Offshore companies are highly versatile and advantageous financial vehicles, which can be used for many different purposes.
Online trading involves the buying and selling of stocks, forex, precious metals, commodities, and other financial derivatives. Each trader needs a broker in the jurisdiction and market where they want to execute their trades, along with a trading account.
There are two reasons experienced traders often use offshore companies to protect their forex trading accounts.
Using an offshore formation provides benefits not found in any domestic environment and effectively separates yourself from your assets. This strategy provides traders with the possibility of tax advantages and enhanced privacy by using a corporate account for transactions which ensures your name is not on any transactions.
In this article, we will explain how offshore companies can act as particularly efficient intermediaries for online trading.
Benefits
A forex account that is traded using a foreign company incorporated in an offshore jurisdiction benefits from:
Tax reduction
Enhance privacy
Asset protection
Fewer regulations
1. Tax Reduction
If you structure your offshore company wisely you are likely able to benefit from significant tax advantages by moving your entity to a country that is in a low or no tax environment.
Offshore jurisdictions offer tax advantages to non-resident entities that incorporate offshore. They become free from any local taxation and if all of their revenue comes from worldwide profits, they are able to remain tax-free until the revenue is distributed.
The only form of taxes that you will be required to make will be when the income is brought onshore, which will be dependent upon where you reside and the tax laws that govern that particular country.
2. Privacy
Privacy is especially important for someone trading other people’s money by means of a managed account solution or a PAMM.
When money managers are prospecting, and a prospectus is used to demonstrate their past performance, they would not want this to reveal their personal details.
A company in a local jurisdiction may be able to provide a limited amount of privacy protection. However, protection can be significantly improved by employing offshore companies to provide geographical separation.
3. Asset Protection
Offshore corporate structures help to remove assets that would otherwise be directly to tied you as an individual. Having assets tied to your person makes them more susceptible to being targeted by lawsuits or creditors or whenever there is an asset search.
Creating a separate legal entity ensures a level of protection by removing your name associated with the assets and any transactions made with the account.
Similarly, having your account held in a jurisdiction that is outside of where you live makes it even more difficult to get to because there is a second legal system and most offshore countries do not recognize local court rulings.
4. Fewer Regulations
Offshore companies operate in a financial landscape that has fewer regulations and oversight together with minimal reporting and financial requirements. This gives businesses more flexibility in operating their company while at the same time it reduces corporate expenses.
How to Use an Offshore Company for Online Forex and Stock Trading
Before we look specifically at how to use an offshore company for each different type of trading account we will examine how to use an offshore company for online trading in the more general sense.
The process is relatively straightforward:
Step 1
Set up an offshore company in a favorable foreign jurisdiction, preferably a zero tax or tax neutral jurisdiction with a high degree of financial privacy.
Step 2
Open a trading account with a broker in the name of the company.
Step 3
Appoint yourself as the company’s authorised trader, giving you the sole right to place the buy and sell orders on behalf of the company.
With this kind of structure in place, it is possible to significantly reduce your taxes and ensure greater confidentiality. The direct corporate taxes owed by the company on the profits would be minimal, so you just need to plan carefully to minimize the taxes you are personally liable for.
Here are some ways to do this:
- Majority of the profits earned by the company can be reinvested in the company itself or another offshore entity with little to no taxes incurred, thus allowing for rapid growth of capital.
- In the case that you do need to withdraw a small amount of the funds to your home country, they can be allocated to you as wages or commission. This would be the only portion which you are liable to pay income tax on in your home country, although the tax which is due can be reduced through allowable deductions.
- To ensure greater levels of confidentiality, the company can be owned by a Foundation that insulates you from personal ownership as well as the use of local nominee directors where the company is located
Let us now look specifically at the different areas of trading which lend themselves well to the this type of offshore structure. The process and steps described are generally true across all these trade areas, unless otherwise mentioned.
Trade Stocks and Shares Using an Offshore Company
With the recent high levels of volatility in these markets, there is great potential for intelligent investors to make significant trading profits out of these extreme movements. The aforementioned offshore structure for online trading works particularly well for trading stocks and shares.
In this instance, the trading account would need to be opened with a share broker. All brokerage contracts would be signed, and meetings would take place, offshore. This would ensure that the company is only liable for tax in the offshore tax haven of choice.
A director would be appointed who would grant you the rights to trade on behalf of the company. A monthly trading report should be submitted to the director who would confirm all the trades placed.
The process for withdrawing/reinvesting the trading profits would follow the same steps as previously mentioned.
Trade Futures and Options
There are excellent opportunities for substantial returns in the futures and options trading markets during this period of economic recession. Good futures traders have their eyes fixed on the longer term. They see that a depressed market is an opportunity to buy and sell mispriced futures and options contracts in the hope of making profits once the market corrects itself.
Once again, the exact same type of offshore structure can and should be used as an intermediary for trading futures and options.
Trade Currencies
There have been major movements and upheavals in the forex market due to the Covid-19 Pandemic which has affected each country differently. Some currencies have become hugely depressed (signaling buy opportunities for savvy investors), whilst others might be overvalued enabling immediate benefits through selling.
There has been a massive surge in online currency trading throughout 2020 and with that a search for finding the most appropriate offshore structure to protect those assets gained.
Fortunately, it is also possible to open a currency trading account through the highly efficient vehicle of an offshore company and follow the same steps which have been laid out above.
