Investingsparkskonto (ISK) US Taxation, FBAR & FATCA
As with many foreign countries across the globe, Sweden developed a new type of investment scheme about 10-years ago in order to assist taxpayers with overseeing their different investment types and saving for retirement. The name of this type of specific investment account is referred to as an Investingsparkskonto or “ISK.” One of the key aspects of this type of investment account is that Sweden does not levy any capital gains on the sale of the assets of the ISK – rather there is a standardized annual tax that is deducted each year, based on the value of the assets. In addition, in further streamlining the process for taxpayers in Sweden — they are not even required to report the acquisition or sale of the assets in the account. But, for US persons to have these types of investment accounts in Sweden, it can get very complicated from a US tax and reporting perspective — because while the ISK may avoid capital gains tax in Sweden — that does not mean it escapes taxation in the United States.
How is an ISK Taxed?
In the United States, there is no annual tax on investments just because of holding the investment — taxation occurs when there is a recognized taxable event, such as selling a stock. In Sweden, for the ISK specifically, the annual tax is levied in lieu of a capital gains tax. The problem is in the United States, when these assets are sold they would still become subject to US capital gains tax. In addition, it can get even more complicated if there are foreign mutual funds within the ISK — which can lead to the unwanted PFIC scenario. If the investments are considered (in part or in whole) as PFIC, they will undergo a much different tax implication in the United States, whereas while the accrued non-distributed growth is not taxable, once distributions are made — and specifically the excess distributions –it will usually result in significantly more tax liability than a taxpayer would have had to pay if they had a similar domestic US version of the same investment. Another concern is whether the annual tax paid (non-capital gain) would translate into a foreign tax credit in the United States because the tax is being levied in Sweden is merely because a person is holding the investment — whereas the tax assessed in the United States is as a result of capital gains and the specific sale of the asset.
Investingsparkskonto (ISK) FBAR, FATCA & PFIC Reporting
Since technically an ISK is a foreign financial account, it is reportable on one or more international information reporting forms, such as the FBAR (FinCEN Form 114) and FATCA (Form 8938). The FBAR and Form 8938 or not mutually exclusive from each other — and therefore taxpayers may be required to file the ISK on both forms. If the foreign investment also contains items such as mutual funds, ETFs, or SICAVs, then the investment may become subject to Passive Foreign Investment Company reporting on form 8621. There are some potential exceptions and exclusions from reporting on 8621, but they are limited. In addition, the Internal Revenue Service does not require duplicative reporting of the same asset on Form 8938 and Form 8621— although if the taxpayer has multiple types of investments and categories of investment — both forms may still be required. While the failure to report these accounts may result in significant fines and penalties, the Internal Revenue Service has developed various amnesty programs to assist taxpayers with safely getting into compliance with a reduced penalty, or even a complete penalty waiver.
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