Unit Trust & US Taxation, PFIC, FBAR & FATCA
While many foreign countries have tax-deferred investments which help Taxpayers save for retirement, the disparity between the US Tax System (based on Worldwide Income) and foreign tax systems (usually based on Residence) may result in an unwanted US tax implication for foreigners who are also considered to be US persons. The term US Person refers to more than just citizens and can also include Lawful Permanent Residents and Foreign Nationals who meet the Substantial Presence Test. Even though there may be a tax treaty with a foreign county, most treaties refer specifically to pension or other retirement plans – and not other forms of investments which while may serve in purpose as a retirement supplement (such as a UK ISA or Indian PPF) – does not qualify as a retirement plan. A common issue arises with the Unit Trust, which resembles a mutual fund but has a key difference which may remove it from PFIC territory – although is still taxable and reportable for FATCA and FBAR.
What is a Unit Trust?
In concept the Unit Trust operates similar to the mutual fund or ETF, in that it is pooled funds in which the pooled funds are then split into “trusts,” which are then sold to shareholders. As provided by Lloyds Bank:
A unit trust is a type of mutual fund where money from many investors (called “unit holders”), is managed by a fund manager to achieve a specific return. This fund manager then creates a portfolio of investments and assets.
With a unit trust, the fund manager invests in bonds or shares of businesses on the stock market. The fund is then split into units, which is what you buy when you invest in a unit fund.
Unit trusts are one of the most popular forms of investment funds. They are generally used by investors who want to buy shares and other assets across a mixed portfolio but have limited time or expertise to manage such investments.
Unit Trust and US Tax
From a US Tax perspective, the Unit Trust is taxable. That is because the foreign investment is generating income and the income would then be taxed in the U.S. – since there is no exception for unit trusts to avoid Tax in the United States, such as how a pension plan may defer (or even avoid) US Tax. If the Unit Trust is considered a Mutual Fund per se, then it may be considered PFIC – this would result in a “deferred tax,” but the ultimate tax consequences are usually far worse unless an MTM or QEF election was made.
Unit Trust & FBAR (FinCEN Form 114)
The Unit Trust is considered a foreign financial account and therefore would be reportable each year on the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114).
Unit Trust & FATCA (Form 8938)
Since the Unit Trust is considered a foreign financial account, it would also (not instead of) be reportable each year on for FATCA Form 8938 as well (Foreign Account Tax Compliance Act).
Unit Trust & PFIC (Form 8621)
Whether or not the Unit Trust is reportable for PFIC can boil down to semantics. Not all unit trusts are incorporated – in fact, most unit trusts are not incorporated. Therefore, if the Unit Trust is not incorporated, then it may not meet the requirements of the PFIC – which generally requires that the trust be a foreign corporation. The problem is if that if the first year elections such as MTM or QEF are missed, then it would require cleansing election later if a late election is made, which could have serious tax implications and so it is something to discuss in detail with your experienced Board-Certified Tax Law Specialist before making any proactive submission to the IRS.
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