New Zealand and Australia, in particular, have instituted a tax regime for offshore investments that fall into the definition of Foreign Investment Funds (FIFs).
FIFs will generally be mutual fund companies that are based overseas, but can also include cash value life insurance underwritten by a foreign company and some stock portfolios from overseas stock exchanges. The US has the PFIC tax, which is a passive foreign investment corporation tax. The PFIC category generally applies to mutual funds or pooled investment companies from foreign countries.
For a US citizen investor, American mutual funds are given a step-up in basis at the death of the account owner, so no taxable gains exist when someone inherits the account. PFICs do not receive a step-up in basis at death. PFICs will also be subject to a complicated tax regime that includes extra taxation on any gains that are above 125% of the previous three years’ average return in the fund.
The FIF regime in Australia and New Zealand can prevent an investor from enjoying the tax deferral of IRAs or similar tax-deferred investments held in foreign countries and instead forces the investor to pay taxes on the gains every year. Such taxes can discourage domestic investors from using foreign investment companies, but this can, of course, be beneficial.
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