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Your foreign account is being closed and you wonder why?
- September 24th 2014, 1pm
- by Karin Mueller
FATCA is the answer.
When I moved to the U.S. 15 years ago, I kept my European stock and bond portfolio, as well as my checking account, at the local HypoVereinsbank (HVB). A few years ago I received a notification from HVB (at the time I was President of HVB Capital Management in New York) kindly notifying me that it was no longer possible for them to manage my portfolio and that they deeply regret having to close the accounts of all U.S. persons. They explained that they were no longer able to advise a U.S. resident. The whole German bank would need to register with the SEC otherwise. Of course I was disappointed, since I was losing the special pricing given to bank employees for security trades. And I was notified that no exemptions were made. So I moved my account to a German online broker. Two years later I received a call requesting that my account with the online broker be closed by a certain date. Had I ignored their request, my account would have been frozen. Again, I had no other choice but to look for a different custodian to transfer my assets. The only bank that offered to open an account was a small local savings bank in the middle of nowhere in Germany. They did not care so much about the registration with the SEC, as they only had one American resident as a client (me!). They slipped under the registration rules for advisors to U.S. residents and they were pleased to get the assets.
But again, in 2012, I received a letter from that little local bank stating that they will no longer be doing business with clients who are either U.S. citizens, green card holders or have an address in the U.S. This change was due to FATCA (Foreign Account Tax Compliance Act). FATCA was making the reporting requirements for Germans living in the U.S. too burdensome. Because of the law, it made much more sense for almost all German banks to drop the relatively small number of U.S. clients they served rather than attempt to comply with the burdensome and costly regulations.
At that point I gave up and transferred my assets to a bank in the U.S – something I should have done a long time ago.
A reason I wanted to keep part of my assets in Germany was because of the possibility that I would go back after being in the U.S. a few years. After it became clear, that I would indefinitely stay in the U.S., I still did not move all of my assets to the U.S. I was told that if I were to become an American citizen, and want to retain my German citizenship, I would need proof that either I wanted to return to Germany one day or that I have special ties with this country etc. I was told that it would be easier to do so if one still held assets in Germany.
Overall, it would have been easier to transfer the assets for various reasons, one of them being a simplified process of tax filing. There would have been no need to prepare extra forms and/or to manually calculate capital gains and losses. Also, I would not have needed to file the FBAR (required for U.S. persons whose foreign account values exceed $10,000).
Moreover, I was working with an excellent European Portfolio manager (a Swiss colleague that joined my team in 2005) who would have taken over management of my portfolio with, in some cases, lower trading costs. And, by investing in European ADR’s, withholding taxes, may be even lower than those of the original shares.
While FATCA is making banks all over Europe lose out on business with U.S. residents, there are specialists in the U.S., who are happy to take on those clients. My Swiss colleague, for example, switched back from managing international portfolios to European portfolios as there was quite some demand from Germans wanting to keep their good old European stocks.
So do not get worried if your German bank points you towards the door and you are dropped despite many years of a trusting relationship with your bank. There are options out there that might be even more suitable for you than you previously thought!
Below is some basic information about the new law.
What is FATCA?
FATCA, the Foreign Account Tax Compliance Act, is a law that requires U.S. taxpayers to report specified financial assets held in a foreign country, regardless of U.S. taxpayer’s current residence. In addition, FATCA requires foreign financial institutions (FFI’s), such as banks, insurance companies, broker/dealers, hedge funds and the like, to report assets held by American clients directly to the IRS.
FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment Act with an objective to uncover tax evasion by U.S. persons. The law went into effect on July 1, 2014.
The question that arises is: Who falls under the category of a U.S. person? FATCA considers an individual to be a U.S. person when he/she is a U.S. citizen, a green card holder, or resides a certain number of days in the U.S. FATCA also considers an individual to be a U.S. person if an individual was born in the United States or U.S. territories or if an individual’s parent(s) is/are American(s). Given the broad definition, a substantial number of people fall under the category of a U.S. person.
Moreover, FFI’s are responsible for identifying and surrendering necessary account information about U.S. persons to the IRS. That means that the FFI’s will be screening every existing account or every new account application for a client’s potential ties to the U.S.
What are the implications?
As a result of the new law, foreign financial institutions have either agreed to hand over the account information about U.S. persons to the IRS or decided not to offer services to U.S. persons’ securities accounts.
It is being reported that individuals receive notifications from their foreign banks saying that they no longer offer services for accounts belonging to U.S. taxpayers who hold and trade securities. Therefore, these accounts are being closed.
U.S. individuals wishing to open an account at a foreign financial institution might be out of luck, since increasing numbers of FFI’s are deciding not to deal with the additional compliance burden and simply deny such applications.
Those institutions that refuse to comply with the new law will be facing a 30% withholding tax.