PFIC Problem for Americans with Offshore Investments

27 Oct
Americans with offshore investments

Americans with offshore investments

WARNING: U.S. Persons who Purchased a Retirement Plan, Savings Plan issued from the Isle of Man, Dublin, Guernsey or U.K. Life Insurance Company are holding a British Style Life Policy (lump sum or savings plan) which requires annual reporting as a PFIC and suffers annual taxes on the growth of 36.9% and huge annual penalties if not reported. The “U.K. Style Financial Advisor who sold thousands of these products had their clients sign a disclaimer that it is not a IRC 7702 or IRC 72 – BUT, they did not tell the customers “WHAT IT IS!”

If you have one it is called a PFIC and the THE PROBLEM is that the Isle of Man, Dublin, Guernsey and all of the United Kingdom have signed an agreement to notify the IRS of all their U.S. clients and quite frankly the IRS knows what a U.K. Style 101% policy is; British IFA Offshore Investments (products). Which means that if you have not reported it previously and annually as a PFIC then you need to read about a Passive Foreign Investment Company.

It is a PFIC (Passive Foreign Investment Company)

  • IF the client has not annually reported his PFIC to the U.S. Treasury the penalty is $50,000 USD Annually.
  • IF the client has not annually reported his PFIC to the IRS from 2011 the penalty is $10,000 USD Annually.
  • If the client has reported it then he has taxes due annually of 36.9% of the growth and if he has not paid that tax.
  • The taxpayer will have penalties and interest charges until he has paid it.

Tax Requirements for U.S. Insurance Contracts

If you are an American, you are taxed on your worldwide income and assets. No surprise! The surprise comes when you find out that the IRC Sec 7702 has a very precise definition of a life insurance contract for tax purposes. When a life insurance contract violates this provision, IRC Sec 7702(g) dictates how the policyholder will be taxed. Guess what? These policies violate the U.S. definition of life insurance. They also violate IRC Sec 72 as they can not be considered an Annuity because an Annuity can not have a life insurance element. All of these plans have 1% life cover which violates IRC Sec. 72.

In a nutshell, a violation results in the policyholder being taxed on the investment income within the policy annually. The policyholder also needs to file the reporting forms for a PFIC to the IRS.

An important component of these policies that violates IRS code is the requirement that the investment funds must be exclusively available to the policyholders of the insurance company and not include non-insurance investors. In my experience, every non-U.S. variable life or annuity policy or unit linked policy would fail to meet the requirements of IRC Sec 817(heart) as well as IRC Sec 7702 or IRC Sec 72. The majority of tax treaties dealing with annuity provisions provides for no taxed on annuity income in the Host Country and only in the Home Country.

Unfortunately, the U.S. tax rules would cause the American owning the foreign life insurance or deferred annuity contract to be taxed currently.

This all means that when a U.S. Tax payer would understand the PFIC Rules they would not have purchased this vehicle and to cancel this policy carries additional penalties! So what to do?

SOLUTION: U.S. Persons who are holding a Life Policy (lump sum or savings plan) from the Isle of Man, Dublin, Guernsey, and Jersey are advised to contact us today for a free no-obligation consultation about how to fix the PFIC problem.

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  1. The Good and the Bad of Offshore Investing - Invest Offshore - November 7, 2012

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