U.S. ETFs and Mutual Funds While Living Abroad: A Tax Experience
By Christie DuChateau
This article walks through the rules, potential pitfalls, and planning considerations surrounding U.S. ETFs and mutual funds for individuals living abroad. The discussion is intentionally detailed and designed to educate, not overwhelm. The perspective shared here is from U.S. tax advisory experiences rather than an investment standpoint, with the goal of helping readers better understand how these holdings are treated and what options may be available.
The 3 questions below are the most common ones we hear from U.S. taxpayers living abroad. They tend to come up often after a move overseas or when a brokerage account suddenly changes what it will or will not allow. While the answers are not always intuitive, understanding how these rules work can help avoid surprises and lead to better long term decisions.
Q: Do I have to sell my U.S. investments now that I live in Europe?
A: In most cases you can keep what you already own, but many brokers will block additional purchases (including some dividend reinvestment features) because they cannot sell certain U.S.-domiciled funds to EU retail clients without the required disclosures.
Q: Will I get in trouble for investing in U.S. ETFs?
A: If your definition of trouble is a penalty or jail time, no. But trouble can find you if your broker decides to sell your investments because the brokerage needs to comply with its regulatory obligations or internal compliance policies.
Q: Can I legally buy pooled investments like ETFs and mutual funds in Europe?
A: EU-domiciled funds are generally available to EU retail investors. For U.S. taxpayers, many non-U.S. funds (including many UCITS ETFs [short for “Undertakings for Collective Investment in Transferable Securities Exchange-Traded Funds”]) can be Passive Foreign Investment Companies (PFICs), which often makes them tax-inefficient and compliance-heavy.
Let me explain:
In the 2010s, European member states noticed that “retail investors,” or normal people without professional financial credentials, began increasingly investing in a diverse range of complex financial products.
The EU concluded that retail investors were:
- buying products they did not understand,
- receiving inconsistent or misleading disclosures,
- and bearing risks that were not comparable across products or jurisdictions.
As a result, the EU implemented regulations (called PRIIPs and MiFID II) as investor-protection regimes (not tax regimes). Their purpose is to standardize disclosures, improve transparency, and reduce the mis-selling of complex financial products to retail investors in the EU. Basically, Europe is Europe-ing and trying to help protect investors.
These two objects (basically) do two things:
- PRIIPs requires a standardized Key Information Document (KID) for most pooled investments.
- MiFID II regulates who can sell what to whom, and under what conditions.
U.S. ETFs and mutual funds are not illegal for EU residents to own. What is restricted is the sale or marketing of PRIIPs products to EU retail investors without a compliant KID.
Most U.S. domiciled ETFs and mutual funds:
- do not produce PRIIPs-compliant KIDs,
- because they are not designed for EU retail distribution,
- and have no commercial incentive to comply.
As a result, EU-regulated brokers almost universally block retail clients from buying them. The restriction is implemented at the broker level. This is why the same American investor might freely buy U.S. ETFs while living in the U.S., but suddenly be blocked from buying those same investments as an EU resident.
The consequences for selling these products lie with the broker, not with the investor. However, as an investor, the unintended consequence can be your account being blocked or worse – your invested assets sold and account closed; you would still receive the proceeds of the sale. Consequently, this would be a taxable event – even though you did not initiate the sale.
Brokers have to take this seriously because they can be subject to significant penalties and could even face loss of license.
What are the alternative pathways to market exposure? There are three options, each with trade-offs:
- EU-domiciled* funds often sell the same products, on the European markets, with the KID required to market to European investors. These are called UCITS products. However, there is an important catch. Follow the asterisk for more.
- If an investor genuinely qualifies, being treated as a MiFID ‘professional client’ with an appropriately regulated firm allows access to products that are restricted for retail investors and are not subject to PRIIPs KID requirements. These are generally high net worth individuals or wealthy family firms. Such investors take risks and may not be well protected like retail investors.
- Use non-fund solutions such as direct securities (individual stocks), managed by the investor directly (you) or a professional wealth manager. Essentially, you recreate market exposure using individual securities instead of a pooled fund.
Practically, many American EU residents maintain U.S. brokerage relationships. Whether that is compliant depends on facts like solicitation/marketing into the EU, where the service is deemed provided, and local regulator expectations. This relationship and trades taking place within it are better described as a regulatory perimeter/jurisdiction question than a ‘loophole.’
Now that I’ve explained in too much detail why there are so many restrictions on buying US-domiciled ETFs while an EU resident, let’s explore the catch.
Why should you not buy UCITS products as a U.S. citizen? A tax perspective:
Under the Internal Revenue Code, most non-U.S. pooled investment vehicles qualify as Passive Foreign Investment Companies (PFICs). The rules were designed in a pre-ETF world and have never been modernized to account for global retail fund markets.
PFIC rules exist to prevent U.S. taxpayers from:
- deferring U.S. tax,
- converting ordinary income into capital gains,
- or hiding income inside offshore pooled vehicles.
When an American buys a UCITS ETF, the IRS assumes the worst-case tax-avoidance intent, even when the motivation was simply regulatory compliance in Europe.
What can a U.S. taxpayer expect when investing in a PFIC?
The result is often an effective tax rate well above normal capital gains rates, unpredictable tax liability, tax due even when no cash was distributed, and extreme compliance complexity.
In Summary:
U.S. domiciled ETFs are not illegal to own as an EU resident. The common obstacle is that many cannot be sold to EU retail investors because a PRIIPs Key Information Document (KID) isn’t available. EU brokers typically respond by blocking new purchases. Investors are usually not the primary enforcement target, but broker restrictions can have practical consequences, including forced repositioning in some cases.
EU-domiciled funds (often UCITS) are generally available to EU retail investors and solve the PRIIPs/KID issue. However, for U.S. taxpayers, many non-U.S. funds can be PFICs. Under the default PFIC regime, these holdings are tax-inefficient and compliance-heavy. Certain elections may change the outcome, but they can be complex or unavailable in practice.
The better option from a Tax Advisor is Option C (we have also seen U.S. taxpayers use foreign real estate as an option too). It is often the safest path forward to avoid the tax inefficient, legally dubious, and potential compliance nightmare entangled in Options A and B.
I hope this explanation helps you see the narrow, but available paths forward for investing. If you would like to map out the tax consequences of these investment choices, book an appointment.
