Investing a USD windfall for a UK/US citizen living in Sweden

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Topic Author
makinitrain
Posts: 6
Joined: Thu Jul 30, 2020 3:49 am

Investing a USD windfall for a UK/US citizen living in Sweden

Post by makinitrain » Thu Jul 30, 2020 3:52 am

Hej! I'm in a tricky situation:
- $400K tax-free insurance payout waiting to be cashed (since last year :/),
- 25 years old,
- US and UK citizen,
- lived in US all my life before,
- no accounts in the US,
- resident of Sweden for 3 years,
- tax-compliant so far (including FBAR)(no taxable income),
- living comfortably on my SEK salary (saving ≈$1500/month),
- don't plan on returning to the US,
- not ready to give up my US citizenship.

I want to invest this money immediately so I can start growing it. Can someone recommend what I should do in this situation?

From what I understand from doing some research:
- I shouldn't invest in foreign-domiciled funds because that would classify as "passive foreign income companies" (PFIC) and incur severe ("punitive") taxation;
- I can't invest in US ETFs from the EU because of "packaged retail and insurance-based investment products" (PRIIPs).

Due to these points, it seems the only worthwhile (PFIC-avoiding) way to grow wealth whilst being a foreign-resident US citizen is to put the money into a US-domiciled brokerage account and invest in US-domiciled funds. However, from what I've inferred, most US-domiciled brokerages don't accept foreign-resident US citizens; and, those that do don't allow investing in US ETFs (why?).

Is this all correct?

Asides:
1. It seems like I should be focusing on ETFs, is this appropriate?
2. Is there a foreign-domiciled brokerage that I could use to invest in US-domiciled ETFs? I understand that Switzerland is not subject to PRIIP, but their brokerages are often exorbitant. Maybe HSBC Expat would work?
3. What would be the US-tax implications if (2) is possible?
4. Are there ways I can invest in Sweden, the EU, or elsewhere without severe US taxation? E.g., Real-estate or peer-to-peer lending?

AlohaJoe
Posts: 5451
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by AlohaJoe » Thu Jul 30, 2020 5:30 am

makinitrain wrote:
Thu Jul 30, 2020 3:52 am
However, from what I've inferred, most US-domiciled brokerages don't accept foreign-resident US citizens
So open one that does. Both Schwab and Interactive Brokers do.
and, those that do don't allow investing in US ETFs (why?).
No, this isn't correct. They have no problem letting you invest in US ETFs.

Valuethinker
Posts: 40605
Joined: Fri May 11, 2007 11:07 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by Valuethinker » Thu Jul 30, 2020 6:01 am

AlohaJoe wrote:
Thu Jul 30, 2020 5:30 am
makinitrain wrote:
Thu Jul 30, 2020 3:52 am
However, from what I've inferred, most US-domiciled brokerages don't accept foreign-resident US citizens
So open one that does. Both Schwab and Interactive Brokers do.
and, those that do don't allow investing in US ETFs (why?).
No, this isn't correct. They have no problem letting you invest in US ETFs.
AFAIK with EU citizens, the European (EU based & regulated) arms of brokerages will not allow investment in US funds. There is a category of investor ("expert investor" or something similar - that does allow you to invest in US Funds & ETFs).

One has to deal with the US offices.

That may be the source of the "disagreement" between the 2 posters - not quite referring to the same things?

TedSwippet
Posts: 3008
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by TedSwippet » Thu Jul 30, 2020 6:01 am

AlohaJoe wrote:
Thu Jul 30, 2020 5:30 am
makinitrain wrote:
Thu Jul 30, 2020 3:52 am
However, from what I've inferred, most US-domiciled brokerages don't accept foreign-resident US citizens
So open one that does. Both Schwab and Interactive Brokers do.
and, those that do don't allow investing in US ETFs (why?).
No, this isn't correct. They have no problem letting you invest in US ETFs.
There are recent reports that both Schwab and Interactive Brokers have stopped EU resident investors from buying US domiciled ETFs:

viewtopic.php?f=22&t=288175
viewtopic.php?f=22&t=252002

I don't know if anything has changed since these were posted. And presumably, using a US mailing address (in other words, appearing to the broker as if you are still a US resident) might work around this. The problem then becomes one of threading the investment needle so as to avoid both punitive US taxes (PFIC) and also any equivalent Swedish punitive tax for what will be (to Sweden) 'offshore' fund investments.

typical.investor
Posts: 2104
Joined: Mon Jun 11, 2018 3:17 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by typical.investor » Thu Jul 30, 2020 6:01 am

makinitrain wrote:
Thu Jul 30, 2020 3:52 am
Hej! I'm in a tricky situation:
- $400K tax-free insurance payout waiting to be cashed (since last year :/),
- 25 years old,
- US and UK citizen,
- lived in US all my life before,
- no accounts in the US,
- resident of Sweden for 3 years,
- tax-compliant so far (including FBAR)(no taxable income),
- living comfortably on my SEK salary (saving ≈$1500/month),
- don't plan on returning to the US,
- not ready to give up my US citizenship.

