          
          
          
                           OFFSHORE MUTUAL FUNDS
          
               The most popular investments for U.S. investors in
          recent years have been mutual funds and insurance
          products.  For the internationally minded investor,
          there are offshore versions of these products
          available.  In many cases, they offer even more
          benefits to U.S. investors than do their domestic
          counterparts.  The IRS and other elements of the U.S.
          government apparently do not believe in offering
          international opportunities to U.S. citizens, however,
          so in some cases these investments are less attractive
          to U.S. investors than to residents of other countries.
               The main obstacle standing in the way of many
          foreign opportunities is the U.S. securities laws.  Any
          "investment contract" sold in the United States must be
          registered with the Securities and Exchange Commission
          and with its counterpart in each of the states.  This
          is a very expensive process.  U.S. securities laws
          require far more disclosure than do those of most
          foreign countries and also require different accounting
          practices.  Therefore, many offshore mutual fund
          companies decide that whatever income they might
          eventually earn would be inadequate compensation for
          the time and expense involved in attempting to comply
          with U.S. securities laws.  In fact, several of the
          mutual funds and hedge funds with the top performance
          records are run from the United States by U.S.
          residents but do not accept investments from U.S.
          residents.  To reduce registration costs and avoid
          other restrictions, the funds are made available only
          to foreigners. 
               One offshore fund group that has partially solved
          this problem is the Third World Funds, based in Panama
          (address is in the offshore funds listing in the next
          section).  They are unable to sell to smaller
          investors, but can sell to U.S. citizens who meet the
          Securities & Exchange Commission definition of
          accredited investors, and who register the shares to a
          non-U.S. address.
               Fortunately, U.S. citizens can get around this
          obstacle through bank accounts or trusts.  Basically,
          you can travel overseas to buy the shares in person,
          you open a foreign bank account and invest through the
          account, or you can establish a foreign trust.  Only
          then will these opportunities be open to you.
          
