Are Foreign Investments Worth it From a Tax Perspective?
Life insurance, mutual funds and ETFs are popular investments for US persons living abroad. However, if not properly executed they can fall under the rules of a “Passive Foreign Investment Company”, aka THE PFIC. If this happens, expenses can rise dramatically, and the investment can become more costly than beneficial. Understanding PFIC’s requires hours of study and calculations to determine if one is subject to PFIC treatment. However, we will leave the links below for those who, like us, are fascinated by esoteric tax rules. One example of PFIC’s that we see often in our practice is foreign life insurance. As the US tries to discourage Americans from making foreign investments, it issues complex rules with punitive consequences on these investments. Income from these investments can be subject to the highest US marginal income tax rate as well as interest that accrues from the first day of ownership. When adding all this together, easily 50% of the gains from foreign investmen...