I want to invest this money immediately so I can start growing it. Can someone recommend what I should do in this situation?

From what I understand from doing some research:
- I shouldn't invest in foreign-domiciled funds because that would classify as "passive foreign income companies" (PFIC) and incur severe ("punitive") taxation;
- I can't invest in US ETFs from the EU because of "packaged retail and insurance-based investment products" (PRIIPs).

Due to these points, it seems the only worthwhile (PFIC-avoiding) way to grow wealth whilst being a foreign-resident US citizen is to put the money into a US-domiciled brokerage account and invest in US-domiciled funds. However, from what I've inferred, most US-domiciled brokerages don't accept foreign-resident US citizens; and, those that do don't allow investing in US ETFs (why?).

Is this all correct?

Asides:
1. It seems like I should be focusing on ETFs, is this appropriate?
2. Is there a foreign-domiciled brokerage that I could use to invest in US-domiciled ETFs? I understand that Switzerland is not subject to PRIIP, but their brokerages are often exorbitant. Maybe HSBC Expat would work?
3. What would be the US-tax implications if (2) is possible?
4. Are there ways I can invest in Sweden, the EU, or elsewhere without severe US taxation? E.g., Real-estate or peer-to-peer lending?

It might be easiest to give up US citizenship. Kinda drastic though...

Using a US address might be the next easiest.

Or maybe Interactive Brokers tools you hold individual stocks and replicate an index. Kinda an accounting headache though.

Here a list I put together before:

viewtopic.php?f=22&t=313366&p=5222348&h ... ”#p5224413

Someone from the Netherlands was using futures that settled in ETF shares. That might be the path of least resistance ...

Valuethinker
Posts: 40605
Joined: Fri May 11, 2007 11:07 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by Valuethinker » Thu Jul 30, 2020 6:09 am

makinitrain wrote:
Thu Jul 30, 2020 3:52 am

4. Are there ways I can invest in Sweden, the EU, or elsewhere without severe US taxation? E.g., Real-estate or peer-to-peer lending?
I think your summary is broadly right.

You could invest directly in government bonds.

Or buy individual stocks. To duplicate the S&P 500 though you'd probably need something like a 50 stock portfolio (recent research has shown, I think, that the vast majority of returns from the index comes from a handful of stocks. If you had owned Oracle HP Cisco IBM Intel Yahoo for example since 2000 you would have totally missed the amazing performance of US internet stocks Facebook Amazon Apple Netflix Google + Microsoft).

Real estate. I have read that Stockholm has what looks like an all-time real estate bubble. Negative interest rates on the SKR led to massive lending boom. One should definitely consult, for example, The Economist magazine indices re Swedish RE prices (Canada and Australia have been the two most overvalued markets for quite a long time, along with Singapore).

Peer-to-peer. I view this as a "play" market because institutional money now picks off the best loans (I believe). Also in the face of the Covid-19 recession, many P2P borrowers were using it to offset other debts, and that kind of money go round stops pretty abruptly.

However it is not an area I have investigated.

The key is opening a US brokerage account.

halfnine
Posts: 1246
Joined: Tue Dec 21, 2010 1:48 pm

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by halfnine » Thu Jul 30, 2020 7:33 am

Valuethinker wrote:
Thu Jul 30, 2020 6:09 am

...You could invest directly in government bonds....
Possibly not. This may expose the investor to phantom capital gains in one country based on the currency exchange rate difference from the time of purchase and the time of redemption. I speak from personal experience where the 1% I received from the bond was less than the tax on the 10% gain I incurred due to currency depreciation.

Topic Author
makinitrain
Posts: 6
Joined: Thu Jul 30, 2020 3:49 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by makinitrain » Thu Jul 30, 2020 7:34 am

Thank you for the replies, I really appreciate it.
Also, just a disclaimer, I am new to investing and don't really know what the best strategies are yet — for now I'm just trying to understand this tax situation. Below I try to modularise the options.

