Am I Breaking The Law?
One topic of conversation during last week’s Live And Invest In Panama Conference had to do with Panama’s position as an offshore haven.
Is Panama a good place to set up an offshore entity?
Is it safe?
Is it even legal?
Here’s the most important thing to understand about offshore entities… no matter where in the world you’re considering forming one:
They are not illegal, neither to set up nor to use.
Yes, the activities of the entities and of the shareholders can break the law… but—as I assured attendees in the room with us last week in Panama City—the entity itself (a corporation, a trust, a foundation, etc.) is a perfectly legal wealth-building and -protection strategy.
The second important thing to know about offshore entities is that they can benefit even us ordinary folks.
Don’t be afraid to use an offshore entity for a legitimate purpose, such as…
1. Holding Property In Another Country
Many people use a local entity to hold real estate in another country. In fact, in some cases you can be required as a foreigner to hold title to a piece of property in another country.
The easy example is an American buying property in Mexico. A foreigner can’t hold title to a piece of property in his own name in Mexico if that property is located within 50 kilometers of the ocean. In that case, you must (that is, you are required by law) use a Mexican fideicomiso, which is a Mexican trust… an offshore entity by definition.
Other countries impose restrictions on the foreign ownership of real estate that can also require you to use an offshore entity.
In addition, you may also want to use an offshore entity to…
2. Minimize Probate When You Die
Owning property in your own name in another country means that when you pass away your heirs have to deal with probate in that country. In some cases, this can mean navigating inheritance laws that require assets to be distributed based on local law, which may or may not match your wishes.
Using an offshore entity that is also offshore to where the property is located can eliminate probate in the country where the property is based. If you use an entity from a jurisdiction that allows for direct inheritance of the entity or its shares, you can avoid probate altogether.
For someone who owns multiple properties in multiple countries, using an offshore holding company is simply a practical administrative strategy, nothing more.
3. Provide Some Asset Protection
In the legitimate offshore world, the word “offshore” is synonymous not with illegal but with asset protection.
A corporation or an LLC can provide asset protection; however, if asset protection is the goal, an offshore trust can be the most effective entity. Frivolous lawsuits are a national pastime in the United States, and the best way to protect your assets and keep them from being vulnerable to attack from some vengeful plaintiff is to move them offshore with the help of an offshore structure.
Holding your stock portfolio in an offshore LLC doesn’t change your tax obligation in the United States, but it does put a barrier between the estimated 15 million frivolous lawsuits filed every year in this country and your hard-earned assets.
4. Provide For Investment Diversification
Maybe you’re not concerned about asset protection. However, you should be keen to diversify your investment portfolio internationally. Setting up an offshore entity can facilitate this.
Most offshore stock brokers and mutual funds won’t accept U.S. persons as investors thanks to concerns over associated Security and Exchange Commission (SEC) regulations. However, they will accept offshore entities as clients even if those entities are owned by Americans.
Using a structure allows the brokerage company to comply with financial regulations and allows the American structure owner access to a broader scope of global investments.
5. Operate An Active Business
Sometimes an offshore corporation is an actual company.
That is, an offshore corporation can be used to run a business in another country or to separate a main business back home from an offshore subsidiary. You incorporate your business overseas for the same reasons you incorporate in the United States—to limit the liability of the shareholders of the company (which brings us back to asset protection).
Some of the media outlets that covered the Panama Papers and then the Pandora Papers went out of their way to make the point that owning an offshore entity doesn’t necessarily equate to being engaged in any illegal activity.
However, others took the leaked documents as an opportunity to paint all offshore entities with the same nefarious brush.
The truth, however, is that having an offshore entity isn’t illegal and can provide important benefits for even average people trying to protect their assets and provide for their future retirement.
Far from scandalous, these benefits can sometimes be simply practical and administrative.
That is, dull.
Lief Simon