This is another area of frustration. Foreign mutual funds, exchange-traded funds (ETFs), and other pooled investments are generally classified as Passive Foreign Investment Companies for US Tax purposes or PFIC. PFICs are punitively taxed and do not benefit from preferential tax rates like qualified dividends and long-term capital gains like US funds do. They are taxed at ordinary rates, potentially at the highest marginal rate, plus an additional interest charge. They also require extensive reports that can be expensive and time consuming. From a tax perspective, investing in US funds is a more efficient option for US expats.
