FATCA & PFIC
Foreign Account Tax Compliance Act and Passive Foreign Investment Company
Does FATCA affect you?
If you’re an American, then you’ve probably heard of FATCA. FATCA stands for the Foreign Account Tax Compliance Act and became law in 2010. Many expats incorrectly believe that FATCA is the law that requires them to report and pay U.S. taxes on their income. This is not the case; expats have always been required to report and pay tax on their worldwide income in the U.S. It’s just that pre-FATCA, it was difficult for the IRS to enforce worldwide taxation on expats because they had no access to expats’ foreign financial information.
However, it applies to many more people than just US citizens because they are “US Connected”.
Who is a Citizen?
- You’re a US citizen if you were born in the US
- You’re also a US citizen if you were born outside the US with one US citizen parent
- Note that the Passport you have is irrelevant, in fact you may not have a US passport but rather one from the country you were born in or live in.
So, who else is US connected
- Green Card holders
- Other visa holders living in the US
- Anyone who is Tax Resident
- There’s a test for this that a US tax adviser can help with.
Why does all this matter
What is a PFIC ?
Passive Foreign Investment Company
What exactly is a PFIC?
PFIC stands for “Passive Foreign Investment Company”. For all intents and purposes PFICs are non-U.S. investment funds, such as: mutual funds, hedge funds, and exchange traded funds (ETFs for short).
Like many expats you are probably asking yourself, why do I need to know this? The answer is because:
- PFICs are subject to draconian taxation by the U.S. that often wipes out any profits they generate; and
- You have to file a report to the IRS for each PFIC.