If you are a US citizen who owns German or European ETFs, some of those investments may be Passive Foreign Investment Companies (PFICs) for US tax purposes.
This can require Form 8621 and create different tax treatment for distributions and gains than you would normally expect from US investments.
Investing through a German brokerage account is common for Americans who live in Germany. You might have a Depot containing ETFs, mutual funds or an ETF Sparplan that automatically invests each month.
The important question for your US tax return is not simply where the account is located. You also need to know what investments are held inside it.
Many non-US mutual funds and ETFs can meet the US definition of a Passive Foreign Investment Company, or PFIC. When they do, additional reporting and special tax rules may apply.
Because US citizens generally remain subject to US tax on worldwide income, German tax treatment does not replace these US requirements.
If you invest while living in Germany, PFIC reporting should therefore be considered alongside the other US tax requirements for Americans living in Germany.
Key Takeaways: German ETFs and PFICs
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German and European ETFs may be classified as PFICs for US tax purposes.
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Form 8621 may be required for each PFIC you own.
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PFIC distributions and gains can receive unfavorable US tax treatment under the default rules.
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Your German brokerage account may also need to be reported on the FBAR and Form 8938.
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Review ETFs before purchasing them because PFIC problems can become more complicated the longer an investment is held.
German ETFs on Your US Tax Return
| If you own… | What it can mean for your US return |
| German or European ETF | Check whether it qualifies as a PFIC |
| PFIC investment | Form 8621 may be required |
| Multiple PFIC ETFs | Separate Form 8621 reporting may be required for each |
| ETF distributions | Must be considered under applicable PFIC tax rules |
| Sale of a PFIC | Gain may be subject to special PFIC calculations |
| German brokerage account | Consider FBAR reporting if aggregate foreign accounts exceed $10,000 |
| Larger foreign assets | Form 8938 may also be required |
| German tax paid | May affect US foreign tax credit calculations but does not eliminate PFIC reporting |
Why German ETFs Can Be a US Tax Problem
The US has special tax rules for foreign corporations that primarily earn passive income or hold passive-income-producing assets.
A foreign corporation is generally a PFIC if at least 75% of its gross income is passive income or at least 50% of its assets meet the applicable passive-asset test.
Investment funds frequently fall within these rules.
That means an ETF being completely normal and tax-efficient in Germany does not necessarily make it simple for a US taxpayer.
A UCITS ETF is also not automatically exempt from PFIC rules simply because it complies with European investment regulations.
The actual fund must be reviewed.
Reporting German ETFs on a US Tax Return
The first step in reporting a German ETF on your US tax return is determining whether the investment qualifies as a PFIC.
If the ETF is classified as a PFIC, you may need to file IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, along with your US income tax return.
The IRS generally requires a separate Form 8621 for each PFIC when a filing obligation applies. For example, if your German investment account (Depot) contains five ETFs and all five qualify as PFICs, you may need to file five separate Forms 8621.
Form 8621 reporting may be required if you:
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Receive certain distributions from a PFIC.
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Sell or otherwise dispose of PFIC shares.
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Report income under a Qualified Electing Fund (QEF) election.
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Report income under a mark-to-market election.
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Make certain PFIC-related elections.
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Meet the annual PFIC reporting requirements.
Certain exceptions may apply. For example, taxpayers with aggregate PFIC holdings valued at $25,000 or less ($50,000 for married couples filing jointly) may qualify for an exception from annual reporting under specific conditions.
However, these thresholds do not automatically eliminate Form 8621 filing requirements, particularly if you receive certain distributions, sell PFIC shares, or make specific elections.
Own ETFs in a German Depot?
Find out which of your funds may be PFICs and whether you need Form 8621. Many European-domiciled ETFs and mutual funds count as PFICs for US taxpayers and can trigger harsh tax treatment if they’re not reported correctly.
How Are PFICs Taxed in the US?
How the investment is taxed depends partly on which PFIC regime applies.
Section 1291
This is generally the default regime when no other qualifying election has been made.
Certain distributions and gains can be allocated over your holding period. Amounts allocated to prior years may be subject to special tax and interest calculations.
This can make selling a long-held PFIC considerably more complicated than selling an ordinary investment.
Mark-to-Market Election
Certain publicly traded PFICs may qualify for a mark-to-market election.
When the requirements are met and the election is in effect, annual increases in value can generally result in income being recognized even though you have not sold the investment.
QEF Election
A Qualified Electing Fund election can provide another method of PFIC taxation.
However, the foreign fund generally needs to provide information required for US tax reporting. Many European retail funds do not provide US investors with the necessary PFIC information.
US Tax Treatment of Accumulating ETFs
Many European ETFs are classified as accumulating funds, meaning dividends and other investment income are automatically reinvested rather than paid directly to investors.
However, reinvesting income does not necessarily eliminate US tax or reporting obligations. Even if you do not receive any distributions, your ETF may still be subject to PFIC rules.
Germany’s tax treatment of accumulating ETFs does not determine how these investments are taxed in the US. The IRS applies its own rules, which may require annual reporting or income recognition depending on the investment and any applicable PFIC elections.
Does the German Brokerage Account Go on the FBAR?
Potentially, yes.
The PFIC and the brokerage account are two separate reporting issues.
If the aggregate value of your foreign financial accounts exceeds $10,000 at any point during the year, you may need to file an FBAR.
This can include foreign brokerage accounts.
You may also need Form 8938 if your specified foreign financial assets exceed the applicable threshold.
That means one German Depot could potentially affect:
- Form 1040;
- Form 8621;
- Schedule B;
- Form 8938; and
- the FBAR.
Not every form will apply to every taxpayer, but each should be checked.
What Information Should You Give Your US Tax Accountant?
If you own German or European ETFs, provide:
- the name and ISIN of each fund;
- country where each fund is domiciled;
- number of shares;
- purchase dates;
- purchase prices;
- year-end values;
- distributions received;
- details of any investments sold;
- sale proceeds;
- German taxes paid or withheld; and
- annual brokerage statements.
Do not simply report the total value of your German Depot. Your tax preparer may need information for each individual investment.
Ready to get your German investments reported correctly?
Our US expat tax specialists can prepare your Forms 8621, 8938 and FBAR.
What Should You Do Before Buying German ETFs?
PFIC reporting is much easier to address before investing.
Before purchasing a German or European fund, determine whether it is likely to be a PFIC and what US reporting would be required.
This does not necessarily mean Americans cannot invest while living in Germany. It means the US tax consequences should be considered alongside investment performance and German taxation.
