Is this a valid investment strategy as EU/US dual citizen with EU residency?

Question

I'm a US citizen that was born and raised in Belgium. I have an SSN and file taxes annually.

Due to my US citizenship, my investment options are more limited. In an ideal world I would just buy and hold S&P500 style ETFs (low risk, long term).

As an EU/US citizen without a high net worth, buying ETFs is not a good option (PFIC / KID regulation).

After some research, my current idea is: buy Berkshire Hathaway stocks through Interactive Brokers.

BRK.B has quite diverse portfolio, so seems to come close to my idea of just buying an S&P500 ETF. Interactive Brokers is one of the few brokers that caters to non-resident US citizens.

As far as I understand, there is no US tax when buying stocks. There is a small tax in Belgium.

As long as I hold the stocks at least a year, the capital gains in the US are taxed at a lower rate and Belgium does not have a capital gains tax. So for my long-term strategy there should be no problems.

Interactive Brokers has some fees on buying stocks, but I probably won't be doing that very often. They used to have inactivity fees, but those seem gone.

Is there anything that I'm missing that I should be aware of?

Answer 1

As an EU/US citizen without a high net worth, buying ETFs is not allowed.

It's allowed, it's just a pain to deal with when it comes to taxes if investing in non-US funds. Read more about PFICs.

After some research, my current idea is: buy Berkshire Hathaway stocks through Interactive Brokers.

PFIC designation is not limited to investments with "fund" in their name, it's based on the characterization of income. It is also done based on annual analysis, a stock can be PFIC one year, and not the next. So if you're investing in a brokerage outside US you may run into the same issue.

Alternatively you can invest in US-based ETFs just as well.

You'll need to discuss your portfolio options with a qualified US and Belgian tax advisor(s), and review them annually.

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It appears that the problem with US-based ETFs you're referring to is their unavailability on EU-based stock exchanges. That's not a problem for you since you can, as a US citizen, trade on US exchanges just as well. IB is one of many brokers that allow that, and that's where you'd be buying BRK.B anyway (it's listed on NYSE).

Answer 2

I am in a similar situation (US citizen resident in Germany, have lived in Belgium for a long time, minimal ties to US).

If you want to invest in ETFs as a US citizen, you have the following options:

1. Invest with a US broker after obtaining professional investor status. This exempts you from EU KID regulations. However, obtaining professional investor status is difficult and requires 2 of the following 3 conditions: a) investment portfolio over 500 000 EUR b) 10 stock transactions per quarter for the last 4 quarters c) 1 year of professional experience in the financial sector making trades. This is likely the best option if you're eligible.

2. Invest with a US broker using a false US address. This is possibly fraud/breach of contract with the broker, but many people report that this works. The penalty for discovery is typically a ban on any further deposits in ETFs, but still being allowed to sell existing positions. I am also concerned that claiming US residence to the broker while claiming EU residence to the IRS could constitute tax fraud.

3. Invest into an EU ETF. This exposes you to the arcane and highly punitive PFIC rules. Generally speaking, each PFIC you hold a share in will require you to submit Form 8621 with your tax return. This form is extremely onerous and tax preparers typically charge about 200 USD to complete it. In addition, PFICs are subject to complicated taxation rules that all but guarantee your gains will be taxed at the highest income tax rate (currently 37.5%) in addition to tax in Belgium. You can use a reporting technique called "mark to market" to instead have your unrealized gains taxed as ordinary income, but this carries additional reporting burdens.

Further notes about PFICs: The definition of a PFIC is very broad and probably includes holdings such as Investor AB. Also, funds holding shares in other funds potentially creates an additional reporting requirement for indirectly held PFICs. Some PFICs complying with US reporting requirements allow you to use the QEF (qualified electing fund) election, which allows the PFIC to be taxed at the normal US capital gains rate. However, the rules around QEFs are extremely complex and I am not aware of any QEFs in the EU anyway.

If I understand the rules correctly, corporations incorporated in the US cannot be PFICs, even if they primarily hold foreign capital.

4. The "options trick": you register an account with a US broker, declaring that you're a Belgian resident. With Charles Schwab, you can easily do this if you deposit at least $25000. Then, you sell a put option on the ETF you're interested in and exercise the option. See here for an explanation. Since options only come in multiples of 100, this requires you to have at least 100x the price of the ETF available in cash. The tax implications of this technique are left as an exercise.

On the other hand, if you buy stock in a holding company that trades on a US exchange and is incorporated in the US (otherwise it's a PFIC) such as Berkshire Hathaway, it is fully legal in both the US and EU, and you pay only the US capital gains tax at the normal rates when you sell (and the Belgian transaction tax when you buy). In particular, since US capital gains tax only kicks in at $41676, this is a great option if your capital is small.

You also pay costs related to currency conversion from EUR to USD and back. Furthermore, in Belgium capital gains are only tax-exempt if they aren't "speculative", which is not clearly defined.

In summary, buying Berkshire Hathaway through Interactive Brokers is one of the better options for American retail investors resident in the EU, other than being rich enough to get the professional investor exemption or moving to the US.