PFIC taxation and Americans abroad

This is a problem that is going to become more and more significant. As a result Dr. Kish and I have authored a separate “PFIC” submission – dated February 6, 2015 – which we have submitted to the U.S. Senate Finance Committee.

This submission is titled: “Request for PFIC Tax Rules Changes for U.S. Citizens Overseas”.

It is intended to be a further elaboration of the “PFIC rules” component of the January 17 2014 submission made to the Senate Finance Committee by Richardson, Yates, and Kish entitled “Request for Tax Rule Changes for U.S. Citizens Overseas.”

Our first submission provided  general recommendations and analysis and included only a limited discussion on the PFIC tax rules (pages 21-24).  This new submission by two of the co-authors (Mr. Yates is not part of the new submission) provides a detailed and, what we believe to be, important discussion and analysis of the PFIC rules with a specific recommendation to the committee. 

The world of PFICs is extremely complicated and confiscatory. The message for U.S. citizens abroad who have purchased mutual funds (and similar investment vehicles) in their country of residence is:

Do NOT buy more and get professional advice for how to deal with the ones you have.

Enjoy (to the extent that it is possible when reading about PFICs).





7 thoughts on “PFIC taxation and Americans abroad

  1. monalisa1776

    When I first learned to my horror about my PFIC problem, I genuinely feared that I might have been bankrupted by the confiscatory taxation, accounting and possibly legal fees (not to mention FBAR penalties). I held close to fifty individual holdings, all with small amounts, with one PFIC holding being worth 60 cents!!!

    If I’d done the OVDI, I would have probably faced accounting fees alone north of $150,000 if we’re talking even a ‘modest charge per 8621 of $250 x 47 x 8 (for eight years) = $94,000 without even taking into account their standard 1040 fees of at least $2000 per year; my pension fund and ISA accounts (which held most of the mutual funds) could have each all required forms 3520/3520a, adding perhaps another $25,000 in account fees if we’re talking about going back eight years!!!

    I would have faced confiscatory PFIC taxation probably north of $50,000 plus attorney fees north of $50,000; so now we’re talking a total accounting bill north of $150,000; legal fees north of $50,000; taxation north of $50,000, especially if you also include interest and penalties; and then, of course, the OVDI miscellaneous FBAR penalty of 25% of the highest aggregate balance of my non-US accounts over that eight year period, which would have equated to at that point about 35% because of falls in the stock market; These foreign accounts were over 80% of my total worth, being permanently settled in the UK for over twenty years at the time, having been completely legally invested in what is a tax-free retirement investment vehicle there, plus a DUAL citizen.

    With a total investment under $400,000, I’m guessing that I would have lost approximately $375,000 in OVDI. If the IRS or FINCEN are reading this and want to use the NSA to find me, my subsequently ax returns came to close to 1000 pages (by an excellent accountant who was prepared to effectively do almost pro bono work for me at ‘merely’ £25,000-$30,000 which was very reasonable considering the huge complexity)’s that for a doorstopper???

    If you feel that this dangerous for me to post, then please delete this….but I am so OUTRAGED to have faced ruin for what had been a completely unintentional mistake and omission. This sense of entrapment and betrayal was essentially why I decided to renounce.

    I was literally frozen in the headlights by FATCA and had been like the frog or lobster being so slowly heated up in the pot that the water was boiling before I realized my peril. Had I known, I wouldn’t have even touched local mutual funds and would have probably just used local certificates of deposit. This PFIC taxation also essentially attacks the small vs rich investors by It’s very nature of mutual funds being designed as a way for the minnow to spread investment risk. It’s all a racket, and I have at least till mid 2016 before all the damn statute of limitations will have finally closed for these PFIC tax filings.

    1. admin Post author

      Your comment includes:

      “If you feel that this dangerous for me to post, then please delete this….but I am so OUTRAGED to have faced ruin for what had been a completely unintentional mistake and omission. This sense of entrapment and betrayal was essentially why I decided to renounce.”

      On the contrary, I appreciate the detail of your comment. Actually you did NOT make an “unintentional mistake and omission”. The simple fact is that the PFIC rules lay dormant until 2009 until they were discovered. You thought you were simply investing for retirement. In reality your attempts to be responsible meant that you were building up a portfolio of tax and penalty liabilities.

      The PFIC rules are very specifically and intentionally designed to penalize Americans who invest in “non-U.S. assets”. This of course includes “Americans abroad” who invest in their country of residence. As one commenter noted, they are almost unmatched in their complexity.

      The Senate Finance Committee as part of its consideration of tax reform has said that they are considering “PFIC” reform. Let`s see if they do.

      As long as these rules exist (and FATCA requires the disclosure of all PFICs) Canadians of U.S. origin are essentially disabled from retirement planing.

      it’s like this:

      You can be an American living outside the United States.


