Offshore investing by definition is simple. However, just like any other type of investing, the 'how' and 'why' is clouded by varying schools of thought and contradicting philosophies based on ethics and morality of business, profit-making and estate planning in foreign economies. In this article, we will avoid the complex matters of offshore investing and offer an introduction that serves the curiosity of average Joe.

DEFINITION : Offshore investing is directing assets to a foreign country with a view to preserving value and/or earning income and profits. A foreign country is any country other than your main country of residence. Assets in this context mainly refers to money when people are discussing offshore investment in general.

PROS
1- Lower Taxation - Some regions e.g. Cayman Islands, British Virgin Islands and Nauru have a reputation as tax havens. You can read more about the speficic tax advantage of each region at http://en.wikipedia.org/wiki/Tax_havens Taxation in these tax havens may be influenced by source of income, residency and citizenship.
2- Higher Rates of Return - It makes business sense to invest in regions which maximize shareholder earnings in the long-term by either reducing the cost of doing business or increasing revenue.
3- Confidentiality - Some regions do not have stringent disclosure requirements which enable individuals and companies to hide business ownership, financial statements and wealth information from the public and predatory legal suits.

CONS
4- Money Laundering -Money and assets generated through illegal means in one country may be temporarily diverted to another as a means of hiding the true source. Money laundering and profiting from crime is illegal in most countries.
5- Unethical Business Practice - Example: Investing in a country which does not enforce human and worker rights so that you can knowingly endanger the lives of employees by not spending money on safety and fair working conditions. The focus in this respect is profit maximization by practising policies which are illegal in your country of residence.
6- Tax Evasion - Hiding income from tax authorities in your country with a view to not paying tax. This is illegal. Tax avoidance is applying legal means to reduce tax.

It is worthwhile to mention 3 issues of discussion which arise when offshore investing is discussed in academic circles.

1- Is it fair and acceptable (ethically and economically) to direct wealth earned in one region to be invested or spent in another region? Does offshore investing contribute to economic decline in the region from which assets are removed?
2- Does offshore investing contribute to the general lowering of taxes and wages and thereby adversely affecting quality of life by encouraging transfer of capital to regions with lower taxes and wage rates?
3- Does offshore investing contribute to market inefficiency by circumventing rules on disclosure of financial information and lack of transperancy?
4- Should offshore investing be considered a valid and necessary means of wealth diversification on the basis of region only?

Let me read your thoughts on the good, the bad and the ugly of offshore investing by writing your comments below.

You may also enjoy reading 'The 3 Forgotten Principles of Investing' by clicking here.