US broker, US funds, US address
So, it seems the most straightforward options is to:
- invest in US-domiciled funds to avoid PFIC,
- and to fake US residency by giving my parent's address to avoid PRIIPs.
I enquired with Charles Schwab about the eligibility of opening an international account as a resident of Sweden — they said "no, if that is the address you give us", which I felt was a suggestion to use a US address. It seems this would allow me to avoid both PFIC and PRIIPs, but I don't want to do this because it would conflict with my tax return address.
- Can someone share experience on this?

US broker, US funds, EEA address
In this case, I guess somewhere like Interactive Brokers would accept me, but wouldn't allow me to invest in US-domiciled funds because of PRIIPs. But, as suggested, I could invest in things that don't qualify as PRIIPs, which I suppose are lower-level investments and would require more management. I'm a bit hesitant about my ability to manage something like this, I fear I'd lose everything.
- Can someone share an experience or direct me to a resource on the difficulty of doing this and how risky it is?

Non-EEA-non-US broker, US funds, EEA address
One place that caught my eye is HSBC Expat, which is "a division of HSBC Bank plc, Jersey Branch". From the territory's official website, Jersey "has a special relationship with the European Union (EU). In simple terms, the Island is treated as part of the European Union for the purposes of free trade in goods, but otherwise is not a part of the EU". Due to this and what I've seen online about Swiss (non-EEA) investors being able to invest without regard to PRIIPs, I get the feeling that this might be a good option. However, I've not been able to find anything online about Jersey's PRIIPs policy. If this category (Non-EEA-or-US broker, US funds, EEA address) is possible, I would prefer it for asset protection, given troublesome the US legal system can be.
- Can someone comment on the possibility and efficacy of this?
- If this is possible, can someone recommend other non-EEA brokers?

Addenda
1. Why does a US broker care about preventing EEA residents from accessing US-domiciled funds due to PRIIPs?
2. What appropriate foreign-domiciled investments would not count as FPICs?

TedSwippet
Posts: 3008
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by TedSwippet » Thu Jul 30, 2020 8:44 am

makinitrain wrote:
Thu Jul 30, 2020 7:34 am
1. Why does a US broker care about preventing EEA residents from accessing US-domiciled funds due to PRIIPs?
PRIIPs mandates that EU brokers can only offer EU residents access to funds that have produced a 'Key Investor Information Document' (KID, or KIID), revealing information about the fund such as TER, risk profile, and so on, in a semi-regulated format. Although they could if they wanted to, and if commercial considerations made it viable, to date no US domiciled fund or ETF that I know of has done this, not least because for all EU investors except for US citizens, the EU's current UCITS offerings all work perfectly well.

US brokers that have absolutely no EU operations shouldn't care about PRIIPs, but those that are international and that have branch operations in the EU will want to follow it. Similar reasoning to why most non-US banks and financial institutions still have to conform to the US's unilateral and extraterritorial FATCA regulations.
makinitrain wrote:
Thu Jul 30, 2020 7:34 am
2. What appropriate foreign-domiciled investments would not count as FPICs?
Individual stocks, individual bonds, and ordinary interest bearing accounts would not count. Anything that doesn't have a fund-like wrapper around it.

The PFIC tax law is protectionist, and drafted as broadly as possible. So virtually every non-US domiciled 'collective investment vehicle' is likely to be a PFIC. For example, all non-US domiciled ETFs, UCITS funds and ETFs, UK OEICs and unit trusts, and any investment trusts.

Topic Author
makinitrain
Posts: 6
Joined: Thu Jul 30, 2020 3:49 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by makinitrain » Thu Jul 30, 2020 9:09 am

US brokers that have absolutely no EU operations shouldn't care about PRIIPs, but those that are international and that have branch operations in the EU will want to follow it. Similar reasoning to why most non-US banks and financial institutions still have to conform to the US's unilateral and extraterritorial FATCA regulations.
I see, that makes sense! Thanks. I guess it would be difficult to find a US-based broker that accepts foreign-residents and isn't internationally orientated.
Individual stocks, individual bonds, and ordinary interest bearing accounts would not count. Anything that doesn't have a fund-like wrapper around it.
Awesome, I guess this means I can play around with investing my Swedish salary in individual stocks in Europe without any significant tax complications.Is there an extra tax form I'd have to fill out?

Valuethinker
Posts: 40605
Joined: Fri May 11, 2007 11:07 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by Valuethinker » Thu Jul 30, 2020 11:17 am

halfnine wrote:
Thu Jul 30, 2020 7:33 am
Valuethinker wrote:
Thu Jul 30, 2020 6:09 am

...You could invest directly in government bonds....
Possibly not. This may expose the investor to phantom capital gains in one country based on the currency exchange rate difference from the time of purchase and the time of redemption. I speak from personal experience where the 1% I received from the bond was less than the tax on the 10% gain I incurred due to currency depreciation.
Ahhh ... good point.

