What is the problem with a PFIC for a US person?

So what is the problem with a PFIC for a US person? There are two main problems with PFICS for US citizens. The first is: that it is quite possible that a US Person invests in a PFIC without knowing about PFICs and the financial risks.

A simple example: let’s say during the year a 10,000 euro investment is made, an investment that happens to be a PFIC, and on December 31st of that year that investment now rises in value to 20,000 euros. And the US person has not sold that investment, has not done anything in that investment. It is quite possible that there would be a US income tax owed on the 10,000 euro appreciation of that investment. So that is not an ideal result for somebody that is looking to invest their capital.

The second problem with a PFIC for a US person is it is a very complex reporting document that has to be prepared and included in that US person’s annual tax return. They are very complex forms to complete and in most cases, a professional accountant would be needed to help prepare those documents. 

The complexity comes from the fact that these PFICs are often in funds or pooled investments. As a result, gains and losses are not reported at the share level, indeed, often the client does not know what purchases and sales have taken place by the financial organization and the FI cannot properly report this for US Tax purposes.

Do I need to avoid PFICs?

Ask your financial planner, but in 99% of cases, the answer is YES. The returns almost never outweigh the punitive tax the IRS charges.

How do I find out that I am investing in PFICs?

Sometimes this is very easy, and sometimes very difficult because it is not clear if the company behind it is foreign. Equity funds or pooled investment offered to “non-US Person” actually always contain PFICs. Fortunately, there are many companies that offer stock funds, shares, and pooled investments especially for US Persons so you are not mistakenly taxed.

Americans Overseas can help you with your PFICs

Americans Overseas offers a large independent network of US tax accountants and financial planners, specialized for Americans living abroad. Based on your personal situation, we provide information and introduce you to the appropriate expert in our Americans Overseas network, free of charge and free of any obligation. 

Contact us for more information