US citizens residing outside the US often find themselves helpless in the face of meeting their obligations to the US authorities. This becomes an even greater, more excruciating hurdle with the added difficulties imposed by the country of residence.
In 2018, the EU passed a series of new regulations and directives concerning the stock market, after a survey revealed that the simple investor is not versed enough in the various financial tools at their disposal. In order to make matters easier and protect investors, the EU required financial institutions to produce key information documents (KID) for each such item. This 3-page document should provide transparency and comprehension of the goals and policies, level of risk, costs, past performance and any other relevant information on said financial product. ETFs are included under this regulation. It should be said that US entities do not produce KID, since European regulation is not imposed upon them, and are subject to other regulation which may clash with the European one.
So what’s the problem?
Naturally, every regulation includes some sort of limitation and cannot take into account every possible scenario. For this reason, European investors who cannot invest in US financial instruments may now seek riskier investments such as contracts and options in these funds. Moreover, regulation is only imposed on the simple investor, while eligible investors – “rich” investors – can remain exposed to the US market and its offerings.
And what does that have to do with US citizens?
US citizens are subject to a unique tax regime, different from the rest of the world. While most countries practice residency-based taxation, the US practices citizenship-based taxation. This means that no matter where you are in the world, the US tax laws still apply. Oftentimes, the US tax regime is completely different than taxation laws practiced in the country of residency, which may often result in excess taxation. One example is the PFIC, a series of draconian laws that stipulate high taxes on the profits of US citizens from certain passive income outside the US. In combining the PFIC with the European regulation, an EU resident who is a US citizen is in a bind: on the one hand, they cannot invest in popular avenues such as European EFTs, because they are subject to PFIC; on the other, European regulation does not enable financial institutions to offer American products that do not produce a KID. Over the past several years, passive products such as EFTs and trust funds have become the most popular savings avenues, which results in significant damage to EU-residing US citizens.
So what can I do?
The first thing is to hope that American funds start issuing KIDs, which does not seem likely in the foreseeable future. The regulation gaps and negligible amount of European investments are simply not incentivizing. One can also seek foreign funds, European and others, that are defined as PFIC but are classified as QEF, which can soften the blow. Of course, taxation in the country of residence should also be considered. Additionally, seasoned investors can invest in derivatives of those funds, such as options and contracts.
