When you think of offshore accounts, you might be picturing evil billionaires, money launderers, and tax evaders. What is offshore investing, really? You may be surprised. Offshore investing is a tool for diversifying your financial portfolio to help protect – and grow – your wealth. Foreign residents of Japan should consider offshore investing as a practical way to diversify, and access international opportunities not available to them here in Japan.
What Is Offshore Investing?
“Offshore investing” refers to storing or investing your money in an account domiciled in a country other than your country of residence. In the case of people living in foreign countries, such as foreign people in Japan, an offshore account could technically be an account in their country of origin. However, most often “offshore accounts” refer to those located in countries that offer low tax rates for foreign investors.
One goal of offshore investing is to reduce your risk by spreading your investments across multiple countries. This allows investors to take advantage of investment opportunities in other countries and limit risk factors such as local economic downturns, capital controls, excessive taxation, and political instability.
Many investors typically choose to use offshore accounts because they want to minimize taxes on their investment earnings. Others may want access to investment opportunities that are only available outside their home country’s borders.
Is Offshore Investing from Japan Legal?
Although media depictions might lead you to believe otherwise, offshore investing is legal. While there have been incidents – such as the Panama Papers released in 2016 – that have highlighted certain unscrupulous examples of people in positions of power using offshore infrastructure to house illicit funds, the majority of offshore accounts are held by normal, affluent people.
The legality of offshore investing generally comes down to properly reporting your offshore assets to your country of residence (as well as your country of origin, if you’re a US taxpayer). You need to be aware of the tax treatment of offshore accounts where you live. Although some offshore investments may offer reduced, deferred, or tax-free investing opportunities, the country in which you yourself are a tax resident may treat them differently.
For example, United States nationals are required to report all global income to the IRS according to the Foreign Account Tax Compliance Act (FATCA). This law also requires banks and financial institutions that hold assets for U.S. taxpayers to report certain information about those assets.
If you have lived in Australia, you may have heard about the “black economy”. This refers to people who are earning money from sources that aren’t taxed by the government (e.g. if they’re working as a cash-in-hand contractor or freelancer without declaring their income on their tax forms). This term also refers to those who use offshore accounts to launder money or evade taxation. The Australian government, along with other commonwealth countries, is cracking down on this type of activity with legislation.
Your residence status here in Japan will determine whether or not you will be taxed on worldwide, or offshore income. Japan is a high-tax country that charges tax on investment income and gains so you need to plan carefully in choosing investment accounts of any kind.
Why Should I Invest Offshore from Japan?
You may be wondering if investing in offshore accounts is worth the trouble. After all, isn’t it simpler and safer to keep all of your finances domestic? Think again.
If you’ve already had an experience with Japan’s banking system, you’ve likely already encountered the accompanying headaches. Domestic banking in Japan comes with complicated application forms, red tape, excess waiting times, and limited options for online banking and internationally accepted ATM cards. Many offshore banks and investment companies offer more convenient client services as well as international services.
Keeping your finances entirely domestic also means missing out on profitable investment opportunities. Take, for instance, the Japanese stock market. Over the last 15 years, the stock market has averaged a 3.38% growth rate. Denmark, meanwhile, has averaged a growth rate of 11.08%. In fact, of 21 other countries included in one comparison, 14 have shown better annual stock market growth than Japan. Those are significant potential gains on which you could be capitalizing, but wouldn’t be if you kept your portfolio domestic.
As for safety, it is impossible to overstate the importance of diversification. Take, for instance, the recent fluctuations in the value of the Japanese yen. Having international investments denominated in various countries’ currencies will help you protect your assets against the falling value of any one currency.
What Are The Benefits of Offshore Investing for Japan Residents?
Beyond the risks of investing in only one place, there are also many benefits to investing in offshore accounts. Some of these include:
- -Tax advantages: Many offshore accounts offer tax-deferred investment opportunities, meaning you can grow your assets free from taxes until the point of withdrawal.
- -Diversification: By investing abroad, you’ll have exposure to different geographies, sectors, and currencies which will help reduce volatility in your portfolio and improve overall performance over time.
- -Opportunity: Offshore investments offer access to asset classes or markets that may not be available domestically due to legal restrictions or other factors such as location restrictions on investments held within certain countries.
- -More privacy: Many countries do not require citizens of other countries to disclose their financial information or holdings when investing or purchasing property within their borders; therefore, it can be easier for people who want enhanced privacy to invest offshore without having their information disclosed publicly or exchanged with foreign governments.
- -Ease of access: Many offshore investment accounts are designed to allow investors to access them from anywhere in the world. Offshore bank accounts often also offer universally accepted ATM cards that make travel more convenient.
What Are The Risks of Offshore Investing for Japan Residents?
While there are many reasons to consider investing offshore, there are certain factors to be mindful of. These are risks to be taken into consideration and can be mitigated with careful financial planning. Some include:
- -Exchange controls: A country’s policy on foreign exchange or currency conversion may impact how you access your money if you’re not from that country. Most of the time, this risk can be mitigated by choosing the correct offshore investment account.
- -Economic risk: Changes in the economy of the country housing your offshore accounts can affect your investment. This, of course, is true of domestic investments, as well, once again highlighting the importance of diversification.
- -Political risk: Some of the countries that become financial havens for offshore investing are still developing, meaning they may be less politically and economically stable than most fully developed nations. While not all political change can be foreseen, this risk can be mitigated by a combination of diversification and careful planning.
How Do I Open an Offshore Account from Japan?
There are many companies that can help you open offshore investment accounts. There are different types of accounts, so you’ll want to consider your financial goals first. Do you want a simple way to keep your money safe that grants you a modest but consistent return on investment? Or do you want more aggressive investments, suited to experienced investors??
Once you’ve answered these questions with your adviser, you can start looking into different companies and the account types they offer. Many people do this through a bank, international insurance company, or investment platform.
Offshore investing may seem intimidating at first, but there are many companies that can help you get started. An experienced financial advisor can guide you in choosing offshore accounts that will maximize your return on investment while minimizing the associated risk. Don’t underestimate the impact that investing offshore could have in securing your financial future. The sooner you talk to a financial expert, the closer you’ll be to financial freedom.