          
          Offshore mutual funds
          
               To diversify your portfolio internationally, you
          could invest in the international funds of a U.S.-based
          mutual fund company.  This approach has satisfied many
          U.S. investors.  But offshore mutual funds (or unit
          trusts, as they are known in some countries) have been
          around longer than U.S. funds and have some outstanding
          long-term performance records.  U.S. funds only
          recently got into the international investment markets,
          while the offshore funds have existed for some time. 
          You probably will find more experienced management at
          the offshore mutual fund companies.  Also, because the
          offshore funds do not have to meet U.S. securities
          laws, they are likely to have lower operating costs. 
          These qualities do not exist for all offshore funds,
          but a number of them do have these advantages.
               If you choose to invest in an offshore mutual
          fund, you will find very attractive treatment under
          foreign tax laws and some unpleasant treatment under
          U.S. tax law.
               Most offshore mutual funds are of a type called
          accumulative, or roll-up, funds.  Under U.S. tax law, a
          mutual fund avoids taxes on its income and gains by
          making distributions to the shareholders at least
          annually.  The shareholders then are taxed on the
          earnings.  But most foreign countries do not impose
          this restriction on their funds.  The funds can retain
          and compound all income and gains.  So while the U.S.
          investor has his investment funds depleted by taxes
          each year, the overseas investor can let the investment
          compound tax-deferred.  Even a U.S. investor who has
          distributions reinvested in shares each year must
          include those distributions in gross income and pay
          taxes on them.
               A foreign country taxes the accumulated income and
          gains only when shares are redeemed.  In addition, many
          foreign countries do not tax capital gains at all or
          tax them at rates far lower than those imposed by the
          United States.  The U.S. taxpayer who invests offshore
          will reap the benefit of such tax breaks.  In addition,
          any taxes imposed by the foreign country on the
          redeemed shares might be exempt from tax withholding
          under a tax treaty between the United States and that
          country.
               The bottom line is that there are tremendous
          advantages to investing in an offshore mutual fund.  In
          addition to the international diversification and
          experienced management you can expect, your investment
          gains compound tax-free until you redeem shares.  Most
          foreign countries essentially treat all mutual funds as
          nondeductible IRAs with no investment limit.
               Some of these advantages disappear when you
          consider the U.S. tax aspects of offshore mutual funds,
          but there are some ways to overcome these tax aspects
          as well.
               A few years ago, the United States taxed U.S.
          shareholders of foreign investment funds the same way
          the foreign countries did.  No taxes were due until
          shares were redeemed.  Then this country decided that
          treatment should apply only when more than 50% of the
          shareholders were foreigners.  In 1986, Congress
          changed the rules again so that no U.S. shareholders of
          offshore mutual funds would get beneficial tax
          treatment.
               The current rules are that you have two choices of
          how to treat the offshore mutual fund on your U.S. tax
          return.  The first choice is to invest in a "qualified
          electing fund." This is an offshore investment company
          that elects to have its shareholders taxed on their pro
          rata shares of all earnings each year.  An established
          offshore mutual fund is unlikely to be a qualified
          electing fund, and you would lose all the benefit of
          tax deferral if it were.
               The next option is to not pay any taxes until
          shares are redeemed.  But if you take advantage of this
          approach, you get hit with the regular income tax plus
          a penalty tax.  The penalty tax is an interest charge
          for not paying taxes on the income and gains each year
          as they accumulated in the fund.  In other words, you
          pay interest on the tax that would have been paid if
          the earnings had been distributed each year.
               For example, suppose you buy shares in an offshore
          fund for $1,000 on January 1, 1992.  You have the
          shares redeemed for $2,000 on December 31, 1996.  You
          will be deemed to have earned the $1,000 gain equally
          over the four years, for $200 of gain each year.  The
          gain for 1996 is included in your 1996 gross income. 
          The other $800 of gain is taxed at the highest rate
          that applied in each of the years you held the shares,
          and an interest charge is added to the tax.
               The tax and the interest charge sound oppressive
          and initially discouraged Americans from considering
          offshore mutual funds at all.  But if you examine the
          situation a little closer, you'll find that offshore
          mutual funds still can be attractive.
               The interest rate charged is 3% more than the
          federal short-term rate, and it is not imposed until
          after the shares are redeemed or an "excess
          distribution" is received.  So you still get tax-
          deferred compounding.  If the mutual fund earns a high
          enough return, the tax-deferred compounding will more
          than offset the taxes plus the interest charge.  The
          longer you plan to hold the shares and let the gains
          compound, the more attractive the offshore mutual fund
          looks.
               You might also have the shares owned through
          decontrolled foreign corporation, an offshore
          corporation with substantial non-subpart F income, or
          some other entity that will not have the income pass
          through to U.S. shareholders.  This might avoid the
          interest charge if set up properly.
               Another option is to invest in an offshore mutual
          fund and never redeem the shares.  Let your heirs
          inherit them.  The heirs then will get the tax basis of
          the shares increased to their fair market value on the
          date of your death.  It is not clear from the tax code
          how the compounded gain will be treated when your
          estate or your heirs sell the shares.  Congress
          apparently did not contemplate this action when it
          wrote the law.  So it is possible that the heirs will
          not have to pay the penalty tax after the shares are
          sold.  Since the tax basis to the heirs will be the new
          fair market value of the shares, there will be little
          or no capital gain to pay taxes on.
               Another possibility is to have the shares owned by
          an offshore trust, that you have established and never
          sell the shares during your lifetime.  After you die,
          the trust no longer has a U.S. person as grantor.  That
          should mean that the trust can redeem the shares after
          your death and the gain will not have to be passed
          through to you or your estate if the trust is set up
          properly.  The trust then could reinvest the income. 
          The tax rules are technical and sometimes rather murky
          for this option, so be sure to get advice from a U.S.
          tax adviser before trying to implement it.
               If offshore mutual funds appeal to you, one fund
          you will want to consider is the Assetmix fund of the
          Royal Trust Bank of Canada.  This is an umbrella fund
          with 14 subfunds that have different investment
          objectives.  You can allocate your account among the
          subfunds however you want and switch the investment
          allocation whenever you want at no additional fee. 
          This type of investment option usually is available
          only to the very wealthy. But Assetmix is available for
          a $20,000 minimum initial investment, with a minimum
          $2,500 to each subfund.
          
