# Why Should U.S. Investors Not Buy U.S. Assets In Foreign Brokerage Accounts?



## lukesdupont (6 mo ago)

Hello everyone.

I'm a U.S. Citizen and Expat living in Japan.

I've been struggling quite a bit with U.S. banks and brokerage accounts, and getting money into them cheaply. I know there are solutions, but for so many reasons, it would be infinitely easier and quicker to just open a brokerage account here in Japan--not to mention that I'm afraid that increasingly strict capital controls may one day make it impossible for me to get my money over to Japan quickly and easily when I need it.

However, I have heard that Americans should not buy U.S. assets in foreign brokerage accounts (I assume this means any stock or ETF listed on a U.S. stock exchange) due to disadvantageous tax consequences. Maybe my google-fu sucks, or google has just become truly useless as of late, but try as I might, I cannot seem to find information on what precisely those tax consequences are. I would like to know the details, and why people say this. Am I taxed double? I understand I can deduct any foreign capital gains taxes that I pay, but I assume there are other taxes or fees involved? I want to decide for myself if the costs really outweigh the benefits.

I do know that I am significantly complicating my life tax wise if I do this, in any case. That cost alone will far out-weigh the annual gains I would make on any investment for some time, but that's a cost that I already bare and realize that I just need to suck up and take losses on until I build a nest egg of sufficient size, unless I'm willing to become an international tax expert, do it all myself, and risk making costly mistakes. Compliance costs always kill the little guy, but that's life.


----------



## Bevdeforges (Nov 16, 2007)

The main issue with foreign brokerage or other accounts is that the reporting requirements for them are usually pretty daunting for anyone not willing to shell out considerable $$$ for tax filing assistance. I know one form involved claims that preparation (including learning about how to fill out the form) should take someone about 80 hours. Depending on the balances in those accounts, it may or may not be worth your while. 

Starting point might be to take a look at the information about form 8938 About Form 8938, Statement of Specified Foreign Financial Assets | Internal Revenue Service and then take a look at the various forms that are mentioned on the 8938 as they apply. The point of the exercise seems to be that the IRS is trying to get foreign financial institutions to fork over the same kind and level of information on US customers that the US banks and financial institutions provide to the IRS in the form of 1099s and similar reporting documents. But the IRS has never been known for "sharing" information with other tax authorities, so many countries don't want to be bothered conforming to the US standards in a one-sided compliance gesture.


----------



## MrNiceGuy (12 mo ago)

The complications from owning a non-US brokerage account as a US citizen are considerable. As mentioned by Bev they include extra reporting requirements on the account owner (FATCA and Form 8938) and also on the foreign brokerage firm (which causes some of these firms to simply refuse to open such an account for a US person). These burdens are worth knowing about.

Nevertheless it is possible to open such accounts. Before reading lukesdupont question, I have heard of another case where a US expatriate was able to open an account based in Europe BUT WAS SPECIFICALLY TOLD THAT HE MUST NOT USE THE ACCOUNT TO PURCHASE US-BASED ETF's, presumably he must only purchase european stocks or ETFs in the account. I found this very puzzling. I wonder what the hold up is, why this is not allowed. I thought maybe it is a quirk that only affects this one brokerage firm or european regulations. Lukesdupont hints that it is more general and there might be a tax reason, and I would be interested in knowing more.

So: what is wrong with a US expat using a foreign brokerage firm to buy securities in the US?


----------



## Bevdeforges (Nov 16, 2007)

I very much suspect that the restrictions on US "persons" using a foreign broker to buy US securities wrecks absolute havoc with the reporting system in the US (which is something of a mess as it is). The issuers of the US securities have reporting obligations to the IRS regarding the holders/owners of the securities. If the holders are foreigners, then it's generally assumed that they are subject to non-resident taxation by the US - but if the broker's clients are US citizens/taxpayers there is a rather different set of reporting obligations due to the different tax rates applied to US taxpayers. It all just adds to the complexities of operating as a broker - which most brokerages choose not to deal with if they don't have to. And the penalties levied against the brokers if something goes wrong include things like prohibiting the brokerage from doing business in the US at all. It's just not worth the risk to the foreign financial institutions.


