subject: Investment in Foreign Mutual Funds and Foreign Corporations US Taxation under PFIC Regime [print this page] Investment in Foreign Mutual Funds and Foreign Corporations US Taxation under PFIC Regime
For Many US persons investment in offshore mutual funds or foreign corporations may seem attractive at first. This is because no tax or low tax may exist in the foreign jurisdiction. And also because the US investor acts under the wrong assumption that earnings are subject to regular taxation in the US when they are repatriated in the form of dividends or sale of the stocks. This approach can be quite costly when considering that certain foreign corporations and foreign mutual funds are treated under US taxation as "Passive foreign Investment Companies" (PFIC).
Taxation and Reporting Requirements of a US Shareholder of a PFIC
Gains from investments in a PFIC are taxed in the US as ordinary income and not as capital gains. Also if certain elections are not made by the US investor, his / her income from the investment will be subject to the highest ordinary income tax rate plus interest compounded annually. This may result in a staggering tax bill.
Under the "Hire Act" Starting from tax year 2010 US persons who own shares in a PFIC have to file an annual report to the IRS regarding their holdings in the PFIC.
Conclusion
The investment in foreign mutual funds has no tax benefits for US investors over the investment in US domestic funds. And even more so, investment in foreign mutual funds or in certain foreign corporations may be very costly due to punitive taxation under the PFIC regime. Also it is important to note that even if a foreign corporation is no a PFIC there may be other US tax implications for the US investor. Therefore the prudent US investor should obtain professional tax advise before investing in foreign mutual funds or any foreign corporation for that matter.
This general overview can not be a substitute for specific professional advise.
The full article can be found at the internet site of Kisch & Co. CPAs - www.kcpa.co.il
