The devil is in the detail

[Rock Private Office]

You've been working hard overseas for some years now and have saved and invested wisely for your retirement. The fruit of your foresight is a sizeable amount of money in various offshore investments and bank accounts. Although it has grown tax free, you have paid income tax on the money used to invest and now you face being taxed again when you draw on it. How can that be fair?

If you are a US citizen or Green Card holder it gets worse. Conventional, non-US-registered funds and similar entities held inside insurance wrappers of the type often used offshore, carry with them the potential for toxic tax treatment by the US Internal Revenue Service, when they are ultimately cashed.

These are referred to as Pfics, or passive foreign investment companies, and the the US regards such funds as “foreign”, thus assigning them to tax-inefficient treatment. However, if the portfolio was organised to invest in individual stocks, equities and individual bonds, these would be compliant for US purposes, while exchange traded funds would be taxed like common stock, and therefore, only taxed on the income, interest or proceeds.

The job of identifying Pfic investments in non-US-administered investment products held by Americans had been made easier for the US tax authorities in recent years as a result of the US having increased the reporting requirements for them – for example, with the introduction of Reports of Foreign Bank and Financial Accounts (FBARs) and Statements of Specified Foreign Assets, known also as form 8938s.


However, if you get the structure right you can defer and or completely avoid liability altogether. The devil is very much in the detail of your portfolio design!