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Americans overseas and the U.S-connected individuals obligated to file taxes in the United States frequently make a common mistake by buying or investing in a foreign mutual fund (including ETFs or other non-U.S.-based funds). These non-US funds are classified as PFICs, and they have serious tax consequences for the U.S. taxpayer. In simplified terms, PFICs are pooled investments registered outside the United States, encompassing mutual funds, non-US pension plans, hedge funds, and insurance products.

What are the characteristics of PFICs?

  • 75% or more of its gross income for the taxable year in passive income, or
  • At least 50% of its assets are held to produce passive income.

Passive income includes:

  • Dividends, interest, royalties, rents, or annuities
  • Excess gains from certain asset sales or exchanges, certain commodities transactions (including futures), and foreign currency
  • Income equivalent to interest
  • Income from notional principal contracts
  • Payments instead of dividends

Common pitfalls American expats and U.S-connected persons residing overseas face

“Excess distributions” from a PFIC can lead to punitive taxation- Tax rates on these investments can rise to over 50% because of (highly) complex rules applying to the timing of PFIC income recognition.

The compliance burden is on the taxpayer. A weighty compliance burden attaches to reporting PFIC investments – for example, tax filers must complete separate forms every year for each PFIC. Hours of professional time can link to the completion of individual documents, and the information provided by foreign investment firms is seldomly tailored to meeting PFIC reporting requirements.

What can I do if I hold PFIC investments?

First, you should speak to a qualified U.S. tax advisor that can make sure you are up to date with any tax filings, taxes due, and or penalties due to the IRS.

Secondly, you should consult a qualified financial advisor to discuss appropriate investments that are not PFICs that are tax-efficient in structure. Choosing the right financial advisor who understands how PFICs work and is conscious of your U.S tax obligations can make a big difference in your retirement and investment planning.

Due to FATCA, the likelihood that the IRS will eventually identify unreported PFICs has increased dramatically. It is crucial for U.S. persons residing offshore with U.S tax obligations to understand PFICs and how they can affect their U.S. tax filing as an expat. Understanding how to avoid PFIC investments can lead to wiser investment decisions.
Beacon Global Wealth Management can work with you to develop an investment strategy that is IRS compliant and tax-efficient.

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Disclosure:
Beacon Global Wealth Management are not tax experts and due to the complexities of the tax system and your aims and objectives, it is highly advisable that you seek an independent tax opinion. You are fully aware that BGWM are not Tax Advisers and as such cannot be held responsible should the applicable tax authority raise a claim against you for any future taxes.
The information on this page does not disclose all the risks and other significant issues related to the investments. Prior to transacting, potential investors should ensure that they have consulted with their financial adviser and fully understand the terms of the investments and any applicable risks.
Any views, opinions, or estimates expressed in this document reflect the current views and opinions of Beacon Global Wealth Management, however, these views, opinions, and estimates are subject to change.
The value of investment products may go down as well as up and any data on past performance, modeling, or back-testing contained herein is no indication as to future performance. No representation is made as to the reasonableness of the assumptions made within or the accuracy or completeness of any modeling or back-testing. The value of any investment may fluctuate as a result of market changes. The information in this document is not intended to predict actual results and no assurances are given with respect thereto.