Taxpayers Should Avoid PFIC Traps with Investment Visas
Taxpayers Should Avoid PFIC Traps with Investment Visas: When it comes to US Persons investing into a Foreign Citizenship-by-Investment or Residence-by-Investment Golden Visa Program, it is very important that the US person understand the US tax ramifications of certain passive foreign investments — this is especially important when the investment may make PFIC tax may creep to the surface. With most Golden Visa Programs, the Taxpayer has the opportunity to select various different opportunities for investment. For example, some visa programs allow the taxpayer to invest in real estate, local business development, and/or financial products and investments. It is the latter category of financial projects that can put the taxpayer into some serious tax peril from a US tax perspective — if they remain a US person. This is especially true when the US person taxpayer applies only for a Residence-by-Investment, with no intent of expatriating from the US.
What is a PFIC?
PFIC refers to the term Passive Foreign Investment Companies — and owning a PFIC can have significant tax implications from a U.S. tax perspective. The idea behind the PFIC, is that when a US person invests into a foreign company — including a foreign mutual fund or SICAV — the Foreign Financial Institution does not oftentimes report the information to the US government — and no-1099 or equivalent is issued to the taxpayer. The United States likes to be in the know when it comes to investments made by US persons, and since the US government cannot track the comings and goings of income generated within a foreign investment fund — they developed the PFIC regime to ensure US persons with foreign passive investments pay any necessary tax as a result of the earnings.
Investment Visa & PFIC Tax Implications
Before a US person invests into a Golden Visa Program in which they are going to invest into financial products, they should carefully evaluate the timing of the investment vs expatriation (if they plan on expatriating). That is because the PFIC taint can result in significant tax consequences.
In addition, the window of opportunity to make a PFIC election (MTM or QEF) is limited — and if the taxpayer misses the opportunity to make the election, they may be stuck in PFIC territory.
US Tax on Foreign PFIC
When passive income is not PFIC — even when it is foreign sourced — it may still benefit from the reduced US tax rates for Long-Term Capital Gain (LTCG) and Qualified Dividends (QD). Conversely, while LTCG and QD may Clock in at 15 or 20% tax rate — if that same income is derived as a result of an Excess Distribution through a PFIC — the tax rate jumps up to the highest tax rate available during each year of the investment — and the progressive tax rate of the US owner for the current tax year.
In other words, the resulting tax liability will leave the Taxpayer paying more than double tax — in addition to penalty interest for the time the investment was sitting in the PFIC.
PFIC Tax Planning for Investment Visas
In conclusion, when a US person is going to invest into a foreign Citizenship-By-Investment or Residence-by-Investment Program, and is considering investing in financial products in that country — it is important to understand whether there will be PFIC consequences. In situations in which a foreign investment is considered a PFIC, the tax implications can more than double from what they ordinarily would have been under general passive income tax rules.
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