This letter and response to it was published in the latest ACA (American Citizens Abroad) newsletter. It provides and insight into how FATCA, a law that only affects FFIs (foreign financial institutions), can have a direct personal effect on each and every individual EXPAT.
Dear ACA, I have been trying to keep myself updated on FATCA and how it can affect me, but until recently I thought that I only had to worry about tax compliance, that is, making sure my taxes were totally correct because my financial institutions would be reporting everything to the IRS anyway. I thought the problem of being denied financial services was a problem with other countries like Switzerland, and living in Scandinavia, that would not be a problem for me.
In the last months, however, I wanted to start saving in an Index fund for my infant son, and so I contacted the bank and had a meeting with the financial advisor, along with my (Scandinavian) fiancé. We agreed the fund should be in my son’s name, with the provision that both me and my fiancé would have to sign for my son to take the money out. The bank drew up the paperwork and sent it to us by post for our signatures.
When I received the papers, I found the following terms (my imperfect translation):
“The undersigned declares that he/she is not an American taxpayer, and promises to inform the bank in writing if this changes. “American taxpayer” is defined as any person that falls under the category of “U.S. Person” (under paragraph S?) of the American Securities Act 1933. The undersigned confirms that the purchase of funds is not being made for any U.S. citizen, and will also never be given to any U.S. citizen.”
I called my bank, and apparently not one single person had any idea what I was talking about. The advisor I talked to admitted he had never read the fine print (!) and we mutually agreed that I should be on the safe side, as well as my son, who has double citizenship. I did not push the issue with the bank, lest I lose all my bank accounts, so I did not investigate further.
My pension fund is also in a Scandinavian bank, invested in mutual funds of some sort, and now I am really afraid these may end up in jeopardy, not to mention I am pretty angry that I cannot have access to investment tools and now have very few options as to my personal financial planning, and that of my son, who is only six months old and can apparently never invest in funds in his own country because of his double citizenship. His father, according to this, is even barred from saving in a fund for him!
Is this a side-effect of FATCA? I am assuming it is, and the lawyers at the bank stuck this in recently, otherwise I would not have been the first customer to notice, as this is one of the biggest banks in Scandinavia. I read online that many countries and the U.S. have tax-dodger-sharing agreements, which is supposed to mean, for me, that the banks promised to be compliant and it’s business as usual for U.S. customers. Is there anyone who can shed some light on this?
Sorry for the long explanation, but since I don’t understand the situation, I don’t know what information is relevant, so I wanted to provide a whole picture.
ACA responds: ACA cannot give tax advice, therefore please be aware that we are answering to the best of our ability and current understanding, but this doesn’t constitute official advice.
Many banks are now being required to provide details of their accounts owned by “U.S. persons” — defined as but not limited to U.S. citizens and green card holders. In Switzerland and the EU, when account holders have declared themselves U.S. persons, some banks have responded by closing their accounts. The requested documentation creates extra compliance costs for every U.S. person’s account — therefore many have taken the road of eliminating the “problem” by closing their accounts. One of our members in Spain had to get an account with a bank four hours away. Other banks have responded by asking the account holders to fill out forms giving the bank permission to hand over their account details to the U.S. government. Rollout of this started in the EU/Switzerland, and is now spreading to other countries. Your bank is essentially getting on-board now.
The ACA website is a good resource to begin to understand this complicated situation that affects all of us.
Additionally, as far as your retirement account is concerned, you should also find out about PFICs — passive foreign investment companies — as they have very special and very onerous tax treatment. We quote VLT Jeker often in ACA’s Newsletter, and she has a good starting point here.
The fact is that foreign funds are considered Passive Foreign Investment Corporations (PFIC) and are subject to extremely onerous reporting requirement by the IRS. While the original law in the 1970s was aimed to prevent wealthy Americans from investing in foreign funds (which did not pay dividends but reinvested gains in the funds and thereby deferred any taxation on gains within a year) to defer US tax. The problem is once again that no one thought of the impact on Americans abroad for whom it is natural and not a tax avoidance measure to invest in local mutual funds. The upshot is that you should probably not invest in foreign mutual funds for your son. The accounting rules under PFIC are so complicated and twisted that you would most likely not even get a positive return from the investment. Concerning your own retirement plan, if it is a plan required by your country’s law, it most likely would be considered deferred income, and not a PFIC. Generally, your contributions to the fund are NOT deductible for U.S. tax purposes and an employer’s contributions must be added to your salary for U.S. tax purposes. (This is the opposite treatment provided for U.S. domestic pension plans). You should check with a U.S. tax expert who knows local laws as well to confirm that your pension plan is not considered a PFIC.
The point is that Americans abroad face deep discrimination and handicaps in saving for the long-term and for retirement due to U.S. tax policies which limit their investment possibilities.