Offshore Mutual Funds
Many of our
clients are very interested in hearing about the investment
opportunities mentioned in our newsletters and daily
updates. Of course, some clients are unfamiliar with certain
types of investment terms, have a fear in general about
offshore investments, or simply are not aware of the mutual
fund investments that are available. The reality is that
well known companies such as Fidelity Investments,
Templeton, Alliance, and other very good investment firms
all offer tax-free offshore mutual funds. In addition,
there are also some excellent investments firms in countries
such as the UK and Luxembourg that offer mutual funds that
Americans especially have never heard of simply because
these firms really do not want to be bothered registering
them in the US. But, they can be sound additions to
your investment portfolio. In addition, keep in mind
that many of these kinds of mutual funds or investment funds
may also be available through a number of retirement annuity
products as well. There is one very good 100 plus year
old insurance company from Europe offering this very same
kind of opportunity, so they are out there if you know where
to look.
What Is A Mutual Fund?
Most American investors are very familiar with mutual funds, but for those that are not, here is a brief explanation. A mutual fund is basically a type of investment vehicle that allows individual investors with a like minded interest to pool their money and have the benefit of professional money management. The professional manager has the responsibility of selecting stocks, bonds or other investments that are consistent with the fund’s goal or objectives. As an example, investors participating in the GT Global Healthcare Fund are doing so because they want to own a portfolio of stocks involved in the healthcare industry. In reality, they are a part owner (along with the other fund investors) of a very large investment portfolio. The portfolio may be a collection of 50 companies worldwide that are involved in the healthcare industry. To duplicate such a portfolio themselves, investors would need to commit a great deal of time and capital. But, with an investment of only $25,000 in the fund, the investor has the benefits of instant diversification and the knowledge that a professional adviser is managing the portfolio for them. Naturally, the fund manager receives a salary from the mutual fund firm and may also receive a bonus that is directly related to how well he or she manages the portfolio for the investors. All mutual fund companies charge a management fee for the services they are providing. Even so-called no load companies are getting their money from somewhere.
The
equivalent British term to the American Mutual Fund is
Pooled Fund or Open Investment Trust. In reality, the
open-ended trusts that can be seen listed in the London
Financial Times are the same type of investment vehicles as
the American Mutual Fund. To be sure, there are many
more terms and detailed explanations that go along with
this. The purpose here is for the reader to have a
basic understanding of a mutual fund type of
investment. I also want you to be aware that there are
a number of investments in Europe that have a different
name, but in essence work the same way as something you are
very familiar with.
Why Are Offshore Mutual Funds Tax Free ?
Well, the explanation for this is quite simple. Just
like some jurisdictions permit interest from bank accounts
to be tax exempt, the same is true for mutual funds.
Some of the more popular offshore mutual fund jurisdictions,
such as the Cayman Islands, Bahamas, Bermuda, Channel
Islands or the Isle of Man permit mutual funds to be exempt
from local taxation as long as the investors are not
residents of these locations. Mutual fund companies
use this to their advantage. All of the well-known
American mutual fund companies mentioned earlier have their
funds registered and based in one of these locations.
As an example, The Fidelity Investments Offshore North
America Fund might be the very same fund as the popular
Magellan Fund or Puritan Fund. The only difference is that
the fund is domiciled and is operated offshore. As a
result, there is no tax on capital gains or dividends for
the shareholder.
Why Have You Not Heard Of These Investments Before ?
