PFIC Mutual Fund Regulations

by | Apr 22, 2007 | Archives

PFIC mutual fund regulations are among what I consider the many regulations that reduce the ability to invest where it is best for us.

Recent messages have looked at how institutions use regulations to rob freedom and deceive the people they are meant to serve.

Two of the most amazing tricks used in this process are words. The first is the lie, “We have to take away your freedom to protect you!” Even worse, “If you have done nothing wrong, you have nothing to hide.”

One of the wonderful acquaintances I gained over the years was Col. Ottomar Herrmann who owned and trained a stable of Lipizzan Stallions. (The Colonel has since passed.)

The colonel loved his magnificent horses and his family has been doing this breeding and training for 300 years. Col. Hermann’s stallions were rescued in WWII by General George Patton. His true story was so dramatic it was made into a movie, “Miracle of the White Stallions”.

Having lived through Nazi Germany, he was also fanatic about freedom and at the beginning of each his performances gave this prayer.

“Our Father, we are gathered here may we all be conscious of the freedoms that have been endowed upon us. How wonderful to come together without being guarded or confined in our activities. We as citizens of a free nation have the freedom of speech, freedom of assembly, freedom of press and freedom of our religious belief. May we be humble in the privileges that are ours, may we guide our youth in the steps that will make us a proud nation.”

Yet in the US and throughout the industrialized world, freedoms are slowly but quietly being removed along with our financial well-being.

Recent messages have looked at how the US government is using the “we must protect you” to regulate and restrict just about anything that can relate to health.

We have seen that these new regulations could relate to items as common as fresh juice and holy water.

The common reaction (mine included) is to think “No law or government agency would be that petty to interfere with something like that”.

However, the greatest deception that has hoodwinked the American public relates to wealth. The IRS and SEC have almost totally robbed Americans of the rights to financial freedom. Looking at how the laws have crept far beyond banks might help us see how they could creep into every aspect of daily life in the name of protecting our health as well.

There have been a myriad of regulations since 1970 at depriving people of their privacy and access to overseas investment facilities. I won’t even list them all, but if you are interested see

The last big regulation was the PATRIOT Act which went beyond just regulating banks and financial institutions. The law created a broad category of businesses defined as “financial institutions” to set up anti-money laundering programs similar to those already in existence for banks.

These “financial institutions” specifically include auto dealers, jewelry stores, travel agencies, and financial service providers, as well as any other type of business the Treasury Department regulators deem to have a connection to money laundering. Like the banks, these new businesses are being forced to report transactions that meet an arbitrary and secretive definition of “suspicious activity,” which regulators have sometimes defined to mean anything that deviates from a customer’s normal transactions.

It is this ability of government agencies to define what is suspicious whether it be the purchase of jewelry or fruit juice that is worrisome. The ability to define good and bad is a huge powerful responsibility. History suggests that power corrupts and absolute power corrupts absolutely!

The IRS and SEC are in the act too.

The SEC protects US citizens by requiring any overseas fund, even if it is well protected by other laws (such as British, German, Japanese or whatever) that has more than 99 US investors to comply with US legislation. Even if the US investors specifically want the fund and are happy with the overseas regulations, the fund still must comply.

Take our youngest daughter as an example. She was born, raised and educated in England and has lived there most of her life. She is a British subject, has a British passport and has a business and happy life there. She has no intention of living in the US. Yet because her father is American, she cannot buy a British mutual fund unless that fund complies with US law (which of course they do not).

The dangerous part is that most US investors are not aware of this because it is the fund that breaks the law if they accept her as a client.

Another set of IRS laws are called PFIC regulations. They are so complex that I hate to even mention them in these messages.

However a reader recently wrote this note:

“Hi Gary, I have been your reader for the last 3 years or so. I have a question for you which I am hoping you could answer as part of your daily newsletter. What are the U.S tax reporting requirements if investing in Jyske Bank (JI Funds) and how are we supposed to handle them?”

Here are some facts about this.

Offshore mutual funds that are not Qualified Electing Funds (most are not) are treated differently from a tax point of view. Their profits are taxed as income, not capital gains. These funds are regulated under Passive Foreign Investment Company rules.

U.S. investors can hold overseas funds but there is no tax benefit (and in some cases there is a tax penalty).

I periodically review these laws with an international tax attorney (whom I have worked with for a couple of decades) who is well versed in this type of legislation. Here is his latest update to me on this subject.

“Gary, Offshore mutual funds which are foreign corporations for US tax purposes generally are treated as passive foreign investment companies (PFICs) for US tax purposes. In fact, the PFIC laws were passed in 1986 in part to target investments by US persons in foreign mutual funds. The taxation and compliance rules for PFICs are rather complex, as you can imagine.

There are the three ways I neutralize this PFIC regulation.

First, I invest in overseas mutual funds through my pension (I believe IRAs work as well).

Second, I invest in overseas bonds funds that pay income rather than roll up profits. I then pay dividends and report the earnings each year.

Third, I invest in share portfolios (like the Green portfolio) we track instead of funds. Shares in overseas companies are not covered in the PFIC regulations.

However, every US investor investing in overseas funds should contact an accountant or attorney familiar with this regulation to make sure how PFIC applies to their investments.

The attorney who sent me the data for the posted overview is Leslie Share at Packman Newall in Miami. Leslie’s email address is

However, there are still some tax benefits for overseas investors, residents and business people. See two of them in tomorrow’s messages.

See another big benefit of Ecuador Real Estate & Organic Food

Until next message, may your PFICS be P-retty F-ine I-nvestment C-onclusions!


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