Is this US tax law? Or Swedish?

Valuethinker
Posts: 40605
Joined: Fri May 11, 2007 11:07 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by Valuethinker » Thu Jul 30, 2020 11:25 am

makinitrain wrote:
Thu Jul 30, 2020 7:34 am
Thank you for the replies, I really appreciate it.
Also, just a disclaimer, I am new to investing and don't really know what the best strategies are yet — for now I'm just trying to understand this tax situation. Below I try to modularise the options.

US broker, US funds, US address
So, it seems the most straightforward options is to:
- invest in US-domiciled funds to avoid PFIC,
- and to fake US residency by giving my parent's address to avoid PRIIPs.
I enquired with Charles Schwab about the eligibility of opening an international account as a resident of Sweden — they said "no, if that is the address you give us", which I felt was a suggestion to use a US address. It seems this would allow me to avoid both PFIC and PRIIPs, but I don't want to do this because it would conflict with my tax return address.
- Can someone share experience on this?

US broker, US funds, EEA address
In this case, I guess somewhere like Interactive Brokers would accept me, but wouldn't allow me to invest in US-domiciled funds because of PRIIPs. But, as suggested, I could invest in things that don't qualify as PRIIPs, which I suppose are lower-level investments and would require more management. I'm a bit hesitant about my ability to manage something like this, I fear I'd lose everything.
- Can someone share an experience or direct me to a resource on the difficulty of doing this and how risky it is?

Non-EEA-non-US broker, US funds, EEA address
One place that caught my eye is HSBC Expat, which is "a division of HSBC Bank plc, Jersey Branch". From the territory's official website, Jersey "has a special relationship with the European Union (EU). In simple terms, the Island is treated as part of the European Union for the purposes of free trade in goods, but otherwise is not a part of the EU". Due to this and what I've seen online about Swiss (non-EEA) investors being able to invest without regard to PRIIPs, I get the feeling that this might be a good option. However, I've not been able to find anything online about Jersey's PRIIPs policy. If this category (Non-EEA-or-US broker, US funds, EEA address) is possible, I would prefer it for asset protection, given troublesome the US legal system can be.
- Can someone comment on the possibility and efficacy of this?
- If this is possible, can someone recommend other non-EEA brokers?

Addenda
1. Why does a US broker care about preventing EEA residents from accessing US-domiciled funds due to PRIIPs?
2. What appropriate foreign-domiciled investments would not count as FPICs?
Jersey I am fairly sure will follow PRIIPs - but you'd have to ring them up and ask them (and I can well imagine it will take a while to get an answer, and it might not be right).

Re not PFICs. I think you'd have to read the IRS tax rules. Perhaps there are guides to if you google them?

One thing you could do is buy Berkshire Hathaway. Buffett's conglomerate is quite well diversified (but has limited exposure to technology). So to some extent you are getting S&P 500 performance (although it has lagged due to lack of technology investments). If you make only one stock investment, this is probably the most justifiable one. It's mostly an insurance company (GEICO) but it also has other businesses like railways & utilities. And it owns large stakes in a number of other listed companies (Wells Fargo for one, Amex, Coca Cola I think). There is a valid concern what happens when Buffett & Charlie Munger die, but for the moment it's a fairly safe large cap play - the most diversified of the 10 largest companies on the S&P 500. Also it pays no dividends so that will not throw up another tax complication. The Swedish equivalent is called Investor AB and owns large stakes in many of Sweden's largest companies.

(weird possible exception. Swedish tax might deem BH some kind of "fund" because it is a conglomerate. Then you might be taxed on "phantom" gains from the shares - it's worth checking into).

You could construct a "stratified sample" of the global stock market. Say the top 20 stocks - look at an ETF which covers the global index (or the S&P 500). Some sectors you probably only need to own one stock. So say JP Morgan in Banks (or JPM + Wells Fargo). Energy you probably get away with Exxon and Chevron but you don't need Shell, BP, Total. Diageo for alcoholic beverages. British American Tobacco for cigarettes. Probably Nestle P&G Unilever for consumer products.

Tech is the hard one because they go up together, but they often go down at very different rates, depending on say, with Apple, how well the iphone release went, etc. So you probably do have to own Alphabet (Google), Microsoft, Apple, Amazon, Facebook (the FAANGs if you add Netflix). But then you can avoid Tencent and Alibaba. Maybe if you own Disney you don't need Netflix.

