An offshore bank account is one of the most traditional ways to start your overseas journey. It’s a very useful tool if you plan to invest in another country, buy foreign real estate, or want to move some of your assets out of harm’s way here in the US.
Unfortunately, it is no longer as easy as it once was for US clients. Thanks to laws like the Foreign Account Tax Compliance Act (FATCA), many banks don’t want to work with Americans.
But no longer easy doesn’t necessarily mean impossible. In this article, we’re going to talk about what offshore banking actually is, why it matters, and the ways a US client can open an offshore account.
What is an Offshore Bank Account?
Although it might sound exotic, an offshore bank account is simply a bank account located outside the account holder’s country of residence.
We work almost exclusively with US clients, meaning that opening an account in Canada or Mexico would be considered “going offshore,” since they aren’t in the US.
One of the reasons that “offshore banking” might sound like something pulled out of a James Bond film is the leading role Switzerland played in early “offshoring” going back centuries. In those days, wealthy European merchants and royals would move their money to the Alpine country for protection and privacy.
During the 20th century, offshore havens like Luxembourg, Cayman Islands and Bermuda (among many others) got in on the game by highlighting privacy, low taxes, and planning solutions for US clients.
Those days are long gone for two reasons:
- Thanks to the long arm of Uncle Sam, most offshore banks aren’t willing to accept US clients except under very limited circumstances.
- Thanks to a raft of information exchange agreements between the US and different governments, it’s virtually impossible to stash “secret” money in an offshore bank account.
Swiss Bank Accounts for Americans
One country that is still very welcoming to Americans is Switzerland. You will find plenty of banks willing to open an offshore bank account for you.
That’s not because we’re biased in favor of Switzerland, or against other countries. It’s just that, for wealthier US clients, Switzerland continues to roll out the red carpet.
Taking on a US client involves a lot of compliance headaches for any offshore bank. That’s something most other countries just aren’t willing to take on anymore. But Switzerland does so long as you move over enough money to make it worth their while.
Given how much we talk about how to protect yourself against bank bail-ins, the main concern for many of our clients is to find a bank that is safe.
How did Swiss banks get their reputation as a place for safe and secure banking options? And do they still live up to it in today’s ever-changing financial landscape with ever more regulations and rules?
You can find more information here: Are Swiss Banks Safe?
Benefits of Offshore Banking
#1: Financial Diversification
One of the main reasons for offshore banking is financial diversification. Holding assets — usually in a different currency — reduces risk linked to economic and political trouble in any one country. Offshore accounts can also be the first step to accessing investments not available at home.
#2: Tax Efficiency
Setting up an offshore bank account can be the first step in (legally) lowering your tax bill. However, since US clients are taxed based on their citizenship, this can only be done as part of a holistic plan.
#3: Enhanced Privacy
Privacy is a major draw of offshore banking. You can safely assume that information about all of your US bank and brokerage accounts is available for sale by data brokers. That’s simply not the case in Switzerland (and other countries) that prohibit financial institutions from selling your personal information to marketers.
Although not as private with respect to government reporting as it once was, Switzerland still leads the pack in this regard; it still offers one of the strongest banking secrecy laws in the world.
#4: Asset Protection
Offshore bank accounts can be a first line of defense in asset protection. The government can freeze your US accounts at any time and without any warning. This can’t be done with assets held overseas. If US authorities want to grab those holdings, they have to go through a legal process to seize them (which isn’t always guaranteed). At the very least, you’ll have an opportunity to defend yourself.
But please note that if a US court order requires you to bring the money back to the US, you must comply. If you’re looking for stronger asset protection, you need a stronger wealth protection plan that includes proper structuring.
#5: Investment Opportunities
An offshore bank account can serve as a first step to access to a wider range of investment opportunities not available in the US.
How to Open an Offshore Bank Account
For US clients, setting up an offshore bank account requires careful planning. Here’s what you need to know.
Step 1: Choosing the Right Bank and Country
Choosing the right place is key for offshore banking. Some factors include:
- Why are you looking for an offshore bank account. Is it to access opportunities, as a safe haven. Or because you’re an expat who needs a local account for day-to-day expenses?
- How safe are the banks. At the very least, you need to see an up-to-date annual report that lists key metrics. (Unstable banks often don’t post their report or are out of date.) Look specifically for their Tier-1 capital ratio. This is a standard way of measuring stability. Anything more than 15% for a commercial bank is considered acceptable. Private banks that don’t engage in commercial lending should have Tier 1 ratios of 20% or more.
- What do the fees look like. In most places, fees are higher than in the US. This is especially true for private banks whose main source of income are fees paid by their clients. Look at your expected bank fees compared to how much you plan to deposit and see if it’s worth it.
The Best Swiss Banks
Here are what we consider some of the best Swiss banks, what makes them good, and the pros and cons of banking in Switzerland generally: best Swiss banks.
Step 2: Required Documentation and Legal Compliance
Banks are required to conduct Anti Money Laundering (AML) and Know Your Client (KYC) compliance before they can open your account. That means a fair bit of paperwork on your end to satisfy the bank you have legitimate sources of income.
You’ll need to show a valid passport and proof of where you live (such as a utility bill), and to complete a detailed questionnaire along with various application forms.
You will also need to sign a document giving the bank permission to give details of your accounts to US authorities.
