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US Expats – Foreign Financial Assets Reporting
FATCA is something every American Expat should be concerned with !
FATCA Solutions For American Expat


Globally aware and sophisticated Americans may well wish to invest into non US markets to benefit from emerging markets or more traditionally based strategies giving, potentially, higher levels of return and a more balanced and risk equalised portfolio. This is where the concept of a Passive Foreign Investment Company (“PFIC”) come into consideration.

The IRS define a PFIC as “… any foreign corporation if 75 percent or more of its gross income is passive income or if 50 percent or more of its assets are assets that produce, or are held to produce, passive income”. What that means is generally any non US mutual fund, bond or company will be treated as a PFIC.

A non-US fund can elect to provide the IRS detailed information such that the US investors can treat the investment return as currently taxable in the US, however most non US funds are not willing to take on this additional compliance and reporting burden so around 95% of all non US mutual funds are classified as a PFIC.

The exact taxing profile of investments made into a PFIC are highly complex and often the cost of merely filing these investments can outweigh the investment return. It is imperative that advice is taken from a competent US attorney if you believe you have any PFIC investments – however to give a very simple overview, every individual investment made into a PFIC should be reported on a separate form to the IRS (Form 8621) which shows the amount of the investment return and the length of time that the asset has been held. Irrespective of whether the return is classified as income or capital gain, the return will be taxed as income, often at the highest marginal rates, broken down on a proportionate basis over the total number of years during which the asset was held. An additional interest charge is also levied to compensate the US Government for the perceived impermissible deferral of tax payments.

Whilst this isn’t a major issue for those who have held these investments for 1-2 years – it can cause havoc for individuals who have held these assets for many years withsevere tax penalties.
It is also worth noting that the IRS have the ability to ‘look through’ traditional investment schemes and trusts that have US participants. Trusts should be fully reported to the IRS as a matter of general compliance (Forms 3520 and 3520-a) and the US will seek to tax the underlying beneficiary as if they were holding the investments personally. Therefore most of these arrangements offer no protection from PFIC charges what so ever.

As the US supports an equalized tax system whereby residents and non residents are treated alike, PFIC charges also apply to US physical residents too. So returning to the US with these investments does not solve the issue!

Information for U.S. Taxpayers on Form 8938 Requirements
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS, generally using Form 8938, Statement of Specified Foreign Financial Assets. The Form 8938 must be attached to the taxpayer’s annual tax return.

Uncertain whether you have to file?  Generally, aggregate value of these assets must exceed $50,000, but in some cases, the threshold may be higher.

Unclear about what qualifies as a specified foreign financial asset? Here’s a chartthat can help.
You may also have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). This comparison table will help you figure out whether you also need to file the FBAR.
Still looking for more answers? View the frequently-asked-questions (FAQs) for Form 8938 for information on real estate, foreign assets held in U.S.-based financial accounts, foreign pensions, valuing certain assets and more.

Failure to report foreign financial assets on Form 8938 may result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the assets exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938. For more information about domestic entity filing,

see Notice 2013-10. Page Last Reviewed or Updated: 04-Mar-2013
Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS. This reporting will be made on Form 8938, which taxpayers attach to their federal income tax return, starting this tax filing season.
In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
  FOREIGN ACCOUNT TAX COMPLIANCE ACT  (FATCA)
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