FATCA, PFICs, QEF Elections, and so much more in simple language!

Does FATCA affect you?

If you’re an American, then you’ve probably heard of FATCA. FATCA stands for the Foreign Account Tax Compliance Act and became law in 2010. Many expats incorrectly believe that FATCA is the law that requires them to report and pay U.S. taxes on their income. This is not the case; expats have always been required to report and pay tax on their worldwide income in the U.S. It’s just that pre-FATCA, it was difficult for the IRS to enforce worldwide taxation on expats because they had no access to expats’ foreign financial information.

However, it applies to many more people than just US citizens because they are “US Connected”.

Who is a Citizen?
• You’re a US citizen if you were born in the US
• You’re also a US citizen if you were born outside the US with one US citizen parent
• Note that the Passport you have is irrelevant, in fact you may not have a US passport but rather one from the country you were born in or live in.

So who else is US connected
• Green Card holders
• Other visa holders living in the US
• Anyone who is Tax Resident
• There’s a test for this that a US tax adviser can help with.

Why does all this matter. Well one simple reason – if you’re American or a US connected person then you have a US tax reporting obligation no matter where you live. You’ve always had this obligation however it became more enforceable because FATCA. FATCA is nothing to be scared of and it doesn’t increase your tax liability.

What has FATCA done?

Foreign Financial Institutions, FFIs for short, are required to report the accounts of U.S. connected persons and entities substantially owned by U.S. connected persons to the IRS.

Generally, they must report the U.S. connected person’s name, Taxpayer Identification Number, account number, year-end account balance, and the gross receipts and gross withdrawals or payments from the account.

The result, as many have experienced, is that banks, fund managers, brokers and many more have decided that they do not want to hold assets of U.S. connected persons. This has made it hard for you to invest while living outside the U.S. and further complicated by:
• U.S. brokerage accounts being closed for those living overseas
• Bans on investing in U.S. mutual funds and U.S. ETFs. For those living overseas

What exactly is a PFIC?

PFIC stands for “Passive Foreign Investment Company”. For all intents and purposes PFICs are non-U.S. investment funds, such as: mutual funds, hedge funds, and exchange traded funds (ETFs for short).

Like many expats you are probably asking yourself, why do I need to know this? The answer is because:
• PFICs are subject to draconian taxation by the U.S. that often wipes out any profits they generate; and
• You have to file a report to the IRS for each PFIC.

PFIC gains are, amongst other punitive tax treatments, not eligible to be treated as capital gains but instead are taxed as ordinary income tax.

Having a PFIC may be very hard to avoid but minimizing the number you have and then only investing in those that are Qualified Electing Funds (QEFs) is important.

Do you have a PFIC?

Do you have investments that are based outside the US?
No: Great!
1. Are those investments specifically designed for US-connected investors?
2. Do you make ALL of the decisions each day on when, where and how the assets in your investment are bought and sold?
3. Is all information on your investment and transactions submitted to the IRS each year by both you and the investment company?
4. Has your investment given all details about its clients and itself to the IRS ever since it first started trading?

If you answered “no” (or you don’t know) to any of question 1-4 then you may well have a PFIC!

What to look for in an investment in Europe:

When considering investments, it’s important to make sure that they cover some key things:

Compliant – Non-compliant investments for U.S. citizens living overseas are taxed as income (up to 37%).
Compliant investments have the potential to be taxed as capital gains tax (from 0%-20% subject to long/short-term considerations).

Liquid – Many U.S. compliant overseas investments are pension based and cannot be accessed before retirement (age 50-59.5 years) without penalties. It’s important to find investments that can be liquidated based on your needs and that are mobile as you move to other countries.

Established – An established financial jurisdiction should regulate the investments and you should focus on top-tier managers.

Fees – All fees should be clearly disclosed and in today’s world products should be cost-efficient, especially in an actively managed portfolio product.

Reporting – All necessary tax reporting should be available. For Americans this includes the ability to file Form 8621 for a Qualifying Elected Fund (QEF) which is important to get the correct tax status of the investment.

New solutions are available

I believe no problem should be impossible to solve. So, we brought together a team from across multiple disciplines – tax, legal, compliance, and fund management to find a solution. Two years later we launched Universal Access Bonds®. UABs® don’t rely on expensive insurance wrappers, “offshore” products or expensive trusts. Instead they’ve been designed to be cost effective and offer a way to invest similar to other “collectives” like mutual funds.


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