However, depending upon your nationality, residency and the offshore jurisdiction will determine the level of confidentiality, assets protection and tax savings that can be achieved.
Learn How To Protect Your Assets With The Strongest Offshore Asset Protection Structure In The World.
What About US Based Traders?
Offshore solutions for forex trading can be particularly beneficial for forex traders which are based in the US. Aside from the obvious tax benefits outlined above, there are other advantages. The US trading market is tightly controlled, with strict regulations and limiting terms. Using an offshore company for your forex trades can give you access to a much wider variety of foreign brokers and accounts with significantly better trading terms and conditions.
The difficulty is that many foreign brokers are reluctant to accept an offshore company as a client if its director, shareholder, or even beneficial owner is a US citizen. To get around this, you will need to first set up an offshore company with a nominee director who is a non-US citizen. Thereafter, you will need to form an offshore foundation or trust to act as the shareholder of the company. With this structure, you (as a US citizen) will be far enough removed that almost all foreign brokers will accept the company as a client, thus giving you access to a much wider range of opportunities.
It's important to remember that due to each countries different tax laws, CFC laws, tax treaties and regulations there is not a standardized approach. Each person's situation must be investigated individually. As foreign corporate entities, especially when using multi-jurisdictional strucutres is about getting the details right to prevent problems further down the road
Practical Examples of How to use an Offshore Dealing Company for Forex
If you engage in any type of trading, offshore company structures are ideal for this type of setup.
If you want to set up an offshore company to trade this is what you can do:
- Incorporate an offshore company (IBC) in a country of your choice whereby you are the beneficial owner
- An account is opened with under IBC with a broker that is used to access funds
- All profits can be held tax free (if you are American you may taxed depending upon your FIEA tax deductions)
- Funds can be transferred to a local bank account in a country where you are a resident of
- Your tax liability would therefore be only the income that is brought within the country where you live
- These funds can be reduced if you are a freelancer/self-employed individual (ie things like transport, certain goods and services, travel etc...
Requirements to Start
Opening an account will require due diligence and KYC requirements. Other paper requirements will include:
- Copy of passport
- Bank statement
- Proof of address
*depending upon the facility linking with credit or debit card
There will likely be other terms and conditions as well as banking documentation in certain jurisdictions. Each account requirement depends upon the location where the account is opened.
Opening Forex & Stock Dealing Accounts: Some Details
When opening a trading account the preferred method is to form an offshore company, either an IBC or a LLC, in a country where details of the company's owners are not required to be filed publicly.
The company is formed using a nominee director and/or shareholder to provide anonymity for the owners. Forex brokers use offshore companies to open accounts as recognize the advantages they gain in comparison to domestic accounts.
Non-US brokers are often hesitant of accepting accounts from US clients because of strict regulations of the regulations.
Regulations change from time to time, and all brokers are different, so it is important to understand your country's regulatory situation before opening an account.
Offshore Companies Provide Better Brokerage Services
Brokers typically hold institutional accounts in higher regard than those of individual traders. Accounts held by an offshore company are generally considered to be more substantial and tend to be given greater attention.
Corporate structures are better entities for holding and transactional accounts and decreases the liability of an individual who is engaged in investments, trading, and financial transactions with other entities.
This is primarily because a corporate entity takes on legal rights of an individual and so can enter into debts and liabilities and can form investment funds and conduct businesses with a number of other investors.
Exercise Caution When Selecting a Broker
When opening a trading account, it is better to do so in a jurisdiction that is well regulated. We suggest avoiding areas that may still have some untrustworthy or unreliable brokers. Locations that may not be recommended for opening a trading account, may, however, be a good choice for opening an offshore company to hold your account. The differences are in the regulations and the financial environment of that specific offshore country.
Seek Local Tax Advice
Since there are different CFC rules for each country, and trading profits in some jurisdictions may be taxable as locally earned income, it is important to get advice from a tax adviser who is competent and experienced in international tax laws before opening an offshore company.
An offshore company should not be formed with the intention to avoid all taxes, since this strategy is likely to fail.
Careful planning is essential because a small oversight in the way an offshore company is structured could result in it being ruled invalid.
Under Australian law, for example, profits earned by an offshore Forex trading company in which an Australian resident holds control, ownership, or receives benefit, profits will generally be regarded Australian for tax purposes.
Brokers are not usually involved in giving their clients tax advice. They also do not specifically report the income of their clients to specific tax jurisdictions.
This is why it is important to seek the advice of a tax accountant or lawyer who is knowledgeable about rules for CFCs and offshore company structures.
To Recap: Why is it Better to Use an Offshore Company for Trading?
Trading via an offshore company has several practical advantages mentioned above each of which will not be found in dmoestic accounts
- Offshore companies can be used to defer, minimize, or even completely eliminate taxes that are otherwise incurred on the trading profits. The greatest tax advantages can be obtained by using an International Business Company (IBC) in a zero-tax offshore jurisdiction.
- Trading via an offshore company will ensure limited liability for the owners.
- Depending on the structure and jurisdiction used, offshore companies can provide much greater levels of confidentiality and financial privacy.
- A trading account creates a distinction between your primary business and personal accounts.
Takeaway
If you are a Forex trader with steadily increasing transactions, it may be time to consider the advantages offered by placing your accounts in offshore companies.
If you should later decide to start trading with assets from other people, you will already have the private structures set up to facilitate success.
Contact us to learn more about how an offshore company can protect your share.