----------



## JustLurking (Mar 25, 2015)

MrNiceGuy said:


> ... Before reading lukesdupont question, I have heard of another case where a US expatriate was able to open an account based in Europe BUT WAS SPECIFICALLY TOLD THAT HE MUST NOT USE THE ACCOUNT TO PURCHASE US-BASED ETF's, presumably he must only purchase european stocks or ETFs in the account. I found this very puzzling. I wonder what the hold up is, why this is not allowed.


The culprit here is PRIIPs, part of MiFID, EU financial regulation. In a nutshell, brokers may not offer ETFs to EU (and UK) residents if those ETFs do not provide a Key Information Document (KID). EU domiciled UCITS ETFs provide KIDs, but US domiciled ETFs do not. JustETF has more detail:

US-domiciled ETFs: why they are no longer available from many online brokers - JustETF

But ... because of the intersection of the US's "exceptional" citizenship based taxation regime and a nasty and spiteful US tax law known as PFIC, US citizens living abroad cannot hold non-US domiciled ETFs without significant US tax pain; PFIC effectively restricts US citizens to using only US domiciled ETFs. More here:

Americans Should Avoid Owning Shares in a Non-U.S. Mutual Fund - Creative Planning

This creates a grim situation for US citizens living in the EU and UK. They cannot buy US domiciled ETFs because of PRIIPs, and cannot realistically invest in local non-US domiciled ETFs because of PFIC. Caught both ways, then, with few workrounds beyond using individual stocks rather than ETFs or funds (stocks _mostly_ won't fall foul of PFIC rules; it's primarily only funds and ETFs that get this US tax punishment).

With all that said, the PRIIPs part of this problem is restricted to EU and UK residents. The OP is apparently a resident of Japan, so that half of things should not affect them. As a US citizen, because of PFIC they definitely want to avoid holding any non-US domiciled fund or ETF, but they should be okay tax-wise to buy and hold US domiciled ETFs either in a local Japanese account or in a US based one.

The fly in the ointment may be that Japanese banks and brokerages, similarly to UK and EU ones, may now simply refuse to open accounts at all for US citizens. The culprit in this case would be an overbearing, extraterritorial, and unidirectional US tax law known as FATCA. It doesn't _prevent_ non-US financial institutions from offering accounts to US citizens, but it does generate US reporting, regulatory and commercial burdens, costs, and risks that are far out of line with the norm, to the extent that many now find it easier, cheaper, and far less risky to simply refuse accounts for any US citizens, even those that are dual and resident locally.


----------



## 255 (Sep 8, 2018)

@lukesdupont -- @JustLurking is exactly right. As long as you refrain from buying ETFs, your reporting requirements will be much simplier. Just concentrate and stocks, foriegn or domestic, and you'll be fine. Cheers, 255


----------



## lukesdupont (6 mo ago)

255 said:


> @lukesdupont -- @JustLurking is exactly right. As long as you refrain from buying ETFs, your reporting requirements will be much simplier. Just concentrate and stocks, foriegn or domestic, and you'll be fine. Cheers, 255


I am a value investor who, very conservatively, picks stocks and sticks to a margin of safety, so this is do-able in my case. Still, it really sounds like I need to consult with an accountant and make sure I know what I'm getting myself into tax-wise...

This entire set of circumstances that U.S. expats find themselves in is maddening, though. It's truly draconian, and the cost is borne disproportionately by average, modest/low income Americans living over-seas. How making it extremely difficult to bank, invest, and do our taxes without incurring huge costs and tax penalties is justified in the name of catching a few wealthy tax evaders who have plenty of legal loopholes to exploit anyway, I can't understand. That we allow our government to treat us this way is ridiculous. But, I didn't make this thread to complain, sorry. I digress...

I guess the real solution is to just increase my income dramatically so I can bare the compliance cost of investing how I want and hire someone to do the taxes / consult with. That's quite a hurdle, but...


----------

