Merchant accounts are necessary for businesses to allow the processing of credit card payments, allowing them to offer goods and services to more people.
There is no question that merchant accounts have a great purpose, but there is some uncertainty regarding offshore merchant accounts.
Unlike domestic merchant accounts, offshore merchant accounts are based in another country and therefore offer separate advantages. They provide excellent solutions for high-risk businesses, which can provide stability in a precarious market.
The idea of an offshore account of any form often makes some uncomfortable due to not understanding how it works and whether it is legal or not.
We’ll simplify this confusion for you below with an explanation of what offshore merchant accounts are, their legality, advantages they provide, and what businesses they are a perfect fit for!
What Is an Offshore Merchant Account?
The first thing you should understand is the difference between a domestic merchant account (DMA) and an offshore merchant account (OMA).
A merchant account is a bank account that exists to accept payments via debit and credit cards.
This is extremely useful because it allows customers to easily purchase your goods and services online and also gives the flexibility of paying with methods other than cash or check.
While domestic merchant accounts and offshore merchant accounts offer the same functionalities, they differ in the requirements for acquiring one, terms of the agreement, and where the bank account is located.
OMAs tend to have less stringent requirements for signing up, making them a feasible choice for a greater number of businesses. They also follow different taxing stipulations, meaning that you’ll often pay far less in taxes for payments made and processed through them.
As you can probably imagine from the name, a DMA is based domestically (within your country), while an OMA is based internationally (outside of your country). This is what allows for different tax requirements, which can make an OMA very lucrative.
Are They Legal?
One big question that is likely coming to mind is whether or not an offshore merchant account is legal. In short, the answer is yes.
Anytime you hear about offshore banking, fraud and hidden funds are typically what you think of.
It is important to note that offshore banking is not inherently illegal, but how you report income relating to it is where problems come into play.
Using offshore accounts for the sole purpose of tax evasion is illegal, whereas using them to take advantage of a lesser tax rate in another country is legal. This is why offshore accounts are indeed legal because you are still paying taxes (just at a friendlier rate).
There are a great number of benefits provided by the availability of offshore merchant accounts.
The greatest one we mentioned above, which is a better tax rate for electronic payments. If you are using a domestic merchant account, then all of your payments must be submitted to the IRS.
This can get quite expensive because the U.S. has very high tax rates depending on how much income you are bringing in. On the other hand, an offshore merchant account can lead to small tax liability if you are savvy about the location in which your OMA is based.
Another benefit is that it gives your business the ability to seamlessly accept payment in multiple different currencies. This is very helpful when you have global customers that pay with a currency that isn’t a U.S. dollar.
A further advantage is that there are fewer restrictions on an OMA versus a DMA. Some domestic merchant accounts have caps on the volume of transactions that can be processed. An OMA does not have that limitation, meaning that you have the potential to generate more revenue than a DMA would allow for.
The final perk of an OMA is that it is far easier to get approved for. DMAs tend to be quite strict about what businesses they allow to set up an account, which can make it difficult and stressful to start. With an OMA, acceptance rates are far higher and the process is much simpler.
Who Should Use an Offshore Merchant Account?
Now that you understand the benefits of an offshore merchant account, you’re probably wondering why every business doesn’t use them.
There is one significant disadvantage to using an OMA and that is the fee per transaction tends to be much higher, sometimes as much as double what you would pay with a domestic merchant account.
It is important to remember that the tradeoff for this is a much lower tax rate depending on what country your OMA is in. Paying more per transaction (and less in taxes) for an OMA often results in a greater financial benefit than received by less per transaction (and more in taxes).
An OMA is not a perfect solution for every business because of this.
With that in mind, who is a good candidate for using an offshore merchant account?
If your business has any of the following characteristics, then an OMA will be incredibly advantageous:
A high volume of transactions.
Conducts business globally.
Expensive tax bills.
High-risk businesses that can’t acquire a DMA.
Companies with poor credit.
OMAs tend to be a good choice for businesses that operate in a field posing a high amount of risk and those that have a history of bad credit.
One final thing to consider is that using an OMA does pose some risk to your company.
You need to be careful and do your research about which merchant you choose to do business with so you aren’t a victim of identity theft. Additionally, if you don’t have a subsidiary based in the country your OMA is located in, you will have a near-impossible time trying to resolve any disputes.
Both of these risks are certainly mitigable and just require diligent research and effective planning.
Offshore merchant accounts are an effective solution for paying a lesser tax rate on electronic payments.
They are 100% legal and provide numerous fantastic benefits like accepting different currencies, allowing a higher volume of transactions, and a lower tax bill.
OMAs tend to be much easier to acquire, which makes them a great choice for businesses that are operating in high-risk industries or those with poor credit.
It is important to remember that not all offshore merchant accounts are the same, so you must carefully pick a reputable merchant that will allow your business to grow without causing issues.
Working with a great OMA will give your business some excellent tax breaks and is key to expanding beyond your domestic market.