          
          Prudent ways for Americans to buy offshore funds
          
               Eventually one gets to a need to make a direct
          foreign investment.  Buying U.S.-based global or
          international mutual funds is a very useful currency
          diversification, and a useful way for the smaller
          investor to get started.  But since these funds are
          still a U.S. asset, such fund investments do not help
          to diversify your assets in an asset protection sense -
          - protection against lawsuits, forfeitures, possible
          future exchange controls, or any other contingencies.
               It is not illegal for Americans to buy offshore
          mutual funds (called unit trusts in some countries) or
          any other security that is not registered for sale in
          the United States.
               Most foreign securities that are not mutual funds
          can be bought through any good stock broker, although
          you can do better if you select a broker who
          specializes in foreign securities.  But he can't sell
          you a foreign mutual fund.  That doesn't mean that
          there is something dirty or illegal about it -- it
          merely means that the fund is not registered for sale
          in the U.S.
               There are a number of reasons for this.  Expense
          is one -- successful foreign funds don't need the
          American market and see little reason to pay the
          outrageous fees of our litigious society.  (Some of the
          best foreign cars cannot be purchased in the U.S. for a
          similar reason -- the makers of $100,000 custom cars
          are not about to give the federal government ten free
          cars per year for destruction testing.)  Some of the
          funds cannot meet U.S. legal requirements because they
          charge investors a performance fee rather than a
          management fee based on a percentage of assets.  But
          many investors would actually prefer a fund manager
          whose only compensation is a share of the profits
          instead of a fee based on the total investments in the
          fund.  The manager's goals are different.
               It is illegal for a foreign securities issuer,
          such as a mutual fund, to sell an unregistered security
          in the U.S.  To be completely safe most, but not all,
          of them refuse to sell to an American citizen or
          resident even if he is residing abroad.  They'd rather
          stay away from anything to do with Americans.
               To protect themselves, they require a statement on
          the application that the purchaser is not a resident or
          citizen of the U.S.
               Some advisors suggest using a mail forwarding
          service in a foreign country, and simply signing a
          false declaration.  It is probably quite safe to do so,
          but such dishonesty could turn out not to be prudent
          later.  To take an extreme example (at least we hope it
          is an extreme example) some other country could
          suddenly adopt American-style forfeiture laws, and
          decide that securities procured by fraud were
          forfeitable to the government.  (The false declaration
          is clearly a fraudulent statement, even if there is no
          financial loss to the seller.) 
               This example could seem extreme, but a recent U.S.
          case presents a scary analogy.  A mortgage applicant in
          1986 made an allegedly false statement as to his
          employment.  In 1992 the house was confiscated by the
          federal government, on the grounds that the false
          employment statement was fraud on a federally insured
          bank, even though the mortgage had been paid.  The
          householder claimed that he had worked for the company
          off the books, but the payroll records did not support
          his claim.  The U.S. Court of Appeals ruled in 1993
          that the house was subject to administrative forfeiture
          by the government, that he was not entitled to a
          hearing or trial, and was not entitled to present his
          defense to a court.
               Looked at in another way, although the purchase of
          the securities by an American is not illegal, it would
          not be impossible for the U.S. government to argue that
          the securities are subject to forfeiture on the grounds
          that the purchaser committed mail fraud by mailing a
          false declaration of citizenship.  The U.S. Supreme
          Court has long ruled that mail fraud need not involve a
          monetary loss, but only the mailing of a false
          statement with an intangible gain (in this example, the
          ownership of a security that could not have been
          obtained without the false statement).  Thus all the
          legal elements of proof for a mail fraud case would
