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The good old days of stashing cash in an offshore account and moving on to the next assignment are long gone for expats.
FATCA and the Common Reporting Standard (CRS) have ended any hopes of shrouding income and investments in secrecy so the tax man can’t find them.
So what is a good investment for expats?
Access to money is now the priority.
Some advisers preach portability – the ability to move expat investments worldwide with the least hassle, but this argument has a flaw.
When an account is closed and moved, expats lose money and generate more commission for the moneymen.
For most expats, the best investment strategy is anchoring their finances with a stable government, solid economy and internet-accessible financial services.
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Tax-free or tax efficient?
As an expat, forget investing in Britain. Although pensions, ISAs and other tax-incentivised investments offer great returns, they are not available to expats.
Countries with a no-tax system charge no personal taxes, like income or capital gains taxes. Around 16 countries charge no personal taxes:
- The Bahamas
- Cayman Islands
- St Kitts & Nevis
- United Arab Emirates (Including Dubai and Abu Dhabi)
- Western Sahara
Several of these countries fall outside the expat desire for a secure economy and government, so are not places to leave large sums of money, so that list of 16 is already fewer than ten.
Low-tax countries tend to tax income generated within their jurisdiction, but not from overseas earnings.
Find a complete list of global tax rates here
Working with FATCA and the CRS
FATCA is short for the Foreign Account Tax Compliance Act, which came into force over a decade ago in the USA.
Under FATCA rules, banks outside the US must tell the Internal Revenue Service (IRS) about any bank accounts or investments that US nationals have outside the US.
CRS stands for the Common Reporting Standard, a version of FATCA imposed by more than 100 countries, excluding the US.
CRS works similarly to FATCA in that foreign tax authorities share data about customers from abroad.
For instance, the Australian tax authority would tip HM Revenue & Customs about the income and investments a British national has in Australia – and in return, HMRC would tell the Australian authorities financial information about their nationals in the UK.
Expats cannot avoid FATCA, and the CRS as the reporting is automatic. Once received, the information is checked against tax filings to ensure no discrepancies and that the right amount of tax is paid.
Avoid investing with a bank
It’s easy to place your current and investment accounts with the same bank. Doing so avoids a lot of hassle in searching out suitable investments. However, bank investment funds are invariably expensive and often perform poorly.
Fees are one area where investments can lose money – for instance, professional fund managers like Vanguard charge a 0.1 per cent management fee yearly, and a typical bank fee would be two per cent of the fund value. Clearly, over several years the bank fee is much higher.
Need Help with your Finances?
Am I an expat?
Deciding if you are an expat is a matter of fact rather than an opinion.
For example, a British taxpayer must remain outside the UK for one full tax year to become a non-resident.
If they leave on April 6 – the start of the tax year – they are not non-resident until the tax year has ended on April 5, a year later. Leaving part way through the year, say September 15, is more complicated.
An expat leaving on September 15 does not become non-resident for tax on April 5 the following year, but on April 5, 19 months after a full financial year has passed.
At the other end, the country where you call home will likely tax an expat after they have stayed there for six months.
Double taxation and expats
Double taxation is when the same income or gain is taxed in two different countries.
Most countries have stacks of double taxation agreements (DTA) with other countries. The principle is under a DTA, one country claims tax residence and taxation rights over an expat’s finances and the second country credits tax paid in the first country against any liability.
It’s a good idea for expats to check the DTA status of any offshore investments before making a commitment.
Learn more about double taxation and the difference between domicile and residence.
So what is a good investment?
A good investment for expats depends on several factors:
- Where you live
- Your tax, double taxation and residency status
- Tax levied in the place where you live
- Taxes levied where you keep your money
On top of these factors, normally sensible investing applies, like considering diversification, the length of time you plan to invest, fees and the state of the economy.
The types of investment offered differ between countries – for example, the Qualified Recognised Overseas Pension Scheme (QROPS), an offshore pension for expats, is available in only 28 out of around 200 countries listed by the United Nations.
As for what makes a good investment for expats, that’s a personal choice once the pitfalls have been avoided.
What’s a good investment for expats FAQ
Offshore simply means investing in a country other than the one where you are a tax resident.
All investments come with an element of risk, regardless of how stable the economy and government of the country where they are based.
Low-risk countries are places like the USA, Japan and the UK.
When considering an offshore investment, think about tax benefits, access, costs and regulation.
Offshore investing is legal, provided any income or gains are timely reported to the tax authority.
Yes. Offshore investing allows expats to pick and choose investments from various countries.
Anyone can invest offshore, but many financial firms set a minimum value for investment due to the cost of providing offshore financial services.
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