"It's not you, it's your government."
It was a brilliant autumn day in October 2007. I was having lunch on Vienna's Ringstrasse with a vice-president of one of Austria's leading private banks. He was explaining why the bank's parent company had made the wrenching decision to stop accepting banking business from U.S. resident investors.
The bottom line, he told me, was that the bank's legal advisors believed that it was too risky to accept further U.S. business. This was because of the increasing number of U.S. laws and regulation that affected the bank both inside—and out of—the United States:
- The USA Patriot Act, which permits the U.S. government to confiscate the U.S. assets of foreign banks, without convicting, much less accusing, the bank, or any of its depositors of a crime.
- Qualified intermediary rules, which impose a draconian 30%-31% withholding tax on both income and gross sales proceeds for U.S. securities owned by foreign banks. The tax can only be avoided if the foreign banks enter into one-sided qualified intermediary agreements with the IRS to enforce U.S. tax laws.
- Securities laws enforced by the U.S. Securities and Exchange Commission that prohibit the marketing of non-U.S. registered securities to U.S. persons. The SEC has an extraordinarily expansive definition of what constitutes "marketing." As a result, some offshore banks no longer permit U.S. residents to purchase foreign securities, even if those orders are unsolicited.
Fortunately, there are several ways to legally avoid these restrictions:
- Have a legal residence outside the United States. Offshore banks are more willing to accommodate non-resident U.S. citizens than those living in the United States. If you're a U.S. citizen with a legal residence outside the United States, investment restrictions offshore banks impose on U.S. residents won't apply. You'll need to prove that you're legally resident offshore; e.g., in the form of an official identity card or residence visa and possibly a driver's license and/or utility bill with a non-U.S. address.
- Conduct transactions in person. Most offshore banks place fewer restrictions on instructions conveyed by a U.S. resident in a personal visit than those originating in the United States. You may also be able to arrange that after you leave, certain trades will occur automatically, depending on market conditions.
- Have the portfolio managed by your bank or an independent portfolio manager. Once you sign a portfolio management mandate, investment instructions will no longer originate in the United States. Most offshore banks impose fewer investment restrictions on such portfolios.
- Invest through non-U.S. insurance or annuity policy, or an offshore entity such as an offshore corporation, offshore limited liability company, or offshore trust. These contracts and entities often eliminate offshore investment restrictions, but have significant tax and reporting consequences.
There's also one thing you should NOT do when dealing with government-imposed obstacles to offshore investing. Many offshore banks recommend that you open your account in the name of an offshore corporation, with the shares held by an offshore trust or offshore foundation. This is structure triggers numerous tax "land mines" that may result in much higher taxes than if you open the account in your own name, or in the name of a "fiscally transparent" entity.
Finally: don't let these obstacles prevent you from investing offshore. As the restrictions tighten, it's more important than ever to get a portion of your wealth out of the United States, away from litigious lawyers, nosy competitors, and SEC investment restrictions.
Copyright © 2008 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society.)