Step 3: Making the Initial Deposit
The amount needed to start an account can vary a lot. If you’re already legally resident in another country and looking to open a local bank account, it can be as little as a few hundred dollars. Canadian banks also have low deposit minimums, but if you don’t have a Canadian residency permit, you’ll need to show a valid reason for opening an account.
On the other hand, US clients looking for a bank account in a more protective country may be expected to put up $250,000 to $500,000 to get started. Some of the best capitalized (and thus safest) banks will ask for seven figures.
Step 4: Accessing Your Account
Offshore banks offer different ways to access your funds, like online banking, mobile apps, and international debit cards. These tools let you easily get to your money and manage your account from anywhere.
Many banks also offer multi-currency accounts, which can cut down on exchange fees and make it easier to deal with money in different countries.
Step 5: Compliance and Reporting
Account holders must follow tax laws and reporting rules in their home countries. For US citizens, this means reporting offshore accounts to the IRS and filing a reporting form (the foreign bank account report or FBAR) if the total value of foreign accounts exceeds $10,000 at any time during the year. If you hold more than $50,000 outside the US, you will also need to file FATCA disclosures. (In certain cases, the FATCA disclosure threshold is higher than $50,000.)
More About FATCA
The Foreign Account Tax Compliance Act (FATCA) is a US tax law aimed at enforcing citizenship-based taxation globally.
FATCA requires financial institutions worldwide to give US tax authorities information on accounts held by US taxpayers. Failure to comply can result in a 30% withholding tax on all US investments those financial institutions make.
Obviously, no bank wants to pay this tax. They’ve gone one of two ways: either comply with the new rules and pass the costs onto their customers or stop working with US clients entirely.
Most banks went the second route and refuse US client business unless the client is also a bona-fide local resident.
Many Offshore Banks Require a Personal Introduction
One trend we’ve noticed is that even if a bank is willing to take on a US client, they usually won’t just accept a call out of the blue from one. Instead, they prefer to work with someone who has done a basic level of due diligence and can vouch for the client.
That’s a service we provide for our clients. If you’re interested in learning more about our services, please book in a free call with one of our Associates.
The Downside of Offshore Banking
Offshore banking has many benefits but it may also comes with risks and drawbacks. Here’s are a few things to consider:
#1: Compliance Risks
Offshore banking is perfectly legal but you need to make sure you fulfill reporting requirements. The two that apply to US clients are the FBAR and FATCA, which kick in once you have $10,000+ and $50,000+ (sometimes more) respectively, in any calendar year. You must also acknowledge foreign accounts on Schedule B of your personal tax return.
#2: Costs
Because at foreign banks your personal information is not sold to the highest bidder, offshore accounts often have higher deposit minimums and fees than in the US.
#3: Federal Insurance Protections
The safety of your money in offshore accounts can vary. In the US, the FDIC insures deposits up to $250,000. But not every country offers such a program. Paying very close attention to the stability of the bank is important.
#4: Service Expectations
To put it delicately, customer service at US banks is often more responsive than at banks in other countries. In some countries, service can be broadly similar but time zones get in the way. In others, customer service is just painfully slow.
Frequently Asked Questions
Is offshore banking legal?
Yes, offshore banking is legal. It’s just the term used to express a bank account held in a country that’s not your home country. An American who has a bank account in Mexico has an “offshore bank account.” For that matter, a Canadian who has an account at Bank of America technically has an “offshore bank account”, though no American would think of it that way.
Do offshore banks report to US tax authorities?
Yes, thanks to FATCA and other laws, foreign banks must disclose information about accounts held by US citizens to the IRS. Failure to comply can result in a huge tax on their US assets or, in extreme situations, being cut off from the US financial system entirely.
If you set up an offshore bank account, you will need to give permission for your account details to be given to US tax authorities.
Do I need to report my offshore bank account?
If you have at least $10,000 in an account at any point during a calendar year, then yes.
How does FATCA affect offshore bank accounts for Americans?
The Foreign Account Tax Compliance Act (FATCA) is a US law that requires financial institutions worldwide to give US tax authorities information on accounts held by US taxpayers. Failure to comply can result in a 30% withholding penalty on all US investments.
In practice, most banks don’t want the hassle of all that extra paperwork and so have stopped doing business with US clients entirely. But there are still some options out there.
Is it possible for an US citizen to set up an offshore bank account?
Yes. It is perfectly legal for a US citizen to open a foreign bank account. But the minimums can be quite high. And you might need an introduction from a company like us,
What is the minimum amount required to set up an offshore bank account?
That depends on the jurisdiction, the bank and how the account is opened. Whether you’re a local resident in the country you’re trying to open the account will also affect minimums. In general, for US clients that aren’t resident in the country they want to open an account in, minimum balances can exceed $250,000.
Canada is an exception. A US citizen who isn’t legally resident in Canada might be able to open an account there with only a few hundred dollars. But you’ll need to show a valid reason for needing the account.
Which jurisdiction is best for setting up an offshore bank account?
There is no such thing as a “best jurisdiction” – it depends on your personal wealth protection goals and needs. Each jurisdiction has its unique strength and areas of specialization.
Need Help?
An offshore bank account is a foundational part of many client’s wealth protection planning for all the reasons mentioned in this article.
Unfortunately, it’s not as easy as it once was to do it on your own. If you’d like our help, feel free to book in a complimentary, no-obligation call with one of our Associates to see if our planning services are right for you.
