There is a misconception amongst many US Expats that FACTA is the law requiring them to pay US taxes on their income. This is not actually the case as US Expats have always been required to pay tax on their worldwide income in the US.

 

The Foreign Account Tax Compliance Act (FATCA) became law in 2010 and prior to FACTA it was difficult for the IRS to enforce worldwide taxation on US Expats and US connected persons because they had no access to their foreign financial information.

FACTA affects both US citizens, US-connected persons and accidental Americans. 

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Who is a US citizen

 

• If you were born in the US 

• If you were born outside the US with one US citizen parent

• The Passport you hold is immaterial, you may not even have a US passport but rather one from the country you were born in or live in.

 

Who is a US connected person?

 

• Green Card holders

• Other visa holders living in the US.

• Anyone who is US Tax Resident

 

Whether you are a US citizen or a US connected person you have always had a US tax reporting obligation even when living outside of the US. This became more enforceable due to FACTA but contrary to general belief FACTA does not increase you tax liability.

Following FACTA becoming law Foreign Financial Institutions have been required to report the accounts of US citizens and US-connected persons and entities substantially owned by US citizens and US-connected persons to the IRS.

 

This reporting is to include the person's name, Tax Identification Number, account number, year-end account balance, gross receipts and gross withdrawals or payments from their account.

 

Consequently, many foreign banks, brokers and fund managers have stopped holding assets of US citizens and US connected persons making it harder to invest outside the US.

 

This has become further complicated by US brokerage accounts being closed and prohibition on investing in US mutual funds and US exchange-traded funds (ETFs) for those living overseas.

PFIC stands for Passive Foreign Investment Company. Under US tax law any pooled investment that is registered outside of the US would qualify as a PFIC including mutual funds, exchange-traded funds (EFTs), investment trusts and certain foreign pension investments.

 

They are subject to taxation by the US, and you must file a report to the IRS for each PFIC you hold.

 

PFIC gains are not eligible to be treated as capital gains and are instead taxed as ordinary income but at the highest rate normally reserved for high earners.

 

Sometimes holding a PFIC can be hard to avoid but we may be able to help you reduce the number of PFICs you have and advise you on alternative compliant structures.