If that makes your eyes glaze over then you probably are stuck in low return investments *unless* you use a US account and a US broker. Or, as you say, maybe Switzerland is an alternative?

halfnine
Posts: 1246
Joined: Tue Dec 21, 2010 1:48 pm

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by halfnine » Fri Jul 31, 2020 2:32 am

Valuethinker wrote:
Thu Jul 30, 2020 11:17 am
halfnine wrote:
Thu Jul 30, 2020 7:33 am
Valuethinker wrote:
Thu Jul 30, 2020 6:09 am

...You could invest directly in government bonds....
Possibly not. This may expose the investor to phantom capital gains in one country based on the currency exchange rate difference from the time of purchase and the time of redemption. I speak from personal experience where the 1% I received from the bond was less than the tax on the 10% gain I incurred due to currency depreciation.
Ahhh ... good point.

Is this US tax law? Or Swedish?
I don't know how Sweden would tax bond capital gains due to currency rate fluctuations if a resident of Sweden held a US Treasury. I just bring it up as a warning of the possible ramifications that can exist when holding individual bonds. Which actually brings up an even more extreme issue. Some countries might even tax foreign savings accounts based on mark to market at the end of the tax year. I believe the UK did this for foreign savings accounts as recently as 15 years ago or so (TedSwippet can likely correct me if this memory is incorrect).

typical.investor
Posts: 2104
Joined: Mon Jun 11, 2018 3:17 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by typical.investor » Fri Jul 31, 2020 3:15 am

makinitrain wrote:
Thu Jul 30, 2020 7:34 am
Thank you for the replies, I really appreciate it.
Also, just a disclaimer, I am new to investing and don't really know what the best strategies are yet — for now I'm just trying to understand this tax situation. Below I try to modularise the options.
Then using a US address is likely best!!!!
makinitrain wrote:
Thu Jul 30, 2020 7:34 am

US broker, US funds, US address
So, it seems the most straightforward options is to:
- invest in US-domiciled funds to avoid PFIC,
- and to fake US residency by giving my parent's address to avoid PRIIPs.
Fake residency is a bit harsh. You are a US tax resident. And legally, if you intend to return to the US eventually, then the US is your domicile which is a form of residency.

But generally Brokers will not accept such arguments and will ask for a utility bill or two to prove it should they decide to challenge you.

It’s much easier if it was your real previous residence and you come up as associates with the address when they do a public records search.

makinitrain wrote:
Thu Jul 30, 2020 7:34 am
I enquired with Charles Schwab about the eligibility of opening an international account as a resident of Sweden — they said "no, if that is the address you give us", which I felt was a suggestion to use a US address. It seems this would allow me to avoid both PFIC and PRIIPs, but I don't want to do this because it would conflict with my tax return address.
- Can someone share experience on this?
I don’t see an issue. I had it that way for a few years. The IRS didn’t care.

The US broker did learn I was not in the IS much, asked for utility bills and froze my account when I didn’t produce them.

On a frozen account, you can sell assets, transfer assets out to another broker. And have dividends reinvested if you leave the assets there. You simply can’t buy more shares.

So in that case, I think maybe you’d have to use Interactive Brokers and individual stocks or options that settle in ETFs (preferable I think). These are more complicated so I’d use your parents address while you can.
makinitrain wrote:
Thu Jul 30, 2020 7:34 am

US broker, US funds, EEA address
In this case, I guess somewhere like Interactive Brokers would accept me, but wouldn't allow me to invest in US-domiciled funds because of PRIIPs. But, as suggested, I could invest in things that don't qualify as PRIIPs, which I suppose are lower-level investments and would require more management. I'm a bit hesitant about my ability to manage something like this, I fear I'd lose everything.
- Can someone share an experience or direct me to a resource on the difficulty of doing this and how risky it is?
If the broker realizes you are in a country where they can’t serve you, they may freeze your account.

But I don’t believe they would sell you US domiciled funds in the first place as by regulation they aren’t supposed to given your declared residency.
makinitrain wrote:
Thu Jul 30, 2020 7:34 am

Non-EEA-non-US broker, US funds, EEA address
One place that caught my eye is HSBC Expat, which is "a division of HSBC Bank plc, Jersey Branch". From the territory's official website, Jersey "has a special relationship with the European Union (EU). In simple terms, the Island is treated as part of the European Union for the purposes of free trade in goods, but otherwise is not a part of the EU". Due to this and what I've seen online about Swiss (non-EEA) investors being able to invest without regard to PRIIPs, I get the feeling that this might be a good option. However, I've not been able to find anything online about Jersey's PRIIPs policy. If this category (Non-EEA-or-US broker, US funds, EEA address) is possible, I would prefer it for asset protection, given troublesome the US legal system can be.
- Can someone comment on the possibility and efficacy of this?
- If this is possible, can someone recommend other non-EEA brokers?
Considering costs and tax forms, I’d stick to a US broker.
makinitrain wrote:
Thu Jul 30, 2020 7:34 am

Addenda
1. Why does a US broker care about preventing EEA residents from accessing US-domiciled funds due to PRIIPs?
2. What appropriate foreign-domiciled investments would not count as FPICs?
Regulatory compliance makes them care. Sweden has rules for it’s residents for their protection.

