When considering investments of any type, the bottom line is of course the most important. But one of the very attractive advantages of alternative investments and overseas retirement is that they are not just digits on a screen. Frequently, they also carry significant fringe benefits that, while not contributing directly to the bottom line, play an important role in the investment itself and in the investor’s longer term strategic planning.
These fringe benefits may be pure fun, or perhaps social status – like inviting friends over to sample the latest vintage from your own winery. But as the traditional financial system remains far from predictable, and the outlook for the rest of 2010 remains gloomy, you might be surprised to learn that savvy investors are turning in droves to alternative Latin-American investments as a conservative ‘safe haven’ for serious international asset protection purposes.
Longtime international speculator Doug Casey, who authored The International Man back in 1976, recently wrote that “a wise man… doesn’t allow himself to be limited by an accident of birth.” Casey predicts that we are “heading into a currency crisis for the record books, and I think you can plan your life around some type of foreign exchange controls. If you don’t get significant assets out of your home country now, you may soon find it costly and very difficult to do so.”
Whether you agree with that prediction or not (I do, by the way!), there are several very good reasons to diversify into hard international assets – things like real estate or physical gold bullion.
For a start, there are the tax benefits. If you are managing an investment portfolio today, chances are your geographic location is not really that important. Day-to-day management of your portfolio can be carried out from anywhere there is a laptop and broadband. So more and more investors and managers have realized that they just don’t need to be located in a high tax, high cost country.
The majority of Latin American countries have territorial tax systems – meaning that if you are officially resident there, you are only taxable on your local source income. Anything you do outside the country of residence is tax free as far as they are concerned, so you don’t even need to bother declaring it. This contrasts starkly with North America and Europe where the rule of thumb is that your home country taxes you on your worldwide income.
By living – even part time – in one country while overseeing investments in another, you can therefore legally slash your tax bill at a stroke. Some countries, like Uruguay and Panama, are particularly attractive in this regard, having passed business-friendly legislation designed specifically to attract this kind of international investment management business. They recognize that even though it doesn’t produce tax revenue directly, it stimulates the local economy and provides work for local professionals, banks and businesses.
Other countries like Costa Rica and Belize offer ‘pensionado’ or ‘qualified retired person’ programs that grant specific tax exemptions to retired foreigners taking up residence. If you don’t feel ready to retire yet, bear in mind that some of these ‘retirees’ are much younger than you might expect – qualifying for the programs simply by proving that they have sufficient regular income from abroad to maintain a quality lifestyle. ‘Retirement’ to them might mean waking up to the sound of the ocean in their beautiful beachfront properties, logging on to check how much money they made overnight, working on the internet for a few hours a day, and travelling a few days a month to oversee their investments in person.
Ah, I hear you saying, but there is one big problem with this strategy – if you happen to be a US citizen. The USA is the only country in the world that taxes its non-resident citizens. A Brit or Canadian who moves his official residence to Belize or Uruguay won’t have to worry about home country taxes any more, but his American cousin will.
But it’s not quite as dire as it sounds. There are still substantial benefits to Americans living overseas, that a competent international tax lawyer can help you with. In the end, however, the only way Americans can legally unshackle themselves completely from the IRS is by renouncing US citizenship.
Many are doing just that. But before taking the drastic step of giving up a US passport, another citizenship is required. Millions of US citizens are actually entitled to European or other passports based on ancestry, though the bureaucracy involved can be quite lengthy. That’s why the Caribbean states of Saint Kitts and Nevis and the Commonwealth of Dominica both offer ‘economic citizenship’ programs, effectively ‘selling’ citizenships and passports for hundreds of thousands of dollars. Years ago most of the takers were Russians, then came the Chinese, but today most of the buyers are Americans who are renouncing citizenship to become tax exiles.
All this brings me to another big fringe benefit of investing in Latin America: most Latin American countries are relatively liberal when it comes to naturalization – the granting of citizenship based on a period of residence or other ‘connection’ with the country. 2-5 years is the norm. This already short period can often be speeded up even more based, for example, on marriage or on birth of a child in-country. Frequently the processing time on top of the officially-designated residence period can be a year or more – but one has to consider that citizenship via this method is almost free.
Demonstrating some connection with the country is a necessity, but this requirement can be easily fulfilled by owning real estate or investing in a local business. So smart second citizenship seekers should be looking for attractive business opportunities in Latin America rather than investing hundreds of thousands on small, hurricane-prone islands in the Caribbean.
The biggest benefit of going global for me, however, is intangible. If I had to sum it up in a word, it would have to be ‘freedom.’ Difficult economic times generally see governments resorting to patriotic calls to ‘unite’ and ‘pull together’ – something that usually ends up as ‘do as I say not as I do.’ The ‘strong leadership’ demanded by the majority in these times is bad news for entrepreneurs, libertarians, classical liberals, and all those who love freedom.
Doug Casey suggests that you should at least consider the possibility of transplanting yourself, or at least start by transplanting some assets. “Don’t look at it as a negative thing,” he says. “The world is your oyster. Make the most of it.”
Although bureaucracy in Latin America can be overwhelming at times, it is relatively easy to cut through. There is less regulation than in the US in particular, and more reliance on common sense and individual responsibility. People don’t sue each other over the least little thing.
Doug is currently involved in developing a community for like-minded individuals in northern Argentina, not too far from Bolivia and Paraguay. The idea being that with the world in constant commotion, it’s good to have a ‘Plan B’ – a place far from the madding crowd that is entirely self-sufficient in terms of food, water and energy – and even wine!
The buyers in such communities, many of whom I have had the pleasure of meeting, are not crazy doomsayers. Most of them are patriotic Americans, serious investors and hard-working entrepreneurs, who hope things will never get that bad – but they sleep sounder at night knowing they have a bolt-hole prepared and assets in place if the worst case scenario plays out. And, lest we forget, they are hoping to pocket a healthy profit on their Latin American real estate investment over the medium to long term.
As with any investment, due diligence in this area is extremely important. But next time you check out an investment, remember to look around for the hidden fringe benefits as well as the cold, hard figures. Treat it not just as a way to increase the number of dollars in your bank account, but as a way to diversify, learn and protect the assets of your family by investing in something with a built-in ‘insurance policy.’