Offshore banking is a well-liked way of setting aside money in a foreign country. There are many benefits of offshore banking, such as better privacy for your capital and protection against political or economic insecurity. Offshore banking first existed in the Channel Islands, and the majority of offshore banks are found in island nations. Yet the term is also used when referring to banks in states such as Switzerland, Andorra and Luxemboug which are not islands but hold greater immunity to the countries around them.

Not surprisingly, due to sitting in tax-friendly nations or islands, offshore banking is frequently associated with tax avoidance. However, cash that is stored in an offshore bank account is not automatically safe from income tax. The same goes for interest earned on the money in offshore bank accounts. Unless you have special dispensation , you most likely are required to pay income tax on the interest you earn irrespective of where that money is kept – in a local or offshore account.

If you live in a country where there is a tense political situation, or there are problems within the public, it could be advantageous to keep your assets in an offshore bank account. By retaining it in a local account you may risk the funds being stolen, frozen or becoming worthless. An additional plus point is that many offshore accounts offer better rates than in the country of residence and there may be fewer running costs involved. You may also be able to get an anonymous bank account which your local bank might not be able to offer. So far it sounds as though offshore banking has many advantages, so what are the drawbacks?

One factor that could be less appealing to a prospective customer is the fact that the money sitting in an offshore account could actually be less secure. This can be seen in the global financial crisis of 2008 -9, where money held in offshore checking accounts in Iceland was lost. Yet if the bank in question gives a good compensation scheme, this may rescue some of the missing cash in the event of a grave financial loss. Another drawback to offshore banking is that it is frequently aimed principally at people with higher incomes. Lots of bank accounts of this kind do hold significant upkeep costs so they may only be worth considering for you if you do receive a healthy salary. However, many of them do give savings plans which can be utilized by consumers with normal incomes as well.