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Many people hear the words “offshore banking” and think of tax evasion or other illegal activities. But there are perfectly legal reasons to open an offshore bank account. Offshore banking could benefit you, especially if you do business internationally.
Here’s what offshore banking is, how it works, and why you should consider it.
What is offshore banking?
Offshore banking is any banking activity that takes place outside of your home country. An offshore bank account can make it easier to conduct business in a foreign currency. It also allows you to take advantage of any financial security or tax benefits offered by another country.
Offshore banking is the most used by companies that operate internationally. However, if you reside in another country, it makes sense to open a bank account abroad where you live.
While there are many legal reasons to open an offshore bank account, the fact that offshore banking is associated with illicit activities should not be ignored. A large part of what separates a legal offshore account from an illegal one is disclosure. The IRS requires disclosure of all income, including international income, so hiding income and assets abroad is a crime.
How does offshore banking work?
If you are doing business outside of your country, having a foreign account allows you to participate in that country’s economy. You can use this account to make purchases, send and receive money, or save and invest money just like you would with a bank account in your home country.
Another attraction of offshore banking is security. Having money in a stable international account in a foreign currency can help you reduce risk, especially if the economy in your home country is volatile. This is even more attractive if your country is going through a period of unrest.
How to open an offshore bank account
Opening a bank account abroad is like opening an account in the country. First, you’ll need to find a bank that does offshore banking. Then you’ll need to prove your identification, residency, and banking history, often with notarized documents.
Here are some examples of documents you may need:
- Government-issued identification, such as a passport or driver’s license
- Proof of physical address, such as a copy of a utility bill
- Bank statements of the last year
Beyond documentation, foreign banks and governments work closely with law enforcement to combat illegal banking activity, so they may question you about the nature of your transactions.
Know that there are fees associated with opening a bank account abroad. These are often much higher than what you would pay to open an account at a local bank, especially if you need legal assistance to open an account. Along with the fees, the bank may require a high minimum deposit.
How is offshore banking taxed?
If you are a US citizen, income you earn both domestically and abroad may be taxable. According to Andrew Griffith, a certified accountant with more than 15 years of income tax compliance experience, “If a person must file a U.S. income tax return constructively, for that taxpayer, even if those sources they are outside the US.”
However, there are some exceptions. Griffith says a tax treaty involving the US or a decision by Congress to exclude this from taxation are two factors that could change your tax liability on foreign-earned income. The IRS provides a list of countries with tax treaties, as well as details of the treaties themselves.
How to disclose your income abroad
Disclosure is crucial to maintaining the legality of your banking operations. Griffith mentioned two forms that must be used to disclose foreign income:
- FinCen Form 114: FinCen is the Financial Crimes Enforcement Network of the United States Department of the Treasury. This form should be used if your total account balance exceeds $10,000 at any time during the calendar year.
- IRS Form 8938: File this if your total assets outside the US are $50,000 or more on the last day of the calendar year.
Filing these forms will help you stay in compliance. Whether you’re banking in Bermuda or Boise, the last thing you want is to get caught illegally evading taxes. “Failure to comply with these requirements can be costly due to the penalties and possible prison time imposed by federal law,” says Griffith.
Popular Offshore Bank Locations
While many factors go into determining the best offshore banking locations, there is one thing they all have in common: they are tax havens. A tax haven is any place where foreign companies or individuals can safely store money by paying little or no tax.
Popular tax havens include many Caribbean islands such as the Cayman Islands, the Bahamas, and Bermuda. These places have earned a reputation for security and secrecy. However, when it comes to offshore banking in the Cayman Islands or Bermuda, things are not the same anymore.
For the past two decades, popular offshore locations have worked closely with foreign governments to uncover illegal activities. While doing business in Bermuda or the Cayman Islands has many advantages, these British territories have their own monetary authorities that investigate tax fraud and money laundering. Still, these places have strict laws that require banks to keep account information private, which can be valuable to you.
Outside of the Caribbean, there are many safe and beneficial places to deposit your money. Hong Kong and Switzerland are known for their safety and tax benefits for foreign bankers. They have the added advantage of offering world-class banking services with links to large foreign markets.
Why should I use offshore banking?
Offshore banking can provide you with flexibility and security. With the right offshore account, you can easily do business in another currency and have money stored in an international location.
In financial centers like the Cayman Islands, Bermuda and Hong Kong, foreign investors pay little if any income tax. You can take advantage of these tax benefits and diversify your investments.
If you reside in another country or do business internationally, it may make sense for you to have an offshore bank account. Many countries provide financial incentives for doing business within their borders. If you decide to open an account abroad, make sure it complies with tax laws.
Offshore banking is not practical for everyone. If you want to improve your banking, it’s smart to start national with the best banking products in the US.
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