Since January 1st 2018, any person or firm advising an EU resident, including US expats living in EU countries, regarding certain investments has to comply with new EU-wide laws known as the PRIIPs regulation.
What is a PRIIP?
A PRIIP is a Packaged Retail Investment- or Insurance-Based Product. These include all funds, many insurance and pension products, as well as any other retail investment product where the value of the investment is subject to the performance of shares, bonds, indices, or other securities.
The PRIIP Regulation states that anyone who creates a PRIIP within the EU must create a KID, and that no one who advises or sells PRIIPS to anyone living in the EU may sell or advise the purchase of a PRIIP that doesn’t have a KID.
What is a KID?
A KID is a Key Information Document, which must provide certain details about the investment. The PRIIPs regulation in fact contains very detailed and specific instructions regarding what KIDS must contain. For example, KIDS must contain a description of the investment, a description of the target investor, the purpose of the investment, details about the costs of the investment to the investor (the fees), and a lot of detail regarding potential risk.
Details about how risky an investment might be to an investor must include a summary risk indicator (e.g. low, medium, or high), how this was calculated, a breakdown of costs relating to the investment such as fees, three performance scenarios showing the possible consequences for the investor in each case, and investor complaint procedures.
How does the PRIIPS regulation affect US expat investors living in the EU?
The PRIIPs regulation has had significant unintended consequences for American expat investors who reside in the EU.
In particular, many US investment products are now not legally available to residents of EU countries, because as they don’t have an EU-approved KID, they cannot legally be sold to EU residents. Many US ETFs for example can’t comply with EU PRIIPs legislation because parts of the new rules are contradictory to some US financial regulations.
A number of US brokerage firms do not, as yet, seem aware of PRIIPs regulations. However, as awareness spreads it will become increasingly difficult for EU based investors to buy US ETFs or other US funds.
The alternative for US expats in the EU of investing in European investment products instead often has complex and potentially expensive US tax ramifications. Many non-US funds are treated as “Passive Foreign Investment Companies”, or PFICs, for US tax reporting purposes. A PFIC is an investment vehicle with at least 75% of its income being passive (e.g. from dividends), or if 50% of its assets produce passive income. Americans have to report their investments in PFICs on a particularly complex form (form 8621) if they have over $25,000 invested in PFICs in total, or if they receive distributions from a PFIC.
US Expats with over $10,000 in non-US financial accounts, including bank and investment accounts, have to file an FBAR (Foreign Bank Account Report) to FinCEN, and may have to file form 8938 with the IRS depending on the value of foreign financial assets they hold.
The salient point is that foreign investments often trigger onerous US reporting requirements that, if neglected, can in turn trigger sky-high fines.
What solutions are available for US expat investors living in the EU?
So the recent EU PRIIPS legislation has left many US expat investors living in Europe caught between a rock and a hard place: they may have limited access to US funds under EU legislation, but investing in European funds triggers onerous US reporting requirements that require expensive compliance assistance to avoid fines.
There are still investment options available for US expat investors living in the EU though. For example, some US products cater to EU investors and so abide by EU rules, or an investment portfolio can be constructed from products that do not fall under PRIPPs regulations such as individual shares or CFDs (Contracts For Difference).
We strongly recommend that US expat investors in the EU deal with a specialist expat financial advisor familiar with such issues.
Sincerely,
Tom Zachystal, CFA, CFP©
President
Individual Asset Management (IAM) Contact Us
