The Tax Implications of Mutual Funds & ETF for Expats

The Tax Implications of Mutual Funds & ETF for Expats

Tax Implications of Mutual Funds & ETF for Expats

When it comes to international tax law, the Passive Foreign Investment Company tax scheme is one of the most complicated that the IRS has to offer. In general, when a person is considered to be a US person and owns various passive PFICs – which can include items such as foreign mutual funds and ETFs –– they are required to perform a very detailed tax computation in any year that they are considered to have received an excess distribution. Even though expats reside outside of the United States, unless they have formally expatriated from the United States they are still considered US persons and are still required to report their foreign mutual funds, ETFs and other pooled funds to the IRS and FinCEN. Even though the reporting and tax implications can be relatively complex, in general once the taxpayer is in compliance — moving forward is not all that bad if the Taxpayer knows what to look out for in future years, and how to potentially minimize the tax implications. Let’s take a look at some important facts for expats involving mutual funds and ETFs.

What is a PFIC?

PFIC refers to Passive Foreign Investment Companies. While they can mean a foreign company that has income that is primarily generated as passive income or from passive assets — it (unfortunately) also includes various types of pool funds such as mutual funds and ETFs, which are very common types of investments.

Tax and Reporting Elections for PFIC

There are many different elections that a taxpayer can make involving their PFIC that may minimize the overall tax implication in the long run. The two main types of elections are the MTM election which is Mark-to-Market and the QEF election which is a Qualified Electing Fund. In general, the QEF election is better — but since it requires more cooperation from the Foreign Financial Institution, it t is not always possible.

Treaty Protections & Elections

If a person makes a treaty election to be treated as a foreign person, then it can impact the PFIC reporting rules — but the details are beyond the scope of this initial article, other than to let taxpayers know that being treated as a foreign person may impact PFIC reporting — especially when the election is made in the first year of becoming a US Person. Another aspect of treaties and PFIC is that in general, when a treaty country is involved then even if there are PFICs contained in a pension plan, the taxpayer does not have to parse out the PFIC separately from the pension plan.

Excess Distributions of PFIC Income

When a taxpayer has excess distributions, they have a very complicated tax computation they must perform in order to determine the amount of income. Even though the income is similar to Qualified Dividends (QD) and/or Long-Term Capital Gain (LTCG), when it is involved in a PFIC, it does not receive the same tax-preferred treatment as QD and LTCG. In fact, the income is taxed at the highest tax rate available in addition to interest charges that are tacked on as well.


The most common types of international information reporting forms are the FBAR and FATCA.  Foreign mutual funds and other pooled funds are required to be reported on these two forms as well as usually on other forms such as Form 8621. Whether or not the funds are located in an account as opposed to just owning the funds individually will determine whether or not just the account information (and the total value of all the funds combined) can be reported as one — or whether the taxpayer is required to parse out each particular fund on the forms.

Expatriation Proposed Regulation

The proposed expatriation regulations have been in effect for several years. There is a proposed regulation that would require expatriates to deem their PFIC sold on the day before they expatriate, which may lead to additional exit tax, even in a situation in which the taxpayer would not otherwise have an exit tax. Therefore, for taxpayers considering expatriating and who own PFIC will want to plan accordingly because at some point those proposed regulations may become finalized, to the taxpayers dismay.

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