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What with the Brexit completely murdering UK stocks right now, and having taken to heart the motto "buy when there's blood in the streets", I was thinking of investing some money in the UK, via ETF. My main worry (other than obviously the worry that it won't recover, but I think long-term) is that it will complicate my tax situation too much (I've always filed taxes myself using Turbotax, and would prefer not to have to pay significantly more money next year to hire a professional). For some reason, I can find loads of information on implications of holding US stocks as a UK citizen, but hardly anything on the opposite, being an American citizen holding UK stocks.

From what I can tell, there is an agreement between the two countries such that dividends aren't taxed by the UK, is that still accurate? And does that imply that no special tax forms would be required, or just that nothing would happen as a result of filing them (if the latter, how well do tax software handle them?) And what about when I eventually liquidate some of it - how complicated will that make my life, tax-wise?

Thanks!

  • For what it's worth, continential stocks seem to be taking the same hiding, the UK-specific EWU is down 11.5% right now and Europe (Vanguard VGK) is barely better, down 10.8%. – Harper Jun 24 '16 at 19:46
  • @Harper Huh? Same as what? EWU is what I was asking about. – neminem Jun 24 '16 at 23:01
  • My mistake, I thought you were asking about the tax implications of holding UK ETFs like EWU. – Harper Jun 24 '16 at 23:22
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You will not be able to continue filing with TurboTax if you invest in foreign funds. Form 8261 which is required to report PFIC investments is not included.

Read the form instructions carefully - if you don't feel shocked and scared, you didn't understand what it says. The bottom line is that the American Congress doesn't want you do what you want to do and will punish you dearly.

  • That appears to be far more specific? I'm not an expert, but wouldn't most companies not generate 75% of their income from passive investments, or have at least 50% of their assets for that purpose? And thus, wouldn't an ETF like EWU not be that type of investment? Or are you saying that the ETF could potentially have some of its funds in companies that are PFIC companies, and thus I'd have to deal with it regardless? – neminem Jun 24 '16 at 17:45
  • edit: that does appear to be the case. Well, that's highly unfortunate. Glad I asked. Are there any US-based index ETFs that invest similarly British stocks to avoid PFIC? :( – neminem Jun 24 '16 at 17:53
  • most??? Not at all, why would they? Someone has to generate some value, no? But yes, a lot of companies that are not necessarily "holding" companies may end up with PFIC classification in some years due to the fluctuations in their income streams, and it complicates the life for the American expats tremendously. – littleadv Jun 24 '16 at 18:08
  • ETF is by definition PFIC, unfortunately. 100% of its income is passive, since all it does is invest in other companies. – littleadv Jun 24 '16 at 18:09
  • Hm. Reading that again, doesn't that mean the ETF itself would have to be from the UK, which, wouldn't that not be the case of EWU, as an ETF run by BlackRock, a US company? (But I do still see that it can, itself, hold PFIC companies and then pass on the PFIC-ness of that money to me, which would mean it'd suck horrifically tax-filing-wise even if weren't all the money in the fund.) – neminem Jun 24 '16 at 18:35
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My understanding is that EWU (and EWUS) are both traded on US stock markets (NYSE & BATS), and as such these are not classified as PFIC. However, they do contain PFICs, so iShares takes the responsibility of handling the PFICs they contain and make adjustments in December.

This contains the information about the adjustments made in 2016. https://www.ishares.com/us/literature/tax-information/pfic-2016.pdf

On page 106 of the statement of the summary information they describe how they handle paying the necessary tax as an expense of the fund. https://www.ishares.com/us/library/stream-document?stream=reg&product=WEBXGBP&shareClass=NA&documentId=925898~926077~926112~1180071~1242912&iframeUrlOverride=%2Fus%2Fliterature%2Fsai%2Fsai-ishares-trust-8-31.pdf

(I'm not a tax professional)

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