          have been met.  More likely than a mail fraud
          prosecution however would be a civil forfeiture of the
          security, similar to the mortgage example above.  And
          why contaminate an honest investment by taking even the
          slightest risk of acquiring it in an illegal manner. 
          There is no reason to do so, when the entire
          transaction can be conducted honestly, legally, and
          properly.
               These horror stories may be far-fetched examples,
          but the house seizure case would suggest that they may
          not be.
               So how can an American purchase these securities
          legally?
               There are two possible routes that would meet the
          legal requirements.
               The first is to use a foreign bank or trust
          company as a nominee holder.  In this example the
          nominee holds the security under a simple agreement for
          the true owner.  This is technically a form of trust,
          but is normally limited to a one or two paragraph
          standard agreement form used by the bank.  This
          strategy would not be valid if the form required by the
          offshore fund included a statement that the beneficial
          owner is not an American.  Most of these fund
          statements do not go that far, but some of them do --
          in particular the Fidelity group offshore-based funds,
          because they are part of an American parent company.
               The second strategy is simply a more sophisticated
          version of the first.  A very simple trust is created,
          with the foreign bank or trust company acting as
          trustee, and the beneficiary being the U.S. holder,
          with a spouse or children being contingent
          beneficiaries in case of death.  Now the trust itself
          is the legal and the beneficial owner, and the
          requirements of the fund will have been met.  The fact
          that the trust has American beneficiaries is not
          legally the same as the shares being beneficially owned
          by an American.
               Such agreements are usually very simple, and most
          major foreign banks can deal with them.  For example,
          banks in Canada, Britain and Hong Kong will usually
          charge only around $500 to set up a trust, and around
          $50 or $100 per year per security for nominee
          agreements.  A Swiss bank could also act as a nominee.
               Canada and Britain have been mentioned in the
          example for a reason.  It is not necessary to go to a
          tax haven for this kind of service.  Very few countries
          are interested in taxing a trust in which the assets
          are foreign and the beneficiaries are foreign, so even
          a high tax country will usually qualify for this type
          of simple trust or nominee arrangement.  The bank will
          be able to tell you the local tax position for such an
          arrangement.
          The banks in the high tax countries tend to be far
          cheaper -- this is as routine as asking your local
          bank's trust department to hold a share certificate for
          your children -- and you avoid the high trust formation
          fees that most tax havens charge.
               In theory a Swiss bank could be a trustee, rather
          than just a nominee, but this gets into some exotic
          legal questions of civil versus common law countries,
          because the IRS will only recognize a common law trust.
               By using either of the approaches outlined, and
          staying in a common law country (essentially Britain
          and the countries that inherited the British legal
          system, including the U.S., Canada, Hong Kong, etc.)
          the trust is neutral or transparent for tax purposes. 
          The value of this is that you can then claim a U.S. tax
          credit for any foreign withholding taxes paid by the
          trust, although normally the point of offshore funds is
          that there are no withholding taxes.
               One of the best ways to purchase offshore mutual
          funds, or make any offshore investment, is a brand-new
          Swiss product called BankSwiss.  Jurg Lattmann, founder
          of JML Swiss Investment Counsellors, has teamed up with
          an excellent Swiss bank, Ueberseebank, to create
          "BankSwiss," an account designed specifically for
          foreign investors.
               The Firm of Marc M. Harris, a Panama-based
          accounting firm which is discussed in more detail in
          the section on offshore trusts and corporations, is
          also very qualified to help Americans arrange fully
          legal purchases of offshore funds.  Because Marc Harris
          is certified to practice in the U.S., he is fully
          familiar with U.S. legal and tax requirements.
          
          
          
          
