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Global Tax Forum: Offshore Trading Accounts Are of Limited Value to U.S. Citizens

People set them up to try to avoid taxes. But it won't work.

Unless you're dying to get into the Pakistani market or get your hands on some exotic foreign security, you probably don't need an offshore trading account.

Many U.S. investors do set up these offshore accounts, but mostly for the wrong reason -- namely, tax avoidance. And that won't work. U.S. citizens are taxed on worldwide income, regardless of where the money is parked. So dodging taxes is not an option.

In fact, an offshore account must be reported directly to the

U.S. Treasury

, says Nick Morrow, foreign tax specialist at

Martin Geller

, a New York accounting firm.

When you file your tax return,

Schedule B

- Interest and Dividend Income

, Part III, line 7a asks whether you have "an interest or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account or other financial account." If so, you must file Form TD F 90-22.1, which goes directly to Treasury.

On the legit side, offshore accounts can be a way to get into emerging markets or establish residency in another country.

And if you're contemplating starting a business or buying a home in another country, a trading account or bank account in that country may help expedite these transactions.

But for U.S. citizens, in most instances, offshore trading accounts provide no benefit and may even be detrimental, since many foreign countries do not offer investors the same protections they get in the U.S.

Non-Citizen Benefits

Overseas trading accounts make much more sense for citizens who are precluded from owning certain securities in their home countries, says Shawn Samperi, manager in the investment advisory division of


in New York.

U.S. investors generally don't have this problem because American depositary receipts (ADRs) are available on our exchanges. ADRs are certificates held in a U.S. bank that represent a specific number of shares of a foreign stock traded on a U.S. stock exchange. Through ADRs, U.S. investors have access to many foreign companies in developed markets. And they can always get emerging-market exposure through mutual funds.

Access to foreign securities is "a bigger an issue for residents of countries like New Zealand, Australia and Japan," says Samperi, because there, restrictions limit the foreign securities, including U.S. securities, that these residents can own. To circumvent this limitation, citizens of these countries can open accounts in other jurisdictions that allow them to buy U.S. securities.

For instance,

Charles Schwab Cayman Ltd.

., a division of

Charles Schwab


, will set up accounts for non-U.S. residents or citizens, says spokesman Glen Mathison. The account is based outside the U.S. but allows customers to trade in the U.S. markets. Schwab does not permit U.S. citizens to open these accounts because there's too much potential for abuse.

The bonus for non-U.S. residents or citizens is that they are not required to pay tax on any capital gains or interest generated from U.S. securities. Dividends are taxable, though, so there's a 15% to 30% withholding on a non-citizen's dividend income, depending on his country's treaty with the U.S.

Cost and Risk

Even if your reasons are sound and your motives pure, opening an offshore account will be more expensive than your U.S.



account. "It's fair to say that the amounts charged overseas are a little more," says Barry Engel, a principal at the law firm

Engel Reinman & Lockwood

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in Englewood, Colo. Fees can start at around 1% of assets and rise according to circumstances.

And these accounts are very risky. Accounts in foreign countries do not have the regulatory protections offered in the U.S. "The SEC

Securities Exchange Commission


National Association of Securities Dealers

and the


work to ensure that that brokers play by the rules and don't screw you. You don't have that in other countries," says Jay Strum, a securities litigation partner at

Kaye, Scholer, Fierman, Hays & Handler

in New York. Without these agencies and the regulations they enforce, it's easier for brokers to take advantage of you and your money.

For asset protection purposes, you don't want to leave this account dangling in the wind. You're better off setting it up in an offshore trust. In that case, the trust's custodian would do the trading for you. For more on the protection offered by these trusts, see our kick-off

Global Tax Forum.

If you're still thinking about opening an offshore account, the easiest way to set one up is through the U.S. office of a foreign bank, says financial adviser Robert Levitt of

Levitt Novakoff

in Boca Raton, Fla.

But if you're a U.S. citizen, why risk it? "We're living in what should be the safest country in the world," says Vallone.

More Exotic Locales for Your Trust

In our first Global Tax Forum, I weighed the pros and cons of establishing an offshore trust and listed a few jurisdictions that have favorable asset protection policies. In true


style, our readers offered more. Below are a few more exotic locations to research if you're thinking about setting up an offshore trust.

Rob Brocklebank

was "unhappy" that I left out his abode, Guernsey, off France's Normandy coast. Sorry. Here's a

map to help you find Rob's homeland. He claims the set-up costs for trusts are not that expensive and the country "has a stable political regime, very good laws and is a great place, although not as warm and sunny as the Caribbean!"

And don't forget Bermuda, reminds

Mark Holman

. "Compared to some of the other jurisdictions the article mentioned, I would place Bermuda higher up on the short list," says Holman, a former resident of the Caribbean islands.

Scott Clark

says, "Belize is a booming offshore haven for legal trusts." His email included a link to the

Banana Beach Resort, in case I need a place to stay while setting up my trust in the Central American nation.

Our readers are so thoughtful.

The Global Tax Forum appears every other Wednesday. Send your questions and comments, along with your full name, to

Global Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.