I’d open an account with Schwab using your parents address. If Sweden/EU does ever allow US citizens to use US domiciled funds (perhaps under a qualifying exception), Schwab International would allow that and it’d be an easy switch.

Vanguard is unlikely to ever accept it. They generally reject residents of countries they can legally serve because they don’t want to do the compliance checking. Some are grandparented in from before rule enforcement got tightened though.

Topic Author
makinitrain
Posts: 6
Joined: Thu Jul 30, 2020 3:49 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by makinitrain » Fri Jul 31, 2020 3:59 am

Thanks again for the feedback!
Considering costs and tax forms, I’d stick to a US broker.
Would it really be that big of a problem. Yes, offshore accounts have high minimum balances, but funds invested through their platform count towards that minimum balance (clarified this with HSBC), so I don't think that would be an issue. And, in terms of taxes, wouldn't it just be another foreign account I have to report (same as my Swedish account)?

typical.investor
Posts: 2104
Joined: Mon Jun 11, 2018 3:17 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by typical.investor » Fri Jul 31, 2020 4:16 am

makinitrain wrote:
Fri Jul 31, 2020 3:59 am
Thanks again for the feedback!
Considering costs and tax forms, I’d stick to a US broker.
Would it really be that big of a problem. Yes, offshore accounts have high minimum balances, but funds invested through their platform count towards that minimum balance (clarified this with HSBC), so I don't think that would be an issue. And, in terms of taxes, wouldn't it just be another foreign account I have to report (same as my Swedish account)?
Ok well if it’s not too expensive to get US domiciled funds through the “Jersey” broker then fine.

And if you want to generate your own 1099 form fine. I wouldn’t want to do so without using an accountant. Wash sales, OID from individual treasuries, capital gains (short or long term), whether dividends are qualified or not, foreign taxes paid, and whether distributions are taxable or not are all things my broker reports to me that I need to file taxes.

You need an accountant either way ... broker gives forms for US taxes or foreign broker gives forms for Swedish taxes.

It seems easier getting the forms for US taxes so you can easily file those and then use a Swedish accountant to do the Swedish taxes based in those.

Finding an US accountant in Sweden will be more difficult but maybe greenback tax services or similar than caters to expats would work.

If HSBC gives you the docs you need for both countries -great!

Topic Author
makinitrain
Posts: 6
Joined: Thu Jul 30, 2020 3:49 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by makinitrain » Fri Jul 31, 2020 4:33 am

Really appreciate the advice, thanks!

EddyB
Posts: 1399
Joined: Fri May 24, 2013 3:43 pm

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by EddyB » Fri Jul 31, 2020 9:24 am

halfnine wrote:
Fri Jul 31, 2020 2:32 am
Valuethinker wrote:
Thu Jul 30, 2020 11:17 am
halfnine wrote:
Thu Jul 30, 2020 7:33 am
Valuethinker wrote:
Thu Jul 30, 2020 6:09 am

...You could invest directly in government bonds....
Possibly not. This may expose the investor to phantom capital gains in one country based on the currency exchange rate difference from the time of purchase and the time of redemption. I speak from personal experience where the 1% I received from the bond was less than the tax on the 10% gain I incurred due to currency depreciation.
Ahhh ... good point.

Is this US tax law? Or Swedish?
I don't know how Sweden would tax bond capital gains due to currency rate fluctuations if a resident of Sweden held a US Treasury. I just bring it up as a warning of the possible ramifications that can exist when holding individual bonds. Which actually brings up an even more extreme issue. Some countries might even tax foreign savings accounts based on mark to market at the end of the tax year. I believe the UK did this for foreign savings accounts as recently as 15 years ago or so (TedSwippet can likely correct me if this memory is incorrect).
Sorry to repeat the question, but who taxed your (currency exchange) phantom gain? Or, if it was at redemption, how was it “phantom”?

