By Howard Borsden, Financial Advisor

RIO DE JANEIRO, BRAZIL – Many U.S. expatriates and also Non-U.S. citizens who are Green Card holders invest into Offshore Investment Based Life Assurances, which give access to a range of Mutual Funds. In particular in Brazil – many U.S. expatriates and Green Card holders have investment accounts in which they hold Brazilian Mutual Funds.

Form 8621, the reporting of Passive Foreign Investment Companies or PFICs, Rio de Janeiro, Brazil News
Form 8621, the reporting of Passive Foreign Investment Companies or PFICs, image creation.

In general these are poor investment choices with high tax costs and tax risks – from a U.S. tax compliance and reporting perspective.
The United States tax system imposes its income tax and its estate and gift tax on its citizens and tax residents based on their world-wide income and assets.  For those citizens living outside of the United States this can pose serious financial problems and planning challenges — from both a tax “costs” standpoint as well as a material limitation of the available investment structures.  
When living outside the United States, it is tempting and reasonable to look at your country of residences’ tax efficient savings and investment plans, especially when living abroad for many years.  For those investors who are not able to support an individually designed and managed investment portfolio, mutual funds (collective investments) can be a sensible means of investing.  

The mutual fund approach allows the investor to pick the amount of “risk” they are willing to take as well as spread the investment effectively into many “baskets”. The problem for U.S. citizens with this approach is that the U.S. tax system imposes severe tax and reporting requirements on non-U.S. mutual funds, making them a very poor investment option.

These types of investments are called Passive Foreign Investment Companies—PFICs for short. Under U.S. rules, income from such investments as well as gains on the sale of such investments, are subject to U.S. tax at the taxpayer’s highest marginal rate — currently 35 percent, but possibly going up to 39 percent at the beginning of next year.

This is often higher than the taxpayer’s effective tax rate — which is often say in the 20-to-25 percent range; and considerably higher than the normal maximum capital gains rate which is currently fifteen percent.  In addition to this, there is an interest charge tacked onto the tax, which is based on the number of years the investor has held the PFIC. 

Financial planner Howard Borsden offers advice on U.S. tax issues, photo by Looking for Dylan.
Financial planner Howard Borsden offers advice on U.S. tax issues, photo by Looking for Dylan.

Thus, the tax plus interest charge could be considerable.  Finally, the investor is required to file an information return (Form 8621) with the IRS for EACH PFIC that he or she owns.
The reporting requirements do not end there.  U.S. citizens must also report all their non-U.S. financial accounts (if the total is in excess of US$10,000) on what is called the Foreign Bank Account Report (TD F 90-22.1) or FBAR. 

This report is separate and apart from the new income tax reporting required for foreign assets (Form 8938) and carries a substantial penalty (US$10,000 per account) just for failure to report!!!!
Beginning in 2013 going forward, non-U.S. financial institutions will be required by the U.S. government under the Foreign Account Tax Compliance Act (FATCA) to report information regarding accounts of U.S. citizens outside the U.S. to the IRS.  

This law requires foreign financial institutions like your local bank, stock brokers, hedge funds, pension funds, insurance companies, trusts, etc. to report directly to the IRS all their clients who are US persons. The penalties for the institutions that do not cooperate are punitive.
The U.S. tax world, at least for U.S. citizens, is getting smaller and smaller – the U.S. system punishes you for virtually any non-U.S. investment and if you have not been keeping yourself “tax compliant”, the U.S. IRS will soon know about it.
There are a number of offshore tax compliant U.S. investment solutions which will keep you in full U.S. tax compliance without triggering PFIC or FATCA risks. Please email me at to discuss your situation – if any of the matters discussed above concern you.
Keep up-to-date on our the latest news and planning tips from our partner tax practice –  U.S. Tax & Financial Services blog:
* This is a paid Advertorial for Looking for Dylan.


  1. Certainly, it is tempting to invest in other countries when you are an expatriate. Human as we are, we find for other opportunities where we can gain extra income. The problem comes when we invest on something that which is not studied well first. Every investment needs a sort of feasibility study and contingencies be made should there be problems. Tax considerations should be among the considerations to be made.


Please enter your comment!
Please enter your name here

2 × 1 =