What's an American investor to do ?
Cross Border Planning
James McEvoy's picture

Many US citizens and green card holders residing outside the United States have had some unpleasant surprises recently as a result of heightened enforcement of FATCA rules.  Non-US banks and other financial organizations have had various responses to these regulations including sending notifications limiting what US persons can invest in and sometimes even asking them to close out their accounts.  It is important to understand how things have come this far. 

Back in 2001, the US Internal Revenue Service established qualified intermediary (QI) arrangements with most banks outside the United States.  This required those banks to keep records of all US persons holding accounts at the bank and be ready to turn that information over to the IRS if requested.  In the last few years the requirements to be a QI were made even more stringent and that led many of these banks to take action with their US clients.

We have seen these actions to include disallowing US persons from being able to hold US stocks, bonds or mutual funds in their accounts and prohibiting the purchase of certain individual life insurance products.  That is the shocking news to Americans living abroad since they do not hear any such action being taken against other Nationals.

This is due to the fact that the US is the only developed country which taxes their citizens based on their citizenship and not on their residence.  This means that each year most overseas Americans (and green card holders) must file a US tax return.  In addition, they must file a foreign bank account report form (Form TD F 90-22.1) and disclose all non-US bank accounts that have had an aggregate equivalent balance over $10,000 at any point during that tax year and a Form 8938, statement of specified foreign financial assets.  Also, US persons who are currently holding pooled investments such as non-US registered mutual funds will have such investments classified as a passive foreign investment company (PFIC) which create costly and cumbersome reporting and potential penalties.

So where does an American investor go from here?  First of all, there are investments that do not pose these problems such as real estate investments, private equity and group insurances and pensions when covered under US treaties.  For many Americans the most direct way to eliminate these problems is to hold their investments in the United States with institutions who issue clear and compliant tax reporting.  Although this can involve some currency exchange risk, it can prove a lot less costly than PFIC entanglements, succumbing to questionable products marketed overseas as US solutions and facing a limited list of choices.

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