When you trade in the Forex Market it is possible to find a trader living in Spain trading JPY through a broker that is located in Russia. As you can see, the Spanish person is not trading his own currency, but a different one and through a company that is not set up in Spain or the Euro zone.
The broker located in Russia is an example of Offshore Forex Broker. It is a Forex Broker that is operating outside of an investor’s home country.
Usually, the reason to choose a different country to base this brokerage activity is the presence of less regulations and constraints. This makes it easier for people to trade foreign currencies.
Depending on your situation, offshore brokers may offer you many advantages or disadvantages.
Tha main advantage is the tax reduction. This is one of the reason why it is possible to find more offshore brokers in those countries called tax heavens.
Tiny countries attract outside people to promote a healthy investment environment and this helps to increase their economic activity.
You would be able to receive promotions that are highly valuable because offshore brokers are less tightened from taxes and they can transfer their savings to their clients.
The second advantage is related to the low requirements concerning the due diligence. Brokers refer to due diligence as the bureaucracy that is needed to open an account. This brings a reduction of the effort that is necessary to open an account for a potential investor.
Another advantage is the confidentiality. Offshore brokers are obliged from those countries that have enacted laws establishing strict corporate and banking confidentiality.
Trading through an offshore broker does not involve any limitation and therefore you are able to make all the trades you want diversifying the investment portfolio using all the techniques you want.
Also, it is possible to trade at lower spreads and with better leverages. Currently, the Offshore Trading Market is growing fast and has many participants. This brings the market to be characterized by great profit opportunities.
The main disadvantage is linked to the main advantage. Since there is tax reduction, the offshore broker are more inspected than standard broker. Tax agencies aren’t ignorant of offshore strategies. They know better how brokers can avoid taxes.
For those who want to open an offshore account, they need to know that is not cheap. This depends on the investment goals but open an offshore account is expensive due to steep legal fees, account registration fees and in some cases investors are even required to own a residence in the country.
How can you be sure that the offshore broker you selected is actually safe or not?
There is actually a very good way to tell if an offshore broker is actually legit or not. It’s to check if the broker has a valid license in another country. So, if a broker is operating from Russia, then it most commonly has a valid license issued by Russia authorities.
Usually, it is difficult to find an offshore broker operating from US, because US is extremely protectionist when it comes to financial services. In fact, a lot of US traders are not accepted from offshore brokers.
Better regulatory conditions and a much lenient tax system in other countries determined most businesses to actually establish themselves mostly in Europe. Europe is also a significant market to being located. It’s Europe that has at this moment the strictest laws and regulations when it comes to financial trading.