TedSwippet
Posts: 3008
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by TedSwippet » Fri Jul 31, 2020 11:02 am

EddyB wrote:
Fri Jul 31, 2020 9:24 am
halfnine wrote:
Thu Jul 30, 2020 7:33 am
Valuethinker wrote:
Thu Jul 30, 2020 6:09 am

...You could invest directly in government bonds....
Possibly not. This may expose the investor to phantom capital gains in one country based on the currency exchange rate difference from the time of purchase and the time of redemption. I speak from personal experience where the 1% I received from the bond was less than the tax on the 10% gain I incurred due to currency depreciation.
Sorry to repeat the question, but who taxed your (currency exchange) phantom gain? Or, if it was at redemption, how was it “phantom”?
Tax on 'phantom' currency gains is a well-known trap for US citizens living outside the US, and who face both local and US tax liabilities.

The problem is that the US measures gains based on the difference between the USD value paid for something at the forex rate on purchase, and its USD value when sold at the forex rate on sale. If the forex rate changes far enough to your disadvantage while you hold the asset, you can even wind up with a local currency loss that the forex rate changes render as a taxable USD gain. It's particularly pernicious when entering into perfectly vanilla local transactions, such as making local (non-US) mortgage repayments.

More, with citations and examples, in this wiki section:

US tax pitfalls for a US person living abroad - Bogleheads

halfnine
Posts: 1246
Joined: Tue Dec 21, 2010 1:48 pm

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by halfnine » Fri Jul 31, 2020 11:24 am

TedSwippet wrote:
Fri Jul 31, 2020 11:02 am
EddyB wrote:
Fri Jul 31, 2020 9:24 am
halfnine wrote:
Thu Jul 30, 2020 7:33 am
Valuethinker wrote:
Thu Jul 30, 2020 6:09 am

...You could invest directly in government bonds....
Possibly not. This may expose the investor to phantom capital gains in one country based on the currency exchange rate difference from the time of purchase and the time of redemption. I speak from personal experience where the 1% I received from the bond was less than the tax on the 10% gain I incurred due to currency depreciation.
Sorry to repeat the question, but who taxed your (currency exchange) phantom gain? Or, if it was at redemption, how was it “phantom”?
Tax on 'phantom' currency gains is a well-known trap for US citizens living outside the US, and who face both local and US tax liabilities.

The problem is that the US measures gains based on the difference between the USD value paid for something at the forex rate on purchase, and its USD value when sold at the forex rate on sale. If the forex rate changes far enough to your disadvantage while you hold the asset, you can even wind up with a local currency loss that the forex rate changes render as a taxable USD gain. It's particularly pernicious when entering into perfectly vanilla local transactions, such as making local (non-US) mortgage repayments.

More, with citations and examples, in this wiki section:

US tax pitfalls for a US person living abroad - Bogleheads
TedSwippet has pretty much explained it. And it works in the other direction as well. See below with a generic and simplified example.

Let’s say you have purchased a 100K USD bond yielding 1% with a redemption date one year later. At the date of purchase the exchange rate is 1.11 for USD to EUR. So, roughly, at the time of purchase you have a 100K USD bond and in terms of the EUR the bond would have a face value of 90K EUR. A year later the exchange rate has dropped to 1.0 and the bond is redeemed. So now in USD terms you have redeemed 100K USD (zero capital gains) but in terms of EUR you now have a 100K EUR redemption (10K EUR capital gains).

So you can see where this is going. Your actual US tax liability based on the capital gains portion would be zero. Now depending on country, your EUR tax liability based on the capital gains portion would be 10K EUR multiplied by the appropriate tax rate (which in some instances might even be taxed as income instead of capital gains).

So, to sum up, you started with 100K in a US account. One year later you ended back up with 100K in a US account (plus obviously some interest) and one large tax bill from the foreign country you are a tax resident in. In most cases you could have just held a high interest savings account instead and ended up in the same place sans the foreign tax bill.

That is essentially my story.

TedSwippet
Posts: 3008
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by TedSwippet » Fri Jul 31, 2020 12:06 pm

halfnine wrote:
Fri Jul 31, 2020 11:24 am
Let’s say you have purchased a 100K USD bond yielding 1% with a redemption date one year later. At the date of purchase the exchange rate is 1.11 for USD to EUR. So, roughly, at the time of purchase you have a 100K USD bond and in terms of the EUR the bond would have a face value of 90K EUR. A year later the exchange rate has dropped to 1.0 and the bond is redeemed. So now in USD terms you have redeemed 100K USD (zero capital gains) but in terms of EUR you now have a 100K EUR redemption (10K EUR capital gains).

