US citizens in Spain: PFIC rules and dual investment reporting

Key rules

• PFIC: Most Spanish funds and non-US ETFs count as PFICs for US tax, and each one needs its own Form 8621.
• Default tax: If you make no election, gains are taxed at the highest ordinary rate plus interest.
• Treaty: The treaty does not stop US tax on you; you rely on foreign tax credits instead.
• Credit limits: The US credit is limited, so some double tax can remain.

The short version

Spain taxes your investment income because you live there. The US taxes it too, because you are a US citizen or green-card holder. Most Spanish funds (fondos de inversión) and non-US ETFs are treated by the US as PFICs, which brings heavy tax and a form for every fund. Plan before you buy, not at tax time.

Why your Spanish fund is a problem for the US

A fund is generally a PFIC if 75% or more of its income is passive, or 50% or more of its assets produce passive income. Most funds meet that test. You must file Form 8621 for each PFIC, with your annual US return.

A small holding may not need a filing. If the total value is under $25,000 for a single person, or $50,000 for joint filers, and you had no distributions or gains, you may be exempt. This applies only to certain cases, so check before you skip the form.

Your three options for each fund

The decision block below compares them. In short:

• Default regime. Gains and some distributions are spread across the years you held the fund. They are taxed at the highest ordinary rate, plus interest. This is what happens if you do nothing.
• QEF election. The fund gives you annual statements so you can report your share of its income. Spanish funds rarely provide these.
• Mark-to-market election. You report the yearly change in value of marketable shares as income. It suits ETFs and funds with quoted shares.

Because the default is so costly, many US persons in Spain avoid non-US funds. They hold US-domiciled investments instead. Ask a cross-border tax adviser before buying.

How the two countries share the tax

The US-Spain tax treaty has a savings clause. It lets the US tax its citizens and residents as if the treaty did not exist, with limited exceptions. So the treaty does not remove US tax. It works through credits:

• The US gives a credit for Spanish tax on foreign-source income. You claim it on Form 1116.
• A treaty provision lets you treat income as Spanish-source, as far as needed to credit Spanish tax on US-source income.
• Spain gives a credit for US tax paid on US-source dividends and interest. The credit is capped at the treaty withholding rates and at the Spanish tax due on that income.

The US credit is limited. You can end up paying some tax twice, especially on PFIC income, which the credit may not cover well.

Other reports to watch

The documents block below lists each form. These are the deadlines and limits:

• FBAR is due 15 April, with an automatic extension to 15 October.
• Form 8938 has higher limits for joint filers: $400,000 at year end or $600,000 at any time.
• Your US return is due 15 June if you live abroad, and you can extend it to 15 October.

Spanish reporting is separate from all this. Your Spanish tax adviser should handle it alongside your US filings.

Choosing between options

How should you handle a Spanish fund or non-US ETF for US tax?

• Mark-to-market election: The fund shares are marketable, so you report each year's change in value.

Ask whether the fund provides annual statements. If it does, use the QEF election. If not, use mark-to-market when the shares are marketable. Otherwise the default regime applies. Claim credits for Spanish tax on Form 1116.

Documents you need

• Form 8621 for each PFIC (passive foreign investment company) you hold, filed with your annual US return.

• FBAR (FinCEN Form 114), needed if your combined foreign accounts exceed $10,000 at any time in the year.

• Form 8938, filed with your return, if foreign financial assets exceed $200,000 at year end or $300,000 at any time (single filers abroad), or $400,000 and $600,000 for joint filers.

• Form 1116 to claim a credit for Spanish tax paid.

• Form 5471 if you hold an interest in a foreign company, and Forms 3520 and 3520-A for foreign trusts and some gifts.

Frequently asked questions

Does a small Spanish fund holding still need Form 8621?

Not always: a small holding may be exempt if its total value is under $25,000 for a single person or $50,000 for joint filers. The exemption only applies when you have no distributions or gains in the year. If you sell at a gain or receive a payout, file the form.

When is my US tax return due if I live in Spain?

Your US return is due 15 June if you live abroad, and you can extend it to 15 October. The FBAR, a separate report of foreign accounts, is due 15 April with an automatic extension to 15 October.

Can I fully avoid double tax on Spanish investment income?

Not always, because the US credit for Spanish tax is limited and can leave some residual tax. You claim it on Form 1116.