If you are a US expat looking to invest in equity funds away from home, you may not know where to begin.
This is unsurprising as the Internal Revenue Service, also known as the IRS, scrutinises every US citizen and green card holder wherever they live.
This often means that US citizens could still be subject to US taxation and may well have to adhere to the taxation of the country they reside in.
PFICs
Mihir Kapadia, chief executive of Sun Global Investments, confirms: “US citizens in the UK need to be aware of the laws and legislation in place before investing, especially with the Foreign Account Tax Compliance Act (FATCA) which sees UK financial institutions reporting directly to the IRS about US clients.”
He adds: “Americans also need to take into consideration the fact that they are taxed regardless of where they live in the world, and will have to be aware of any investments they have chosen to keep in the US, as both countries will take this into consideration.”
Keith Poniewaz, director of international advisory services at Walkner Condon, points out that non-US domiciled funds are tax toxic in the US because they are considered passive foreign investment companies (PFICs) for US purposes.
A PFIC is a foreign based corporation which has two characteristics. Either at least 75 per cent of the corporation’s gross income is “passive”. Or at least 50 per cent of the company’s assets are investments that generate income through earned interest, dividends or capital gains.
Sigita Dromantaite, director at US and UK Eagle Taxation, says: “The IRS is having a field day with investments falling under PFIC regime by imposing high tax on those investments.”
She adds: “I have seen people losing lots of money and I mean really thousands and thousands of dollars when the poor souls find out that all investments they have in their investment portfolios are PFICs.”
Tax-friendly investments
If PFICs cause more pain than gain to US expats, which US equity funds can be useful for those living in the UK?
Mr Kapadia thinks investors should consider being very selective with their investments and there are currently a small number of US mutual funds and ETFs which are eligible to be taxed in the same way as other UK funds.
This includes investing in individual stocks and bonds and also having the possibility to buy individual stocks that qualify for advantageous tax treatments.
Ms Dromantaite says: "While it may look as not that profitable, investing directly in shares globally is OK [as the] PFIC regime does not apply.”
She explains that investing directly in corporate bonds and registered funds could also be options as none of them fall under the PFIC regime.
