeping the amount of investment in each asset under a certain amount, and spreading the offshore investments over a wider range of nations.
Bank Secrecy Act
The terms of the Bank Secrecy Act require U.S. citizens to file what is known as a Foreign Bank Account Reporting or FBAR when that taxpayer has what is known as signature authority over one or more accounts associated with a banking institution in an offshore location. The act further states that if the taxpayer has a financial interest in one or more offshore accounts, it is necessary to file the FBAR with the annual tax return.
Furthermore, when one or more accounts are involved, the focus is on the aggregate amount of all those accounts; should the combined balances exceed a certain amount at any time during the tax year, they must be reported. Compliance with this act would encourage investors to purchase and hold offshore assets up to the threshold amount required for reporting, as a way of enjoying the best possible calculation of taxes due on those assets.
National Securities Markets Improvement Act of 1996
This act provided the basis for the establishment of a new type of offshore investment fund that was not covered under the terms of the Investment Company Act of 1940. Essentially, the provisions of the 1996 act made it possible for managers of unregistered domestic investment funds that were limited to no more than 100 investors to create offshore funds that were free of that restriction. Best of all, those offshore investment funds could include U.S. investors, if those investors are classified as ineligible for participation in the domestic fund. Thanks to the structuring of the act, it is possible to invest in these offshore funds and enjoy a significant level of return.
Keep in mind that U.S. tax laws as they pertain to offshore investing are under close scrutiny and are likely to change significantly over the next few years. In fact, FACTA has already minimized some of the incentives for offshore investing even as the provisions within the act expand the potential for other offshore investment strategies. With so many clauses included in various sections of the current tax code, it will be some time before investing in offshore enterprises becomes impractical for U.S. based investors.
In connection with requests to Karlsberg International Insurance Company (KIIC) to obtain information on the insurance products and services being offered by KIIC, understand that KIIC Representatives are not tax or legal advisors and do not provide advice with respect to any insurance plan, policy, or trust structure. Consult with your own tax and legal advisors.