      You can be an American who can save for an adequate retirement.

      But, there are few Americans abroad who can plan for an adequate retirement.

      What does this mean? If these rules are not changed, Americans abroad will be (as you were) forced to renounce U.S. citizenship to protect their futures.

      Thanks again!

  2. monalisa1776

    The other outrageous thing is that in theory at least, I wouldn’t have been able easily do an IRA, especially if taking the foreign ewers income exclusion. In fact it might even have been your report that mentions that US persons abroad aren’t even allowed to legally invest in US-based mutual funds, nor are they easily able to retain or open a US brokerage account (or even bank account) if living abroad. We’re screwed at all sides and yet Chuck Schumer has the gall to want to treat people like me as apostates with the Ex-Patriot Act…:'( It’s terrifying and even though I’ve renounced, realize that I won’t be truly free till all the SOLs have completely closed.

  3. DDD


    just to clarify : you did a QD – nearly a voluntary disclosure – with or without a RC letter ?
    by amending the last 6,7,8 years of tax returns ?
    amending or filing the delinquent FBARs ( 47 of them ????! ) for 6,7,8 years ?

  4. badger

    See this new law journal article about PFICs, Canadian mutual funds and US punitive treatment of same:

    Volume 37 – Issue 3 Fordham International Law Journal
    'Getting Caught Between the Borders: The Proposed Exemption of the Canadian Mutual Fund from the Passive Foreign Investment Company Rules'

    "While legislators had valid reasons for promulgating the PFIC regulations, namely to discourage US citizens from deferring or avoiding US taxation by investing in non-US corporations, the PFIC rules are over-inclusive In practice, the PFIC regime captures assets that do not facilitate the legislative intent of preventing tax evasion and tax deferral. Specifically, the inclusion of certain regulated Canadian assets in the PFIC rules is improper because, unlike the Cayman Islands, Bermuda, or Luxembourg, Canada is certainly not a tax haven. US investors do not exploit Canadian mutual funds to avoid or defer US taxation. Hence, subjecting US investors in Canadian mutual funds to the PFIC rules causes such investors, just like Keith, to incur a combination of higher tax rates, interest for underpayment of phantom income taxes, and penalty taxes, all without serving a clearly delineated legislative purpose…"

    1. admin Post author

      Thank you for drawing my attention to this article. As time goes on, the assumption that Canadian mutual funds are PFICs, ensures that they will be treated as PFICs (everybody just assumes that mutual funds are PFICs).

      The truth is that, other than the “acceptance by the tax community” that Canadian mutual funds are PFICs, it is not immediately apparent why they should be so. I have never understood how, in terms of the Internal Revenue Code, Canadian mutual funds meet the definition of a PFIC.

      Let me explain my thinking. I invite somebody to enlighten me on the point.

      1. PFIC is an acronym for “Passive Foreign Investment Corporation”. In 2010, an IRS counsel opined that even though a Canadian mutual fund may be a trust under Canadian law, it is a corporation under U.S. law. Okay (bearing in mind that the opinion of an IRS counsel does NOT make it the law), but …

      2. There is a difference between the owners of the mutual fund company itself, and the assets owned by the mutual fund. For example, persons A, B, C and D can go into the business of operating a mutual fund which they organize as a corporation. They would be the owners of the mutual fund company itself. Furthermore, the mutual fund company is an active business. The profits of the mutual fund company come from earnings for managing the assets of the fund. Therefore, the mutual fund company is NOT a PFIC.

      The mutual fund company then goes and gets investors X, Y, W and Z to invest $100,000 each, which they give the fund to invest. The investors are NOT owners of the mutual fund company, but are entitled to their proportionate share in the investments owned by the fund. My point is that the investors are NOT shareholders in the mutual fund company itself. So what are they? Well, they are investors are who are entitled to their proportionate share in the earnings of the (passive) investments in the fund. How does the fact that the investors, who are not owners of the mutual fund company, are entitled to their proportionate share in the passive returns from the fund’s investments, make them shareholders of a PFIC.

      I would be grateful if somebody could explain how we move from the definition of a PFIC (which speaks of shareholders in a corporation) to the investors owing shares in a PFIC corporation. Why did it take until 2010 to “wake up to the idea” that investing in a mutual fund was investing in a PFIC?

      Those who are interested in this question, should read the PFIC provisions of the Internal Revenue Code.

      S. 1297 – What is a PFIC – Given that the owners of the mutual fund are different from the investors in the fund, according to S. 1297, how are the investors in the mutual fund the owners of a PFIC?

      “(a) In general
      For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—
      (1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or
      (2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent.”

      S. 1291 – How PFICs are taxed – This is outright theft!

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