With no pan-European pension plan available, country-hopping expats who want to save money for their retirement are left with few options. Here's what you should know about offshore investing. By Rob Hyde.

• Just the facts on offshore investing

For years, HR managers have struggled to come up with workable and attractive pension schemes for their expats.

Traditionally, HR has made one of two arrangements for expat pensions. Option one, expats on international assignments have their salary paid into their host country's social system. Or two, those intending to live in a foreign country for good become "local employees" of the foreign office, paying local social security tax that will eventually be rewarded with a state pension.

Huge problems arise with country-hopping expats since they do not stay anywhere long enough to receive any state's pension. Such expats working within several countries in Western Europe find this highly frustrating.

But offshore investing could be a solution, as well as a way for HR managers to retain foreign workers who are sick of the financial complications that their international assignments cause them.

Obviously this would mean that the expat would not be in the same country as his savings, but then if he is constantly on the move, then he is used to this. Also, if the offshore investment institution can fix him up with an internationally recognised ATM card, he can withdraw funds regardless of his location.

However, some experts are quick to voice their fierce opposition to such suggestions. Robin Chater is the secretary general of the London-based Federation of European Employers.

He says, "I don't agree with offshore investment. It's a sleazy world and is basically about tax evasion. I know they dress it up as 'tax avoidance', and 'paying the least rate going' or whatever, but at the end of the day it's about trying to hide all the money. It's immoral."

Chater believes the stereotypical view of such schemes - a haven for tax-evading criminals and shady dealmakers - are true, and expats and personnel staff should avoid all involvement with them.

"I would definitely tell European HR managers not to be advising their expatriate workers to be considering this as an option," Chater says.

"I'm sure it may seem attractive but it is all about greed and I'm sure they could land themselves in very hot water from a legal standpoint if they are not careful."

But experts on the other side of the fence argue with just as much vigour.

On the FAQ section of UK-based portal, Investorsoffshore.com, less regulation is listed as the first advantage of offshore investmenting, stating, "The behaviour of the offshore investment provider, whether he be a banker, fund manager, trustee or stock-broker, is freer than it could be in a more regulated environment. Any regulator in a high-tax country will immediately say, oh, of course, if it's unregulated, then it is riskier. Well, they would say that, wouldn't they." 

However, European HR managers do not by and large seem impressed by the idea of advising their expats on offshore investment issues. Many HR seniors at Benelux-based multinationals were quick to denounce the idea as "ridiculous".

Garesh Kota, HR director at Netherlands-based IT consulting company Mascot Systems, says the company would not consider telling its expats about offshore investment, but only because their current system seems to be keeping them satisfied, though some say not enough money is being saved.

"We don't have any pension funds as such but we do operate a government system whereby EUR 70 are deducted per month from all salaries of all employees - native and expats, as we treat them all in pay terms as local employees," explains Kota.

"This money is then put into a state account where it is tax-free. However they can't usually touch these savings for around five years, but at the end they have money for their old age and it has not been touched by tax."

Kota says in-house accountants "can try to help work out a special arrangement for them to suit their needs, but nothing offshore, just Netherlands-based."

Views seem just as varied within the expat community. Europe-based finance analyst Mark Mayne has worked for the Financial Times and BA Barbados.

"Obviously, any individual would need to take expert advice before entering into any kind of offshore arrangement - both from the legality point of view, and the suitability of the scheme itself," says Mayne.

Offshore investing: a brief history The offshore industry developed during the 1970s as UK-based fund management firms established non-domestic fund management subsidiaries, originally aimed at expatriate, non-taxpaying investors. After a few years, they became popular with firms and individuals in Latin America and the Middle East who were eager to secure their funds because of their politically or economically volatile locations. Today, offshore investment is big business even in Europe. Switzerland is famous for its secretive banking practices, though it has had to tighten up its formerly anonymous system after alleged connections with Nazi gold. Luxembourg now specialises in low-tax schemes for fixed-income funds, and the Republic of Ireland tends to serve as a centre for equity funds. Meanwhile, many of the original offshore financial centres are based in locations with historical ties to Britain, such as the Isle of Mann, Jersey, Guernsey, the British Virgin Islands, Gibraltar and Hong Kong.

"Not all so-called 'tax havens' have the same financial procedures or international tax liabilities, and those attempting to make a quick buck may well get badly burned as a result." 

A slightly more positive, but still cautious view is offered by Canadian expat Ron Cooper, local general manager for the Dutch office of pharmaceutical company Bristol-Myers Squibb.

"I pay local tax and I paid US tax whilst working in the UK, and I don't think I'll be in Holland forever, so I could really do with looking to sort out some pension fund, and I'm certainly intrigued by the idea of offshore investment," Cooper says.

"But I think outsiders like me have a completely different perspective to it than those working within the industry and who know the various laws of each country. Those just wanting to have a look into it like me are left really wanting to find away round the pension problem, but bouncing around without really knowing what's what, and it is a little daunting to say the least."

January 2002

UK-based freelance journalist Rob Hyde is a regular contributor to Expatica HR. A British national, Rob has lived and worked in England, France, Germany and Austria. His work has appeared in The Times, The Sunday Express and the Wall Street Journal Europe. He also contributes articles to the BBC Online's German language section.

Just the facts on offshore investing

• The amount. Most investments for which substantial rewards can later be shown, tend to be of around a minimum of USD 25,000. However, the internet means costs are falling constantly, and most offshore banks will require a minimum deposit of USD 1,000 for a standard service and USD 100,000 for tailor-made "private banking" service.

• Where to invest. An investor should talk to an independent financial advisor (IFA) about which tax jurisdiction best suits his needs. An individual may benefit from using different jurisdictions in his offshore structure, and especially companies who can one jurisdiction for the corporations, one for the bank account and another for the trust. This means the investor can exploit the different financial laws of each country.

  Some jurisdictions operate a double-tax treaty whereby two countries agree to relieve persons who would otherwise be subject to tax in both countries from being taxed twice.

• Pulling out. If it all does go wrong or you get scared, the majority of offshore structures can be dissolved very easily. Dissolving a trust usually costs no more than a small filing charge, and if it looks like it could prove expensive, the assets can be withdrawn, giving it zero value.

• What is definitely illegal. Investing offshore is only illegal depending on where you live. In the US, Canada, the UK and France, it is illegal for offshore investment providers to advertise products. However, generally it is not illegal for citizens of those countries to make offshore investments (although you should check with local advisers as to your rights).

  It is illegal in almost all jurisdictions not to declare the income or gains from offshore investments to your local tax authorities.

  'Money laundering' refers to the conversion of 'illegal' money into 'legal' money. An example would be a criminal who opens an account in the Bahamas with EUR 1 million, then the next day transfer the money into an Austrian bank account and invests it into company shares. The money is then 'clean.' This practice is clearly illegal.