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Foreign Nationals Should Beware of PFICs

Many foreign nationals live and work in the US.  For those who are permanent residents or have received their green card or other qualifying visa, it is important to understand your requirements as a US taxpayer and the impact your foreign investments may have upon the taxes you will owe to the IRS.  Many foreign nationals have offshore savings and investments prior to their arrival in the United States.  Often they have invested in offshore mutual funds and other investments that trigger what the IRS calls a “Passive Foreign Investment Company” or PFIC.  Why should you be concerned about the nature of your offshore investments?  One simple reason: heavy taxes.  If any of your investments qualify as a PFIC under IRS tax regulations, you will be required to pay the highest personal income tax rate (currently 39.5%) on all associated income.  This is much higher than the typical capital gains tax for like investments that do not qualify as a PFIC.  Foreign nationals should beware of PFICs and the heavy taxation that could result.

Many foreign nationals are quite disturbed to learn that one or more of their investments qualifies as a PFIC, and are disturbed by the exceptionally high tax rates.  What do you need to know about PFICs?

Generally speaking, the IRS has established that a “Passive Foreign Investment Company” or PFIC consists of a non-US corporation that derives 75% or more of its gross income from passive income, or if 50% or more of the “average fair market value of its assets” are assets that produce passive income.  Passive income usually consists of rental income, or ownership in a business that does not require any effort on your behalf.  Other sources of passive income may include royalties or fees associated with licenses or intellectual property.

Foreign nationals should beware of PFICs and consider other investment and structural options.  If any of your holdings qualify as a PFIC you will need the advice of a seasoned international tax attorney with extensive experience with the IRS.  Janathan Allen provides insightful international tax planning and legal advice for US residents, US taxpayers and those who are involved in business and investment overseas.  We invite you to call 866-631-3470 for a free consultation and to learn more about your tax exposure, PFICs and FBAR reporting requirements.