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What is an Offshore Banking License?

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  • Written By: John Lister
  • Edited By: Kristen Osborne
  • Last Modified Date: 28 November 2016
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An offshore banking license allows the holder to operate a bank in one country that provides services to depositors who are residents in other countries. The license is issued by the country in which the bank is operated, which is not necessarily the country in which the holder is a citizen or resident. Usually these countries have low or even zero tax rates, meaning depositors can lower their tax bills by banking there, rather than in their own country. However, many countries, including the United States, still require residents to pay tax on their offshore bank account holdings, if, that is, the tax officials are able to prove such holdings exist.

Many holders of an offshore banking license are not interested in running a bank as such, and won't take deposits from the public. Instead, they will be seeking to operate a bank that exists solely to handle the finances of a business they own and run in their country of residence. This set-up can lead to lower taxes and greater privacy, through both legal and illegal methods.

There are two main types of offshore banking license. A general license, often called a Class A license, allows the holder to carry out all types of banking business. A restricted license will limit the holder to activities specified in the license.

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Most countries that offer offshore banking licenses will require both an annual fee and paid-in capital. The amounts involved can vary immensely, though in virtually every case, the paid-in capital is considerably higher than the annual fee. The fee goes to the country's government, while the paid-in capital is used as the operating cash of the bank and gives some degree of security that the bank will remain solvent and operational.

One of the most important variations among countries that offer an offshore banking license is their approach to taxation. Countries that offer a "fully compliant" system will cooperate fully with the tax authorities of the countries in which depositors reside. Other countries offer minimal or no cooperation.

Offshore banking licenses should only be obtained from the relevant government authorities. Many older licenses contain a clause that claims the license can be transferred, meaning they can be sold on to somebody else. However, most of the countries that issue such licenses have laws barring transfers and these laws override any clauses in the license itself. The main reason for this is to make sure all license holders go through the government's vetting process.

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WaterHopper
Post 3

@boathugger- I’m sure there are still plenty of millionaires who have these accounts and many who own the licenses. However, the IRS is trying to enforce the tax law mentioned by “carrotisland”. They are trying to get the TIEA (Tax Information Exchange Agreements) to share all banking information about any citizen of the United States on any offshore accounts they have.

Due to this, many of the offshore banks are turning down Americans wishing to open accounts. They do not want the IRS breathing down their back and nosing into their accounts. Places like Panama, which was a leader in offshore banking, has signed the treaty to release information.

CarrotIsland
Post 2

@boathugger- I don’t personally know anyone who has acquired an offshore account. However, I had a friend that was awarded a large sum of money in an insurance settlement. She was trying to figure out how to invest the money or at least keep it safe.

We looked up several things on the internet. If you type in “offshore bank account” or even “Swiss bank account”, there are literally thousands of hits. So many people want your money. They tell you that it is safe and undetectable but that is just not true.

I have a friend that works for the IRS and I asked him about how offshore money is detected. He said that Congress passed a

law after 9/11 that made it almost impossible for anyone to “hide” money in any kind of foreign account. It was initially intended to fight terrorism but is now mostly used to prevent tax fraud. He said that any individual who holds a combined total of $10,000 or more in offshore accounts is obligated to report it and pay taxes on it.

BoatHugger
Post 1

I know that I probably watch too much TV but I always hear about people having offshore accounts so that their money cannot be tracked as easily. I'm sure it would require having a lot of money in the first place. I am just curious if anyone knows anyone that has ever actually placed money in an offshore account.

Personally, I'm just a credit union kind of person.

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