So you can see where this is going. Your actual US tax liability based on the capital gains portion would be zero. Now depending on country, your EUR tax liability based on the capital gains portion would be 10K EUR multiplied by the appropriate tax rate (which in some instances might even be taxed as income instead of capital gains).
Unless I'm missing something here though, at least in this case you end up with a spendable local currency gain (assuming EUR is your local currency?). So in that sense anyway, if no other, the gain seems somewhat less 'phantom' than realising an EUR loss that forex rate changes combined with the dark sorcery of the US tax code miraculously turns into a taxable US gain.

I'm sure it's annoying even so, though. Particularly for anyone only temporarily using EUR, and who would still regard the USD as their home and 'functional' currency.

EddyB
Posts: 1399
Joined: Fri May 24, 2013 3:43 pm

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by EddyB » Fri Jul 31, 2020 12:51 pm

TedSwippet wrote:
Fri Jul 31, 2020 12:06 pm
halfnine wrote:
Fri Jul 31, 2020 11:24 am
Let’s say you have purchased a 100K USD bond yielding 1% with a redemption date one year later. At the date of purchase the exchange rate is 1.11 for USD to EUR. So, roughly, at the time of purchase you have a 100K USD bond and in terms of the EUR the bond would have a face value of 90K EUR. A year later the exchange rate has dropped to 1.0 and the bond is redeemed. So now in USD terms you have redeemed 100K USD (zero capital gains) but in terms of EUR you now have a 100K EUR redemption (10K EUR capital gains).

So you can see where this is going. Your actual US tax liability based on the capital gains portion would be zero. Now depending on country, your EUR tax liability based on the capital gains portion would be 10K EUR multiplied by the appropriate tax rate (which in some instances might even be taxed as income instead of capital gains).
Unless I'm missing something here though, at least in this case you end up with a spendable local currency gain (assuming EUR is your local currency?). So in that sense anyway, if no other, the gain seems somewhat less 'phantom' than realising an EUR loss that forex rate changes combined with the dark sorcery of the US tax code miraculously turns into a taxable US gain.

I'm sure it's annoying even so, though. Particularly for anyone only temporarily using EUR, and who would still regard the USD as their home and 'functional' currency.
Yes, that was what I was thinking and why I didn't see it as "phantom" gain, but thanks for the more fulsome explanation.

Topic Author
makinitrain
Posts: 6
Joined: Thu Jul 30, 2020 3:49 am

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by makinitrain » Sat Aug 01, 2020 1:21 am

Thanks again for the replies!

Some questions about the US broker, US funds, US address approach:
- How is it legal to use a US address even though I'm an EEA resident?
- If I eventually want to relinquish my US citizenship, after having grown the assets in the US for a number of years, how would I go about transitioning my assets?

TedSwippet
Posts: 3008
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Investing a USD windfall for a UK/US citizen living in Sweden

Post by TedSwippet » Sat Aug 01, 2020 3:47 am

makinitrain wrote:
Sat Aug 01, 2020 1:21 am
If I eventually want to relinquish my US citizenship, after having grown the assets in the US for a number of years, how would I go about transitioning my assets?
After renouncing US citizenship, the two ends of the spectrum are:
  • Do nothing.
  • Sell everything and reinvest in entirely equivalent non-US domiciled funds and ETFs instead.
Which you move closest to, and by how much, really depends entirely on your situation at the time. Particularly your country of residence, but also your future plans.

For example, if you renounced US citizenship today but left stuff in US domiciled assets, you would see a 15% US dividend tax (US/Sweden income tax treaty), and you could probably find protection from confiscatory US estate tax on amounts above $60k from the US/UK estate tax treaty. If Sweden doesn't punitively tax 'offshore' funds, and your Swedish tax on these dividends exceeds 15%, and you can claim a credit against Swedish tax for this, you're no worse off. If you then moved to the UK, provided all your US domiciled ETFs have UK 'reporting status' similar rules to those in Sweden apply, so you would still be okay holding them.

If you renounced US citizenship and move to the UAE though, you would then definitely want to sell everything and reinvest in non-US domiciled assets. You would have no income tax treaty cover, so 30% loss to US tax on dividends, and no local UAE tax credit to offset this deadweight US tax loss. You could probably continue to use the US/UK estate tax treaty, as long as you don't renounce UK citizenship.

Finally, before taking any action in this area, make sure you are fully familiar with all the details of the US's shameful 'exit tax'. This can be either a large deterrent against renouncing (if you're in scope for it) or a significant motivation for renouncing (if you're not in scope for it, but likely to be in future).

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