Cross-Border Wealth Management for US Expats in Europe

Investment Restrictions for US Persons Abroad

The PFIC Problem

Passive Foreign Investment Companies (PFICs) are the single biggest investment trap for US expats. Any pooled investment vehicle organized outside the US — including European UCITS ETFs, mutual funds (OPCVM, Investmentfonds, fondos), unit trusts, and SICAVs — is classified as a PFIC.

PFIC taxation is punitive:

• Gains taxed at the highest marginal ordinary income rate (currently 37%)
• An interest charge is added, calculated as if gains accrued ratably over the holding period
• Each PFIC requires a separate Form 8621 filed with your tax return
• No long-term capital gains rate, no matter how long you hold

MiFID II and EU Regulations

Since January 2018, EU's MiFID II/PRIIPs regulations require a Key Information Document (KID) for packaged investment products sold to retail investors. US-domiciled ETFs do not produce EU KIDs, which means:

• Most European brokerages cannot sell US ETFs to retail clients
• Interactive Brokers classifies US expats as US persons, allowing access to US ETFs
• Some European brokerages may allow US ETF purchases if you qualify as a "professional investor"

US Brokerage Access from Abroad

Tax-Efficient Investment Strategy

Recommended Approach

1. Use Interactive Brokers as your primary brokerage — multi-currency, global access, competitive FX rates
2. Invest in US-domiciled ETFs — VTI (US total market), VXUS (international ex-US), BND (bonds), VNQ (REITs)
3. Individual stocks for European market exposure — individual stocks are never PFICs
4. US Treasury bonds directly — no PFIC risk, favorable state tax treatment
5. Avoid: European mutual funds, UCITS ETFs, SICAVs, unit trusts, Assurance Vie unit-linked funds

Currency Considerations

US expats naturally accumulate multi-currency exposure: income in EUR/GBP/CHF, investments in USD, expenses in local currency. This creates both risk and opportunity:

• Natural hedge: if your income is in EUR and investments in USD, a weakening EUR means your dollar investments are worth more in local terms
• FX risk: a strengthening local currency erodes the value of USD-denominated investments
• Tax implications: FX gains/losses on personal transactions above $200 are reportable
• Strategy: maintain spending reserves (6-12 months) in local currency; invest long-term in USD

Retirement Planning Across Borders

US Retirement Accounts Abroad

• 401(k) / Traditional IRA: can be maintained abroad; distributions taxed normally; treaty may reduce or eliminate withholding
• Roth IRA: can be maintained but contributions require earned income; if using FEIE, you may have no taxable income to make contributions
• FEIE interaction: if you exclude all earned income via FEIE, you have no earned income for IRA contribution purposes
• FTC approach: using the Foreign Tax Credit preserves earned income, allowing continued Roth contributions

Foreign Retirement Plans

Real Estate Considerations

• Mortgage interest: deductible on US taxes for primary or secondary residence (subject to $750K limit)
• Rental income: must be reported on US return; foreign taxes paid can be credited via Form 1116
• Sale of foreign property: capital gains reported on US return; FIRPTA does not apply to foreign property sales
• Property value: must be included in FATCA Form 8938 if it produces financial income (e.g., rental)
• Currency gains: sale of foreign property may generate FX gain separate from the property gain

Estate Planning

• The US taxes worldwide estates of US citizens regardless of residence
• France has forced heirship rules (reserve hereditaire) that may conflict with US estate plans
• US-France estate tax treaty helps avoid double estate taxation
• Wills should be prepared in both jurisdictions by attorneys familiar with cross-border issues
• Powers of attorney may not be recognized across borders — consider parallel documents

Frequently Asked Questions

Can I buy European ETFs if I'm a US citizen?

You can, but you shouldn't. European UCITS ETFs are PFICs for US tax purposes, subjecting you to punitive taxation. Use US-domiciled ETFs through Interactive Brokers instead.

What happens to my Vanguard account when I move abroad?

Vanguard typically restricts new purchases and may eventually freeze your account. Before moving, consider transferring assets to Interactive Brokers or Schwab International.

Should I use FTC or FEIE?

For most expats in high-tax European countries, the Foreign Tax Credit (FTC) is more beneficial. It credits the full amount of foreign taxes paid and preserves your ability to make Roth IRA contributions. The FEIE caps at $126,500 and doesn't apply to investment income.

Sources

• IRS — Instructions for Form 8621 (PFIC)
• SEC — Investor Bulletin: American Depositary Receipts
• FINRA — Investing Abroad
• OECD — Model Tax Convention
• IRS Publication 54 — Tax Guide for U.S. Citizens and Resident Aliens Abroad
• EU PRIIPs Regulation (EU) 1286/2014

This guide is for informational purposes only and does not constitute investment or tax advice.