Passive Foreign Investment Company (PFIC) Problems

Prague Castle from Charles BridgeFor U.S. persons it is absolutely correct that you should engage in diversification of investments and assets overseas. However, the difficulty with much of the information received from a blog or Google search, no matter how attractive it might seem, is completely out of date. All the points sound great if you say them quickly.

Diversification for a U.S. person outside the USA is a good thing to do and the difficulty to open a foreign bank account is impossible for both the banks reason and for your reasoning. Therefore, any discussion about the use of a foreign bank account is academic. To obtain a foreign bank account, if you don’t live in a foreign place or strongly connected to a foreign business, is not going to happen and even if it did it is very limited and almost impossible to operate.

There are new reporting rules and the big one is the Foreign Account Tax Compliance Act (FATCA) and there is the ever present one which is the report to the U.S. Treasury which is forever; and most people don’t even really understand how it works. Additionally there is the penalty one, which is also the technical one which is the Passive Foreign Investment Company (PFIC) IRS Form 8621. The IRS says that unless it is specific in the tax code as not being a PFIC then it is a PFIC. This filing is devastating for any type of investment overseas except for one. You can take it that all forms of overseas investment structures or forms should be regarded as a PFIC except for one.

Instead of looking at complicated legal structures and tax efficient trusts and asset protection regimes that are advertised frequently and commonly it should be appreciated that the U.S. tax reporting is now legally so comprehensive that none of the commentaries out there, although they use to be excellent ideas, have any current value.

The whole idea of the use of foreign bank accounts or foreign trusts is history. They use to be a great idea 20 years ago or perhaps even 5 years ago but not now; marvelous ideas but that was then and this is now. These old things are like a stock market analysts report which is out of date before they are printed, and that is the difficulty with them. There are a number of ideas that have been around for a long time that are not operable these days.

In the area of looking at what a U.S. person should or shouldn’t be doing, actually starting with tax planning is completely the wrong place to start. You should be looking at what do you want from your life? Where do you want to live? You should not start from a determination of how much tax I am going to save and then attempt to bend everything which is what many of those trusts and things force upon you. Referring to such things as asset protection or tax efficient trusts are not clever.

There are new rules on how to invest overseas and you can take it that all forms of overseas investment structures or forms should be regarded as reportable and a PFIC except for one.


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