Three reasons: fear, aggravation and the S.E.C or Securities
and Exchange Commission. The US Securities and
Exchange Commission prohibits offshore or non-US registered
funds from soliciting US investors. In theory, this is
to protect US investors from unscrupulous and unregulated
offshore fund companies and in my opinion is a valid
regulation. The regulations and requirements in some
jurisdictions regarding offshore fund companies range from a
highly regulated environment to none at all. Investors
therefore must investigate a fund company thoroughly and do
their homework. There are some excellent companies
operating offshore, such as Global Asset Management, Baring
Asset management, Fidelity Investments, and then there are
some crooks. You must certainly separate the good from
the bad. In all honesty, there are also a number of
very good trust or fund companies from Europe that simply do
not want to be bothered with all of the paperwork and filing
requirements of the S.E.C, just so they can market their
funds in the US. Part of this also has to do with
taxes. Many European funds operate on what is known as
a roll-up basis. This means that capital gains and
dividends are automatically reinvested back into the fund,
pushing up the share price in the process. No
distributions are actually made as with the US funds. These
type of funds are actually tax deferred because, the
investor does not have a tax consequence until they redeem
their fund shares five years later, ten years later or
whenever. You can be sure that the IRS does not like this
arrangement and the European fund companies are not about to
change the way they operate just to please the IRS. If
you currently own shares in a US mutual fund, even if you
request automatic re-investment of your capital gains and
dividends, you know that your annual capital gains are
reported and that you must pay tax on it. This is
regardless of whether or not the actual share price of the
fund has changed or whether or not you physically received a
check from the fund. This has got to be one of the
greatest tax scams in history and the IRS loves it.
You are actually paying tax twice on your US mutual fund
investment. Once every year that you own the fund and
of course again when you redeem your shares.
The other reason that you may not have heard about these
offshore funds is fear. Even though offshore funds
cannot solicit US investors directly, US investors are
certainly permitted to solicit them. Meaning, it is
perfectly legal for you to own shares in any of the funds
offered from Luxembourg, Isle of Man, Cayman Islands, Honk
Kong and elsewhere. However, recent hassles or scare
tactics regarding tax reporting issues and money laundering
efforts have made many offshore fund companies refuse to
accept American clients. This is especially true with
the investment companies located in Europe. Most
of these companies are tired of being harassed by the IRS or
the SEC to cooperate with tax reporting or to turn over
investor lists. If it is not a requirement in their own
country, why should they do it just because 3% of their
clients are American? It is unfortunate, but this is how the
US government agencies have gotten around the
constitution. It is far easier, and technically legal,
to put the fear of God into a foreign company, so much so,
that they will not take American clientele. Remember
what I mentioned previously. However, it is perfectly
legal for a US citizen to own shares in a foreign or
offshore mutual fund, annuity or to have an offshore bank
account. The problem today is finding a
company that is not afraid of the IRS or the SEC and that
will take an individual US citizen as a client. I do
know of a few companies in Europe that will do it, but they
are the exception to the rule.
How Can Investors Participate In An Offshore Mutual Fund ?
There are two problems that both can be addressed by
using the Offshore Trust, Foundation or Company
structure. One problem is something already
discussed. That is the refusal of many offshore fund
companies to take US citizens or residents as clients.
While many firms have a fear about this, for the reasons
discussed, they have absolutely no problem with a Trust or
Non-US company as the shareholder or beneficial owner of the
fund. So, while the US citizen is shunned, a
Panamanian Corporation or Trust from the Bahamas is welcome
with open arms as a shareholder. However, another
option is of course for the investor to obtain another
citizenship and another passport. In this regard, he
or she would be investing individually (and not necessarily
via an offshore company or trust) albeit as a citizen from
another country (see our other articles about dual
citizenship and obtaining a second passport).
The second problem US
investors have is taxes. Even if you find an offshore
mutual fund that will take you as a client, and while it is
perfectly legal under US law for you to own such an
investment, you still are required to pay tax to the US
government. This is true regardless of the fact that
there is no tax liability in the jurisdiction where the fund
is domiciled or if the fund is a SICAV or “roll-up” type
fund that does not make annual distributions. The
answer again is to own such an investment through a properly
arranged offshore entity. When you factor in the tax
savings, asset protection benefits and availability of some
excellent investment opportunities; Offshore Mutual Funds,
SICAV Funds, and Unit Trusts from the Isle of Man or the
Channel Islands are extremely appealing and offer the
possibility of returns not found in the North American
market.