what does offshore mean?
the popular financial term explained
Offshore is a word that means “away from the coast” or “off the shore”. This description applies to different types of activities carried out at sea like offshore oil exploitation or production of wind energy.
In financial language, the term “offshore” is used metaphorically to describe any business or investment made outside the country of residence. Many different products may be called by this name: bank accounts, insurance policies, real estate, foreign companies, investment funds, etc.
The term was coined for the first time in the United Kingdom, which had a number of territories like the Channel Islands or the Island of Man, which had a particularly favorable tax treatment. So, when a British citizen residing in London or elsewhere on the main island, invested in one of these domains “off the shore”, he talked about having an offshore account or company. The term started to be gradually applied to other, more remote areas and to investments abroad in general.
Starting in the eighties, the use of the term offshore started to be restricted to certain types of businesses. It was understood that to speak of a real offshore investment, this should occur in any country or territory offering certain advantages over the own place of residence. We are talking about tax benefits, easy steps to set up corporations, strict privacy or bank secrecy laws among others.
These conditions exist in the so-called tax havens which, because of the pejorative connotation traditionally assigned to this term, began calling themselves offshore jurisdictions or offshore financial centres (OFC). Therefore, the term is currently used to describe the entire industry and the whole range of services that has grown up around tax havens and other low tax territories.
Many of them (though not all) are located on remote islands and territories, so the initial definition (off the shore) is very accurate. In any case, whether they are situated in the sea or not, all these territories constitute genuine “tax islands.”
offshore case studies
Let’s look at a case study that will help us to understand better what we have said up to now:
A British citizen decides to open a bank account abroad in order to make some investments. Should he choose Panama for this purpose, we would be talking about an offshore bank account, and the investment he makes, will definitely be extraterritorial as well.
Conversely, should he decide to open an account in France, it would not be considered an offshore banking operation. France, despite being another country, has a tax system similar to the British one, and being a member of the European Union has various agreements for cooperation and exchange of information with the United Kingdom.
The person in our example would not get any special advantage by opening his account in France and, of course, the confidentiality of his deposit may also be seriously compromised.
Moreover, we should add that investments or business done within the country of residence or, as seen in the example above, one with a similar tax system, are described with the term onshore (within the coastline).
Following the above definition, it seems quite easy to establish when a financial transaction can be considered as offshore or onshore. But in real life, the dividing line is often not so clear. Various organizations publish lists of tax havens. However, apart from these, there are many territories that offer advantages to foreign investors in some way or other. These do not have to be of a fiscal nature only.
Countries such as Switzerland, Cyprus and Latvia, for example, have been highlighted for their strict bank secrecy laws. Another example is Ireland, which offers significant tax benefits for artists (writers, singers…).
This way, many investors take advantage of loopholes and special features of some countries considered onshore to profit from them as if they were genuine offshore jurisdictions.