US Taxation of a PEA (Plan d’Epargne en Action), FBAR & FATCA
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US Taxation of a PEA (Plan d’Epargne en Action)
France has many different types of investments that are designed to assist taxpayers with saving for retirement — and supplement their pension(s). One of the more common types of investment plans is referred to as a Plan d’Epargne en Action (PEA). Similar to the Livret, the PEA is an investment type in which the investment can avoid certain taxes on the income — as long as the investment remains invested for a predetermined period of time (usually 5-years). Unlike the Livret, taxpayers can invest upwards of $150,000 per person (or double that per couple) — and depending on how well the investment does may result in significant tax-exempt income. The problem becomes when the person is also a US Person and therefore becomes subject to US tax on their worldwide income along with reporting the asset on various international reporting forms such as the FBAR and FATCA. Let’s go to the basics of US tax of a PEA.
PEA (Plan d’Epargne en Action) Tax Treatment
While the PEA may grow tax-free in France, unfortunately, this type of investment does not receive the same tax-exempt treatment in the United States. From a baseline perspective, the United States taxes US persons on their worldwide income. Therefore, if a US person has ownership of a PEA, then they will be required to pay tax on the income associated with the PEA. The PEA gets unnecessarily complicated, because even if the income is not distributed it is still taxable — unless the income is derived from foreign mutual funds and not distributed then they typically qualify as PFIC and are usually not taxed until distributed – – although it sounds better than it really is because then later it is taxed at the highest tax rate available in accordance with the PFIC tax regime unless an MTM or QEF election was made.
FBAR, FATCA & PFIC Reporting for PEA (Plan d’Epargne en Action)
Since technically the PEA is a foreign financial account, it is reportable on one or more international information reporting forms, such as the FBAR (FinCEN Form 114) and FATCA (Form 8938). The FBAR and Form 8938 or not mutually exclusive from each other — and therefore taxpayers may be required to file the PEA on both forms. If the foreign investment also contains items such as mutual funds, ETFs, or SICAVs, then the investment may become subject to Passive Foreign Investment Company reporting on form 8621. There are some potential exceptions and exclusions from reporting on 8621, but they are limited. In addition, the Internal Revenue Service does not require duplicative reporting of the same asset on Form 8938 and Form 8621— although if the taxpayer has multiple types of investments and categories of investment — both forms may still be required.
While the failure to report these accounts may result in significant fines and penalties, the Internal Revenue Service has developed various amnesty programs to assist taxpayers with safely getting into compliance with a reduced penalty, or even a complete penalty waiver.
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