Why Many Investments in Spain Cause Tax Headaches for Americans (PFIC Explained)

When Americans move to Spain, they expect differences.

Later dinners. Better bread. Less ice in drinks.

What they don’t expect is their Spanish bank or financial advisor will sell them funds that are subject to harsher U.S. tax treatment than normal investments. But that’s what many of them unknowingly do.

The culprit? Funds that are classified as Passive Foreign Investment Companies (PFICs). The origin of PFIC rules was to prevent U.S. investors from deferring tax by investing in offshore funds. Unfortunately, they now affect many Americans simply because they live abroad. Most non-U.S. investment funds — including European mutual funds — are considered PFICs.

Many Americans living in Spain buy PFICs unintentionally and only discover the issue if their U.S. tax preparer asks about foreign funds. This is where careful cross-border planning becomes essential.

Helping clients avoid these types of financial complications is a core part of what Peter Dougherty does as a cross-border financial planner at BISSAN Wealth Management in Spain. He is the Wall Street-trained, Spanish-speaking, Ivy League-educated American who loves both Spain and helping individuals and families with their financial planning. In fact, he’s the first American to be certified as a Financial Planner in Spain. Peter is also the author of two books explaining how Spanish and American financial and tax rules sometimes do and don’t fit together.

As Dougherty says, “Many Americans living in Spain discover PFIC rules only after they have already invested in European funds. That’s because funds that are perfectly normal investments for European investors can be problematic for U.S. taxpayers. Spanish banks or financial advisors recommend them due to a lack of awareness.

When gains are realized in an investment that’s considered a PFIC, the IRS often treats them as “excess distributions.” The result can be income taxed at the highest historical marginal rates and interest charges applied retroactively. Thus, the effective tax rate can be far higher than normal capital gains tax rates.

In addition, each PFIC investment generally requires filing Form 8621 every year. This form is highly technical, often requires specialized tax preparation, and significantly increases accounting costs.”

Dougherty goes on to say, “Financial advice is almost always designed for a specific taxpayer within a specific regulatory system. Spanish investment solutions are built for Spanish taxpayers within European regulations. U.S. investment products are built for U.S. taxpayers. But American expats in Spain live in two systems simultaneously.

The result is that many Americans in Spain end up with fragmented advice: competent professionals optimizing within their own jurisdictions, but no one designing for the full cross-border reality.

The problem is not that Spanish advisors misunderstand Spain, or that U.S. advisors misunderstand the United States. The problem is that neither system was built with dual-jurisdiction American expats in mind.

Proper cross-border planning like we provide at BISSAN Wealth Management can help avoid many of these issues.”

BISSAN Wealth Management, EAF, S.L., is an independent financial advisory company in Spain which is authorized and supervised by Spain’s National Securities Market Commission (CNMV).  It has offices in both Barcelona and Bilbao.

For more information:  https://www.financial-planning-in-spain.com